Global investment firms, when deciding on funds allocation, give significant weightage to companies’ environmental, social and governance (ESG) scores. In an interesting trend, data from Acuité Ratings and Research Ltd have revealed that private companies in India are ahead of their public sector undertaking (PSU) peers on this front.
Of the Nifty 50 companies, 40% of those from the private sector hold an ESG rating of ‘Risk A’, against 14% of those from the public sector, said an Acuité report. Per the rating company’s matrix, Risk A is assigned to an entity with a sound track record of managing material ESG risks.
The report further said that of all the companies on the Nifty index, 48% of private sector firms and 86% of PSUs were given an ESG rating of BBB. This is typically given to firms that do hold a good track record of ESG risk management, yet do not show evidence of a robust framework.
While PSUs may have been late in implementing ESG measures, their respective fields of operation are also sometimes responsible for it, said the report. “Several large PSUs are active in oil and gas, mining, power generation and steel, also the highest carbon-intensive sectors”, the Acuité report said. This could be tilting the balance against them, it pointed out.
“ESG factors have a strong linkage with the long-term financial health of an issuer or borrower. Clearly, ESG factors are increasingly relevant in the evaluation of the credit quality of debt issuers (borrowers). Acuité has taken an important initiative to incorporate ESG factors in a more meaningful way to make tomorrow’s rating methodologies more accurate,” said Antony Jose, Chief Rating Officer, Acuité.
While private companies may be early adopters of ESG measures in a bid to be competitive in a global environment, PSUs are catching up, the report revealed. Many of the state-run companies are implementing measures to shape their business portfolios to ensure sustainability over the long term. Also, experts pointed out, in terms of disclosure, PSUs fare well.
PSUs on the fast-track
PSUs are fast playing catch-up, said experts. A good ESG rating procures debt at a lower cost, so it is imperative for the state-run companies to improve their scores to ensure better finances for the long term.
At present, as they remain quasi-government owned, this may not appear a major issue. But, in case they are privatised in future, funding via debt would call for higher ESG scores, which may again propel the companies to improve their performance on this count.
Also, while PSUs may not be very advanced in terms of environmental and governance scores, they have consistently focused on the social aspect, said experts. There are numerous hospitals and educational institutions, for instance, that are run by PSUs, for which they may not have taken formal credit via ESG scores. A push in this direction is expected to improve their tally.
Business ethics rating
The Acuité report said that in terms of business ethics, there was hardly any difference between the two segments — while private sector players scored 49% on an average, PSUs scored 48%. This aspect of ESG takes into account an entity’s measures to ensure fair competition and whistle-blower protection, while stemming graft and insider trading.
Acuité Ratings, the flagship company of the Acuité Group, is a full-service credit rating agency registered with the Securities and Exchange Board of India (SEBI). Late last month, it began to incorporate ESG factors in the ratings process by including a section on ESG assessment for listed issuers and companies with large debt.