ESG ratings have become an essential tool for investors seeking to understand a company’s sustainability performance and long-term risk exposure beyond just financial results. These ratings help investors evaluate not only what companies do, but how they do it. In India, where sustainability challenges are increasingly intersecting with financial materiality, ESG ratings offer a critical lens into long-term corporate value and resilience.

Understanding ESG Ratings as a Modern Investment Tool

ESG ratings are metrics used to evaluate a company's performance across three key dimensions:

i. Environmental: Assesses how a company manages its environmental impact, including energy use, waste management and carbon emissions.

ii. Social: Evaluates how a company treats its employees, customers, suppliers and communities, focusing on diversity, labour practices and human rights.

iii. Governance: Examines a company's internal practices and policies, focusing on board diversity, transparency and ethical business practices.

These ratings offer a composite view of a company’s operational integrity, sustainability performance, and risk profile. They are utilized by investors, regulators, and other stakeholders to assess a company’s alignment with responsible business practices and long-term value creation.

A strong ESG score often indicates effective risk mitigation, operational efficiency, inclusive workforce practices, and proactive regulatory compliance. Companies that score well are more resilient in today’s volatile landscape and better positioned for long-term investment. They demonstrate preparedness for a low-carbon economy, possess a stronger brand reputation, and have enhanced access to ESG-focused capital.

India’s ESG Reforms: Strengthening Investor Insights

India’s ESG landscape has evolved significantly with SEBI mandating the top 1,000 listed companies to publish Business Responsibility and Sustainability Reports (BRSR) from FY 2023. From FY 2024-25 onward, the top 250 companies must also report BRSR Core disclosures, focusing on standardized, assured data. These regulatory shifts are laying the groundwork for higher-quality ESG data, which in turn enhances the credibility and comparability of ESG ratings—equipping investors with more reliable tools for evaluating corporate sustainability and long-term risk exposure.

In line with this shift, a 2024 study titled The Current State of BRSR at Corporate India, conducted by the NSE, CFA Institute, and CFA Society India, highlights the growing importance of ESG disclosures among companies. By reviewing 300 firms covering 70% of India’s market capitalization, the study revealed measurable improvements in both the quantity and quality of ESG disclosures offering investors clearer, more reliable data to assess sustainability performance and long-term risk-adjusted returns.

Financial Outperformance Linked to ESG

Strong ESG performance is now widely seen as a driver—not a drag—on financial returns. Recent data and trends reinforce this positive link between ESG and profitability:

1. The belief that ESG compromises returns has been disproven by several rigorous studies. A 2023 Kroll study across 13,000 global firms found those with higher ESG scores yielded 12.9% average annual returns compared to 8.6% for lower-rated peers.

2. A 2025 study by the Centre for Sustainability and Excellence (CSE), USA, revealed a 92% correlation between strong ESG performance and profitability among top North American companies. ESG framework adoption is widespread, with 87% aligning with GRI, 63% using TCFD, and 56% implementing SASB standards. However, decarbonization remains a challenge—67% of firms lack formal targets, and only 12% are committed to net-zero by 2050. ESG-linked executive bonuses are also on the rise, reinforcing the growing accountability of leadership in driving sustainability and long-term financial performance.

Advantages to Investors

As impact investing (also known as ESG investing) gains momentum in India, ESG ratings have become a key tool for investors to assess risk, identify growth opportunities and ensure long-term value. Here’s how they add value across the investment journey:

1. Make informed decisions

ESG ratings offer investors a holistic view of a company’s environmental, social, and governance performance, beyond financial metrics. In India, where impact investing generated USD 1,217.9 million in 2024 and is expected to grow at a 23.3% CAGR to USD 4,109.6 million by 2030, integrating these ratings helps assess long-term sustainability and ethical practices. 

2. Ensure investment in investee grows

Companies with strong ESG performance are better equipped to handle regulatory changes, reputational risks, and operational disruptions. Investors focused on ESG are more likely to support businesses with sustainable growth. A 2023 study published in ResearchGate analyzed 37 Indian companies and found a significant positive relationship between ESG performance and financial metrics such as Return on Capital Employed (ROCE), ROA (Return on Assets) and ROE (Return on Equity), highlighting that ESG-driven companies are more likely to deliver superior financial returns.

3. Advise corrective actions to investee companies

ESG ratings highlight not just strengths but also areas where a company is underperforming. This gives investors the opportunity to engage with investee companies constructively, urging them to take corrective measures to address key ESG gaps. This active stewardship enhances investor influence and promotes responsible, resilient practices that drive long-term value.

4. Risk management of your investment 

Environmental fines, regulatory breaches, social unrest, supply chain issues, and poor governance can cause major financial losses. ESG ratings serve as early warning tools, helping investors spot risks before they translate into material losses. With tightening ESG regulations, these ratings help proactively de-risk portfolios and avoid non-compliant entities.

5. Lay roadmap & track investee’s ESG performance

Regular ESG assessments help investors track company progress and assess if sustainability commitments and milestones are being met. According to KPMG’s 2024 CEO Outlook, Indian CEOs are increasingly taking a long-term view on ESG investments, expecting ESG returns within five to ten years—highlighting the importance of ongoing ESG tracking for resilient portfolios.

Why ESG and Financial Performance Are Connected

While the positive correlation between ESG and financial performance is well-documented, understanding the causal mechanisms behind this relationship is key. There are several reasons why ESG drives financial success:

1. Risk Mitigation: ESG-conscious companies are often better at identifying and mitigating long-term risks, such as regulatory changes, environmental disasters, or social unrest. This allows them to avoid costly surprises and maintain stable financial performance.

2. Operational Efficiency: By implementing sustainable practices, companies can reduce waste, lower resource consumption, and cut costs, which improves profit margins.

3. Brand Loyalty and Reputation: Companies with strong ESG reputations tend to attract more loyal customers, partners, and employees. Consumers increasingly favor brands that align with their values, leading to higher sales and market share. Supporting this, a CII–AT Kearney report showed that over 70% of Indian consumers favor brands that are sustainable and trustworthy, highlighting the growing influence of ESG on buying behavior8.

4. Access to Capital: Companies with strong ESG ratings tend to attract more investment from institutional investors who prioritize sustainability. This can lead to lower financing costs and better access to capital. India’s ESG mutual funds are reflecting this trend, growing fivefold from ₹2,268 crore in March 2019 to ₹12,447 crore by March 2022 (according to data from Morningstar India). Top fund houses such as SBI and ICICI Prudential have launched ESG-centric funds using ESG ratings as a key screening tool9.

Conclusion: ESG Ratings Are More Than A Trend

In India’s dynamic and sometimes opaque market, ESG ratings act as a compass—illuminating governance standards, ethical practices, and sustainability readiness. For investors, they aren’t just a checkbox but a core part of evaluating long-term value and resilience.

As regulatory landscapes evolve and climate challenges intensify, ESG ratings will play a central role in investment screening, portfolio construction, and capital allocation. The message is clear: ESG is no longer peripheral; it is central to investment success.

References

https://rpc.cfainstitute.org/research/reports/2024/the-current-state-of-brsr-at-corporate-india?utm_source=chatgpt.com

https://www.kroll.com/en/about-us/news/kroll-study-shows-stronger-investment-returns-companies-high-esg-ratings

https://cse-net.org/2025-sustainability-esg-research-findings/