The Carbon Rating Framework Phase 2 builds on Climate Policy Initiative’s ongoing effort to integrate emissions performance into financial decision-making. As India advances toward its net-zero and Paris Alignment goals, the financial sector faces growing demand for tools that can systematically assess whether corporate activities align with these targets.

Despite increasing awareness, most investment and lending evaluations continue to depend on traditional credit ratings, which often overlook carbon performance and may misclassify climate-positive businesses as high-risk, particularly those pioneering low-carbon technologies or novel transition models.

To address this gap, CPI developed the Carbon Rating Framework, a methodology designed to evaluate companies based on their carbon emission intensity and the pace of their reductions, offering a new way to incorporate environmental performance into financial analysis.

What Phase 2 Delivers

Phase 1 established the conceptual foundation and methodology for the framework. Phase 2 takes this forward by applying the model to a representative sample of Indian companies, testing its feasibility, and refining the approach through engagement with market participants.

The results demonstrate both the technical viability of generating rating-based assessments of emissions intensity and their potential applications to transition finance.

Insights from Phase 2 Testing

Applying the framework to 50 companies across 10 sectors revealed a balanced distribution across all carbon rating levels, demonstrating strong differentiation and comparability:

• Consumer Discretionary, Utilities, and IT sectors also showed clear rating spreads, validating the framework’s applicability across diverse industries.
• Sub-sector analyses, such as cement, steel, and real estate, confirmed the framework’s ability to capture nuanced differences in carbon performance even within similar industries.

The Phase 2 pilot highlights opportunities to further strengthen the framework and its integration into India’s sustainable finance ecosystem. Key next steps include:

• Aligning with National and Global Standards, including India’s NDCs and the Carbon Credit Trading Scheme (CCTS).
• Refining Metrics, incorporating sector-specific indicators like production volume or energy intensity.
• Expanding to Scope 3 Emissions, using qualitative factors to capture value-chain impacts.
• Embedding in Financial Systems, enabling banks, investors, and regulators to integrate carbon ratings into credit appraisal and risk assessment frameworks.

By combining emissions data, disclosure quality, and transition-readiness indicators, the Carbon Rating Framework provides a foundation for transition finance, helping direct capital toward companies actively reducing their carbon footprint.

Download the report here