The Impact of ESG Rating Divergence on Capital Market Efficiency: Evidence from the Indian Scenario

Abstract

Environmental, Social, and Governance (ESG) integration has gained traction in Indian capital markets, driven by regulatory mandates and global investor demand for sustainable investments. However, discrepancies in ESG ratings across agencies create uncertainty, potentially undermining market efficiency. This paper examines the research problem of ESG rating divergence and its impact on capital allocation, cost of capital, and firm valuation in India. Using a mixed-methods approach—quantitative analysis of ESG ratings for 200 Indian firms and qualitative interviews with market stakeholders—the study finds that rating inconsistencies increase information asymmetry, elevate equity costs, and distort valuations, particularly for mid-cap firms. The findings contribute to the global discourse on ESG reliability while addressing India-specific challenges in sustainability adoption.