Securities and Exchange Board of India (SEBI) released a Consultation Paper on ESG (Environmental, Social, and Governance) Disclosures, Ratings, and Investing. The paper aimed to solicit feedback on proposed regulatory changes to improve ESG disclosure and practices in the Indian securities market.
The paper covered a range of topics, including the need for standardized ESG disclosure frameworks, the role of ESG ratings agencies, and the integration of ESG considerations into investment decision-making.
In May 2022, SEBI constituted the ESG Advisory Committee (EAC) to make recommendations to streamline the regulatory framework for ESG Disclosures, Ratings and Investing.
SEBI has mandated the top 1000 listed companies by market capitalization to make filings as per the Business Responsibility and Sustainability Reporting (BRSR) from FY2023. In FY22, more than 175 companies reported on the BRSR framework on a voluntary basis.
PART A: ESG Disclosures
Several stakeholders placed reliance on disclosures made in the BRSR, wherein assurance becomes key for improving credibility and investor confidence and the same is required for disclosures made by supply chain participants of companies.
In order to achieve the twin objective of improving credibility and limiting the cost of compliance, BRSR Core has been developed for reasonable assurance which consists of select Key Performance Indicators (KPIs) under each E, S and G attributes. The KPIs contain a number of intensity ratios such as intensity of GHG emissions, water consumption etc., to enable comparability irrespective of size of company. To make the intensity ratios more globally comparable and fairer to low-cost/developing economies, intensity ratios based on economic value adjusted for Purchasing Power Parity (PPP) should be computed in addition to normal intensity ratios. Initially, country-level PPP may be used, and sector-specific PPP may be developed over time.
Following are the KPIs identified by the EAC (provided in Annexure 1 of the consultation paper):
In keeping with a glide path approach, reasonable assurance of KPIs in BRSR Core is suggested to be mandated in a gradual manner, as under:
The consultation paper proposed to introduce a limited set of ESG disclosures for supply chain of companies i.e., BRSR core in a gradual manner on a comply or explain basis in order to ensure full understanding of the ESG risks and related impact.
PART B: ESG Ratings
EAC identified ESG parameters that are relevant to Indian context that may be integrated in at least one of the ESG ratings for an Indian company. It also stated that ERPs would be permitted to develop customised ratings for specifics user groups depending on user needs.
ESG ratings are currently assigned by corporations based on self-reported data, without any third-party assurance. This is concerning as investors rely heavily on these ratings for making investment decisions. The proposed BRSR Core provides for disclosure of assured KPIs and suggests that ERPs should also provide a Core ESG rating based on assured/audited/verified information and reports. This would increase the reliability of ESG ratings and benefit investors.
PART C: ESG Investing
SEBI is developing a regulatory framework for ESG mutual funds in India and has proposed measures to prevent greenwashing and mis-selling, including placing additional responsibilities on asset management companies and introducing greater transparency in relation to voting on resolutions of investee companies. SEBI aims to address ill consequences at the level of ESG schemes and investee companies through disclosures. If an asset management company has holdings in an investee company under both ESG and non-ESG schemes, and the voting approach is contrary, the AMC must provide the rationale for the contradiction. These voting disclosures will become mandatory from the FY24 onwards.
SEBI has proposed additional disclosure obligations for AMCs and portfolio companies, effective from the FY26, and mitigation measures to prevent greenwashing at the ESG scheme level. These measures include requiring ESG schemes to invest at least 65% of their assets in companies reporting on comprehensive BRSR with assurance on BRSR Core disclosures, monthly portfolio disclosure of security-wise BRSR Core rating or scores, and third-party assurance of scheme portfolio compliance. From April 1, 2023, mutual funds must obtain an ESG audit certificate, and fund managers must provide a commentary on ESG strategy, engagements, and annual tracking of ESG ratings movements in investee companies from the FY24 onwards.
SEBI has proposed to create 5 sub-categories of ESG Schemes considering AMCs may want to launch multiple diversified ESG schemes. This permits each AMC to launch one ESG scheme each under the following sub-categories:
