Impact of Factoring Environment, Social, and Governance (ESG) in Credit Rating in India on Global Capital Flow

Abstract

This chapter is a study of the impact of environmental, social, and governance (ESG) issues on credit rating in India. It will help issuers, investors, and other market participants understand rating agencies' approach to incorporating the sustainability-related factors in its analysis. This will provide an overall perspective on the considerations that are usually the most important. Under environment considerations, climate change, waste recycling, air pollutants, and natural capital sustainability can be important factors. Social considerations are becoming more and more important among investors and consumers and are raising awareness about prosperous and failing communities. Moreover, COVID-19 pandemic has further highlighted the need for redirecting capital flows toward sustainable activities, making our economy and society more resilient against shocks. Governance factors primarily involve the corporate governance practices prevalent in the entity reflecting the different rights and responsibilities among its different stakeholders management, board of directors, employees, lenders, shareholders, customers, and suppliers. It also encompasses the corporate's business conduct and practices related to transparency and disclosure. This chapter will focus on the contemporary issues of including ESG in credit rating and what are the probable impacts of doing the same.

With favorable rating, companies can access international debt market easily. Moreover a favorable sovereign rating is beneficial for the overall economy of a country as better rating enables the government of the country to access the international debt market. Even capital allocation by foreign institutional investors increases which is beneficial for the equity market too.

Citation

Khatua, S. and Ghosh, A. (2024), "Impact of Factoring Environment, Social, and Governance (ESG) in Credit Rating in India on Global Capital Flow", Bhattacharyya, R. and Mazumdar, D. (Ed.) Contemporary Issues in International Trade, Emerald Publishing Limited, Leeds, pp. 309-321. https://doi.org/10.1108/978-1-83797-320-020241020