SEBI's ESG Ratings Review: Fixing Credibility Gaps in India's Sustainability Ecosystem

A fund manager friend of mine once showed me two ESG rating reports on the same Indian cement company, from two different global rating agencies. One had the company near the top of its sector. The other had it near the bottom. Same company. Same quarter. Same publicly available data.

"Which one do I trust?" he asked.

"Neither, fully," I said. "But that's the job, isn't it?"

This is the strange world ESG ratings live in. They carry huge influence — investors use them to allocate billions, lenders use them to price loans, and companies use them to justify sustainability claims — yet the raters disagree with each other constantly. SEBI stepped into this mess in 2023 with one of the world's first proper regulatory frameworks for ESG Rating Providers. That was a bold move. Whether it has actually fixed the credibility problem is a different question altogether.

What Are ESG Ratings and Why Do They Matter?

ESG ratings are scores that assess how well a company manages environmental, social, and governance risks. Think of them as a credit rating, but for sustainability. Rating agencies look at emissions, labour practices, board composition, ethical conduct, and dozens of other factors, then produce a score or grade that investors can use.

These ratings matter because money increasingly moves on the back of them. Global ESG funds use them to decide which stocks to buy. Banks use them in sustainability-linked lending. Regulators reference them. Companies get added to or kicked out of major indices partly on the basis of these scores.

In India, ESG ratings have grown in influence because foreign investors pouring capital into Indian equities often screen companies through this lens. A poorly rated Indian company can find itself quietly excluded from portfolios without ever knowing why.

So when ratings are inconsistent, unreliable, or opaque, real money gets misallocated and real companies get mispriced. That's the problem SEBI tried to address.

Why Did SEBI Decide to Regulate ESG Rating Providers?

SEBI introduced the ESG Rating Providers framework in 2023 because the ratings market had a credibility problem that had been quietly building for years.

The core issue is one that academic researchers at MIT Sloan documented in a widely cited paper called "Aggregate Confusion." Their work, along with follow-up studies by others, showed that major global ESG rating agencies often give dramatically different scores to the same company. Credit ratings across agencies typically correlate at around 0.99 — almost identical. ESG ratings across agencies correlate far lower. Same company, same public disclosures, wildly different verdicts.

Why? Because every rating agency uses its own methodology, its own weights, its own definition of what counts as "material." One agency might weight carbon emissions heavily. Another might prioritise board diversity. A third might focus on labour practices. The company doesn't change — the lens does.

For a regulator like SEBI, this raised a straightforward question. If ratings are being used to guide investor money in Indian markets, shouldn't the raters themselves be accountable for how they operate? Until 2023, ESG Rating Providers in India operated in a regulatory grey zone. Credit rating agencies were regulated. ESG raters, which often did similar work with similar market impact, weren't.

That gap is what SEBI closed.

What Did SEBI Actually Do?

SEBI introduced a formal registration and oversight framework for ESG Rating Providers, often shortened to ERPs. The regulations were notified in 2023 as part of amendments to the SEBI (Credit Rating Agencies) Regulations. A few key pillars matter here.

Registration became mandatory. Any firm wanting to provide ESG ratings to regulated Indian entities now needs to register with SEBI, meet specified eligibility requirements, and operate under a prescribed code of conduct.

Methodologies must be disclosed. ERPs have to make their rating methodologies public. This is important because one of the biggest complaints from companies has always been that they get rated against criteria they can't see. Mandatory disclosure forces at least a minimum level of transparency.

Conflicts of interest must be managed. The regulations require ERPs to put in place structures that separate rating work from any commercial activities that could compromise independence. This borrows from lessons learned the hard way in the credit rating world after the 2008 financial crisis.

A Core ESG rating was introduced. SEBI required ERPs to provide what it called a Core ESG rating, based specifically on the BRSR Core parameters that listed companies now have to disclose with third-party assurance. The idea is to anchor at least part of the rating in data that has been independently verified, rather than on company self-reporting or external estimations that can vary wildly.

India-specific parameters are encouraged. SEBI pushed for ratings methodologies to reflect Indian realities — things like caste-based workforce metrics, rural employment impact, and local environmental concerns — rather than simply importing global templates that were designed around Western corporate contexts.

This was, and still is, one of the more detailed regulatory frameworks for ESG raters anywhere in the world. The US Securities and Exchange Commission has issued guidance and proposed rules, but nothing as structured. The European Union has moved on ESG rating regulation too, but much of the heavy lifting came after SEBI had already acted.

Which makes the next question important.

Where Are the Credibility Gaps That Regulation Can't Fix?

Here's the uncomfortable part. Regulation can solve certain problems — accountability, transparency, basic market conduct. It cannot solve the deeper problems of what ESG ratings actually measure.

Gap one: ratings measure disclosure, not performance. A company that reports extensively on its emissions, diversity, and governance tends to score better than a company that reports less — even if the second company is actually more sustainable in practice. This is because raters can only grade what they can see. Companies that invest heavily in sustainability communications get rewarded. Companies that invest heavily in actual sustainability but communicate poorly get penalised. This is one of the most well-documented findings in ESG ratings research globally.

