SEBI’S ESG Ratings Circular: A Step Forward, But Is It Far Enough?

[Om Chandak is a 4th Year and Arjun Kapur is a 5th Year at Maharashtra National Law University, Mumbai]

Introduction

In recent years, the importance of sustainability in the economy and governance has changed how global capital flows, decisions are made, and corporate performance is evaluated. Environmental, Social, and Governance (ESG) factors, which were once seen as optional corporate social responsibility disclosures, now shape investment strategies, shareholder actions, and regulatory policies around the world. ESG functions as both a mirror, showing risks, and a compass, directing capital to sustainable businesses.

India’s approach to ESG has kept up with this global trend. The Securities and Exchange Board of India (SEBI) has taken the lead in promoting sustainability-related disclosures in the Indian capital markets. The launch of the Business Responsibility and Sustainability Reporting (BRSR) framework, for the top 1,000 listed companies by market capitalization, is a crucial step in formalizing ESG disclosures. However, the BRSR only provided part of the solution.  It is important to standardized a way to interpret these disclosures and assign trustworthy ESG scores, to make the regulatory framework complete.

With the aim to fill this gap, SEBI issued the Master Circular for ESG Rating Providers on July 11, 2025. This circular not only combines earlier guidelines but has also tried to establish an official structure for ESG ratings in India. This blog will evaluate the new ESG rating framework introduced by SEBI. It will start by examining the ESG rating process as outlined in the Master Circular before identifying gaps in regulations and procedures. After analysing problems with current structure and referring international structure we have suggested ways that could improve the credibility and usefulness of ESG ratings in India.

Understanding SEBI’s ESG Rating Process

At the centre of SEBI's new ESG rating system is the regulation of ESG Rating Provider (ERPs). These providers must now register with SEBI under the updated Credit Rating Agencies Regulations, 1999, and follow the procedural, operational, and disclosure standards set out in the Master Circular.

The rating process begins when listed companies submit their BRSRs, which contain disclosures on ESG parameters such as energy use, emissions, labour practices, diversity, and corporate governance, and serve as the main dataset for ERPs to assess performance. These BRSRs are supported by public data, third-party verifications, and other sources. However, a reasonable conclusion can be drawn that when there is a lack of clarity and standardisation regarding the formation and content of BRSRs, combined with the variety and inconsistency in supplementary sources, raises concerns about the uniformity, transparency, and fairness of the overall rating process.

The Master Circular correctly standardises the output of ESG ratings by requiring all ERPs to mark their assessments on a scale of 0 to 100, along with the corresponding rating category. It introduces six rating products: three ‘Core’ ratings based only on assured data (Core ESG Rating, Core Transition/Parivartan Score, and Core Combined Score), and three ‘Overall’ ratings that blend assured and non-assured data (ESG Rating, Transition/Parivartan Score, and Combined Score).  While this dual-score model seeks to differentiate between assured data (which has been independently verified for accuracy) and non-assured data (which is based on company disclosures without external validation), it might confuse investors who do not have the expertise to understand the significance of this distinction.

The Master Circular outlines two acceptable business models for ERPs:  In the issuer-pays model, the company whose securities are being rated bears the cost of obtaining the rating, whereas in the subscriber-pays model, the funding comes from investors, institutions, or data subscribers who pay to access the ratings and related research. Both the model comes with its own challenges. The issuer-pays model raises serious concerns about conflicts of interest and the risk of inflated scores. The subscriber-pays model, which is potentially more objective but might struggle to thrive in India because of to the limited demand for ESG data from retail and even some institutional investors.

SEBI mandates that ERPs reveal their rating methodologies in order to increase the reliability of the ratings. Regulation 28S of the CRA Regulations mandates that internal audits conducted by the company under their obligation under Section 136  are also required as a component of the yearly compliance check. The rules do not, however, include real-time assurance procedures for ESG data or independent third-party audits, which weakens the credibility foundation.

Key concerns with the current framework

Lack of uniformity in the ESG rating methodology

The SEBI master circular mandates the disclosure of methodologies used by ERPs to calculate ESG rating, but it fails to prescribe a uniform method to calculate ESG rating. It does not prescribe a baseline set of parameters on the basis of which the calculation will be done or weightage will be given to a particular function. This leaves significant room for discretion, which might lead to divergence in rating. This regulatory choice means that one ERP may, for example, assign 30% weight to environmental parameters and another only 20%, or define “employee well-being” through different indicators entirely. Mr. Rohit Inamdar, CEO of Care Edge ESG (one the ERP) has also highlighted this problem. He says that different ERPs assign different weightages to ESG themes, so the same company can get very different score.

