Taking into account the fact that the emerging markets have environmental and social challenges that differ, the ESG Rating Providers (ERPs) “shall be required to consider India/Emerging Market parameters in ESG Ratings”
The Securities and Exchange Board of India (SEBI) has approved the regulatory framework for Environmental, Social and Governance (ESG) disclosures, ratings and investing by mutual funds to promote a balanced approach to ESG. Norms would be also introduced for ESG Rating Providers (ERPs).
A new section has been introduced in the SEBI (Credit Rating Agencies) Regulations, 1999, to this effect. Along with it, the SEBI board gave consent to the amendments made to SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 and SEBI (Mutual Funds) Regulations, 1996 to support a holistic approach to ESG.
Varghese Bose, Senior Director - ESG, Cyril Amarchand Mangaldas, said, "The SEBI’s decisions on ESG logically connect disclosure, rating, and investing. The new value chain disclosure will be a challenge to reporting companies, but it will bring unlisted companies into the ESG fold.”
A Business Responsibility and Report (BRSR) core is to be introduced. It will contain an exhaustive list of Key Performance Indicators (KPIs). The listed entities will need to have adequate certainty on the KPIs. The BRSR core applicability starts with the 150 top listed entities (by market capitalisation) from 2023-2024 and will hold relevance for the top 1,000 listed entities by FY 2026-27.
The ESG disclosure and assurance (BRSR core only will also be introduced in the value chain of listed entities in accordance ‘with certain thresholds’ that will be stated.
The disclosure and assurance will be applicable to the top 250 listed entities (by market capitalisation). It begins from FY 2024-2025 and FY 2025-26.
Taking into account the fact that the emerging markets have environmental and social challenges that differ, the ERPs “shall be required to consider India/Emerging Market parameters in ESG Ratings.” But there would not be any constraint on issuance of other types of ratings.
To ensure credibility in the ratings, ERPs, a different category of ESG rating ‘Core ESG Rating’ will have to be churned out based on the certain parameters of BRSR core.
To facilitate growth of ESG investment, red flags like ‘mis-selling’ and ‘greenwashing’ has also been duly dealt with. Measures have been introduced like launching a new category of scheme that will facilitate a number of schemes related to ESG.
Monish G. Chatrath, Managing Partner, MGC Global says, "The right blend of a “rules based” and “principles based” approach can seek to enhance corporate governance. However, this recipe can only succeed if companies make concerted efforts to comply with the legal framework in substance and go beyond the legal framework, to the moral framework and ethical framework in the context of which business decisions are made. Consequently, this is a positive development that seeks to ensure that board level appointments get viewed as meritorious positions in principle, which a clear focus on optimisation of value creation for stakeholders."
SEBI has also proposed compulsory disclosure of voting decisions with due focus on ESG factors and how the ESG framework is “applied on the fund/ investments.”