Gap two: methodology matters more than the score. Two legitimate rating agencies, both following their disclosed methodologies honestly, can still produce opposite ratings on the same company. That isn't a bug. It's a feature of ESG being genuinely contested territory. Is a tobacco company with great labour practices a good ESG investment or a bad one? Is an oil company that leads its sector on emissions a leader or still a laggard? Different raters answer differently. SEBI can make them disclose their answers. It cannot make them agree.

Gap three: Indian context data is still thin. Even with India-specific parameters encouraged, the underlying data needed to assess many Indian-specific sustainability issues is patchy. Supply chain labour conditions, water stress at the catchment level, biodiversity impact in specific agro-climatic zones — this data often doesn't exist in structured, comparable form. Rating agencies then either leave gaps or estimate, and both choices affect credibility.

Gap four: the user doesn't always understand the tool. Many retail investors, and even some institutional ones, treat ESG scores as objective truth. They aren't. They are structured opinions based on particular weightings of particular data. A company with a score of 72 is not "better" than one with 68 in any absolute sense. This misuse problem sits outside SEBI's regulatory reach but very much inside the credibility problem.

Who Gets Hurt When ESG Ratings Go Wrong?

Three groups take the damage.

Companies that are actually sustainable but don't know how to play the ratings game. A mid-sized Indian manufacturer that has quietly invested in water recycling, worker welfare, and clean energy for years can end up with mediocre scores simply because it doesn't have a sustainability communications team producing the right documents in the right format. Meanwhile, a competitor with better-paid ESG consultants gets a glowing rating. Markets reward the presentation, not the performance.

Investors who don't understand the methodology. An investor who buys a fund claiming to hold only "high ESG-rated" companies may end up with exposures very different from what they expected. Without reading the methodology, they don't know whether they are buying into climate leaders, governance champions, or companies that simply fill out lots of surveys.

The Indian sustainability ecosystem as a whole. When credibility is shaky, the entire system starts to lose trust. Companies wonder why they should bother with genuine ESG work if a glossy report gets them the same rating. Investors grow cynical. Regulators get pressure. And the legitimate, hard, important work of making companies genuinely more sustainable gets tangled up with the performance of it all.

How Should Companies and Investors Respond?

Forget the boilerplate advice. Here's what I've seen actually work.

For companies, stop chasing the rating. Focus on the underlying performance and let the rating catch up. Companies that genuinely improve their environmental and social practices tend to see their ratings improve too — just more slowly than companies optimising for the rating directly. The first approach compounds. The second stops the moment you stop paying consultants.

Engage with raters, don't fight them. If a rating seems unfair, ask for the methodology notes, respond through the proper channels, and provide better data. Most rating agencies have formal engagement processes. Using them works better than sending angry letters to the CEO.

For investors, read past the score. Look at the rating agency's methodology. Understand what it weights heavily and what it ignores. Compare two or three ratings for the same company and notice where they disagree. The disagreement often tells you more than the agreement does.

Treat ESG ratings as one input, not the answer. This is how credit ratings are treated by serious investors. ESG ratings deserve the same discipline. They are a structured opinion. They are useful. They are not the final word.

For regulators, keep iterating. SEBI's 2023 framework was a strong first move. The next steps — tighter oversight of methodology changes, better protection for companies that feel unfairly rated, clearer guidance to retail investors on how to interpret scores — all matter for the long-term credibility of the system.

The Deeper Truth Nobody's Saying

Here is something rarely stated directly in ESG panels and industry events. ESG ratings are, at their core, attempts to compress something enormously complex into a single number. They are useful for the same reason credit ratings are useful — humans and markets need simplified signals to make decisions at scale. They are limited for the same reason — compression loses information.

The credibility problem in Indian ESG ratings is not going to be fully solved by SEBI, or by any regulator anywhere. It is partially a data problem, partially a methodology problem, and substantially a conceptual problem about what ESG even means in a country as vast and varied as India.

What SEBI has done is raise the floor. ERPs can no longer operate as completely unregulated opinion factories. That's a meaningful win. But raising the floor is not the same as fixing the ceiling. The harder work — of building credible data, of narrowing methodological disagreements, of educating the market about what ratings can and cannot tell you — sits with the industry itself.

And that work moves slowly. Much more slowly than the marketing cycle of any given ESG fund launch.

So What Happens Next?

My honest read is that the next few years will sort the serious players from the performers, on both sides of the rating relationship. The ERPs that invest in credible methodologies, Indian-specific data, and transparent engagement will earn trust. The ones that slap generic global templates onto Indian companies will lose it. Similarly, the Indian companies that treat ESG as a real business issue will see their ratings stabilise and improve. The ones treating it as a reporting exercise will keep getting whipsawed between agencies that see through the performance.

The credibility gap in India's sustainability ecosystem is real. It is wider than the regulatory gap that SEBI has closed. But it is also narrower than the gap in most other emerging markets, and arguably narrower than the gap in some developed ones.

If you sit on an investment committee, in a boardroom, or on a sustainability team, the question worth asking isn't whether you trust ESG ratings. It's whether you understand them well enough to use them properly — and whether you're doing the underlying work that would make a good rating deserved rather than manufactured.

Because ratings, like most signals in a complex market, eventually get tested against reality.

And reality, in my experience, tends to win.

ESG is no longer just a sustainability report — it’s becoming a core boardroom responsibility across the UAE.

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