This problem is not unique to India; it’s a globally recognized issue. Regulators in the United Kingdom (UK), United States of America (US), and European Union (EU) have highlighted it as a crucial issue. Internationally, the  Organization for Economic Co-operation and Development (OECD) and the International Organization of Securities Commissions (IOSCO) have raised concerns about the inconsistent methodology used for ESG ratings.  The European Banking Federation has also raised similar concerns about the proposed ESG rating regulation in the EU. The impact of inconsistent ESG ratings can be analysed through the 2022 Tesla example, where they were removed from the S& P 500 ESG Index, whereas they retained their position in other indices.

The removal, based on the S&P’s subjective assessment of various social and governance issues at Tesla, contrasted sharply with the inclusion of other companies such as ExxonMobil and McDonald’s. This shows how the same company is rated differently by different rating agencies based on their own methods. Such inconsistent outcomes lead to a lack of trust in these ratings by the investors and asset managers who seek ESG investment opportunities. In the Indian context, also prominent mutual fund house like ICICI, SBI, Kotak, etc have launched their ESG Fund, which is dependent on the ESG rating of the companies. Lack of awareness among people and inconsistent rating standards have raised barriers to the growth of these funds. Without standardization, ESG ratings may fail to serve as dependable indicators for responsible investing, both in domestic and global markets.

Core vs. Overall Ratings: A Redundancy?

The other problem is regarding the dual-rating structure introduced by SEBI, i.e., Core rating and Overall rating. There are 6 types of ESG rating products-

1.     ESG Rating

2.     Transition or Parivartan Score

3.     Combined Score

4.     Core ESG Rating

5.     Core Transition or Parivartan Score

6.     Core Combined Score

Out of these six types of ESG rating products the last three scores i.e., the Core ESG Rating, Core Transition (or Parivartan) Score, and Core Combined Score; are completely based on core data, which means they use only verified information. The Parivartan Score measures how much a company has improved over time. The ESG Rating Score includes both core (verified) and non-core (unverified or disclosure-based) factors. Finally, the Combined Score takes into account both the ESG Rating Score and the Parivartan Score. In simple terms, SEBI has divided these ratings into two groups- Core Ratings, which rely only on verified data, and ESG Ratings, which also include non-verified or voluntary disclosures.

Some critics argued that the ESG rating includes core rating and non-core rating, which includes data issued by companies that are not verified. Therefore, the overall rating raises a question of bias, which results in the core rating being a more reliable form of rating. The reliance on public data in the Core Rating presumes that all meaningful ESG information is externally available and assured, which is often not the case. In practice, many ESG parameters, such as employee well-being, community engagement, or emissions disclosures, require companies to disclose this data, which is cumbersome to verify. Therefore, neither score, which is calculated alone, can offer a holistic view of the company’s ESG profile.

Way Forward

To address the concern of a lack of uniformity in ESG rating methodologies, SEBI should move beyond mere disclosure requirements. A standardised baseline framework for all ERPs is crucial. While rating agencies may retain flexibility in adopting sector-specific or forward-looking metrics, adherence to a common minimum methodology is important. This will help in ensuring consistency, comparability, and transparency across ratings.

To address the situation of core vs. non-core, SEBI should introduce a single rating method. Unlike the Indian regime, the EU’s ESG Rating Regulation does not bifurcate ratings into ‘core’ and ‘overall’ categories but focuses on ensuring transparency through disclosure of the rating methodologies adopted.  A uniform system where all data is verified by an independent auditor will be an effective solution. The EU model demonstrates how a common framework can significantly enhance the quality and consistency of ESG ratings by setting clear standards for transparency and ensuring the credibility of rating activities. All the data being verified will increase the rating's trustworthiness. This will not only enhance investor trust but will also enhance rating consistency. ERPs should provide a list of parameters that the company will use to prepare a report and get the same verified by an auditor. On the basis of all the verified and publicly available data, an ESG rating should be given. A strong push toward verified, standardized ESG data will motivate companies to strengthen internal governance systems, which will help build a data management capacity and treat ESG disclosures as a strategic, rather than compliance-oriented system. Phased implementation, regulatory support, and giving incentives to companies for early adoption can create a robust verification ecosystem that not only supports market integrity and sustainable development goals.

Conclusion

SEBI’s Master Circular for ERPs is an important development in the ESG ratings process. It introduces a clear scoring framework, different rating products, and required more disclosure for better transparency. The updated framework has not only improved transparency but also improved accessibility. However, it still has gaps in consistency, verification processes, and rating structure, which limit their reliability and comparability. Addressing these deficiencies through a baseline methodology and assured data standards would strengthen investor confidence and align the Indian regime with emerging global norms. As sustainable finance grows in significance, refining the framework to ensure consistency, credibility, and market-wide acceptance will be essential for India to position itself as a trusted jurisdiction for ESG-linked investment.