ESG rating of 80% Indian firms just 'adequate' or 'below average': Analysis

Firms did better in environmental (E) parameter compared with social and governance (G), says Crisil Research

Indian companies have to catch up when it comes to the environmental, social, and governance (ESG) disclosures, ranking modestly in a ranking for disclosures and risk management.

The analysis by Crisil Research shows 20 per cent of 586 Indian companies were in the ‘strong’ and ‘leadership’ matrix. Nearly 80 per cent or 464 companies were placed as ‘weak’, ‘below average’ and ‘adequate’.

The good news is that most companies saw an improvement in their ESG scores driven by better disclosures and improved performance on various parameters, says Crisil.

“Leaders on ESG have demonstrated a clear commitment towards sustainability, and have consistently delivered superior performance. In contrast, those in the ‘weak’ and ‘below-average’ categories have poor disclosures and inadequate ESG risk-management practices. The uptake of sustainability in decision making is very piecemeal in India Inc because of a lack of stewardship, and fiduciary persuasion to improve the ESG quotient,” said Amish Mehta, managing director and chief executive officer of Crisil.

"For ESG to truly be embedded and practiced in spirit, all stakeholders have to work collaboratively and create a favourable environment for ESG in India. In addition to focussing in the near-term on targeted actions such as decarbonisation, a mindset shift is necessary to transform from merely complying to creating value and structurally mitigating risk,” said Mehta.

Companies' performance on the environmental (E) parameter was weaker compared with social and governance (G), the study showed.

“In India, only 1 in 5 companies reported their Scope 11 and Scope 2 greenhouse gas (GHG) emissions. The disclosure on Scope 3 emissions was even worse — only 63 out of 586 companies published this data,” said Crisil in a press release.

Globally, evaluation on the environment front revolves around emissions.

Interestingly, on social aspects, public sector undertakings (PSUs) fared relatively better with an average score of 55 compared with 49 for private companies. PSUs also fared better on key parameters such as gender diversity (15.3 per cent for PSUs versus 12.7 per cent for private companies), attrition (2 per cent for PSUs and 22 per cent for private), and pay disparity (CEO to median employee pay ratio of 4.8x for PSUs versus 137x for private).

PSUs fell behind their private-sector peers on governance practices, especially board composition and functioning.

“Despite increasing by almost 2x in the past one year, the share of independent directors at 40 per cent for PSUs was much lower compared with 51 per cent for private companies. Similarly, while 41 companies had independent directors, none was a PSU. Further, women directors constituted 19 per cent of private company Boards, while for PSUs it was just 13 per cent,” Crisil said.