Sebi to put in place regulatory framework on ESG disclosure, ratings

Markets regulator Sebi on Wednesday decided to put in place a regulatory framework on ESG disclosures by listed entities, ESG ratings in the securities market, and ESG investing by mutual funds to facilitate a balance between transparency, simplification and ease of doing business in an evolving domain.

Also, the regulator has decided to come up with norms for ESG Rating Providers (ERPs) amid the growing importance of their role in making investment decisions. 

To promote ESG investing, Sebi will introduce certain measures to address the risk of mis-selling and green-washing and to enhance stewardship reporting requirements.

This comes amid growing recognition of the significant economic and financial impact of climate change and environmental, social and governance (ESG) risks. 

In order to enhance the reliability of ESG disclosures, Sebi said that BRSR (Business Responsibility and Sustainability Report) Core will be introduced, which contains a limited set of Key Performance Indicators (KPIs) for which listed entities will be required to obtain reasonable assurance.

A glide path will be prescribed for applicability of BRSR Core, beginning with the top 150 listed entities by market capitalisation from FY2023-24, which will be gradually extended to the top 1,000 listed entities by FY2026-27, Sebi said in a statement after the board meeting. 

According to Sebi, a number of companies have significant ESG footprints in their value chain and in order to increase transparency, ESG disclosures and assurance (BRSR Core only) will be introduced for the value chain of listed entities with certain thresholds that will be specified.

In its board meeting, the regulator has cleared a proposal for a regulatory framework for ESG Rating Providers in the Indian securities market and related proposals on enhanced transparency in ESG rating rationales, measures to mitigate conflict of interest by ERPs, facilitating augmentation of transition finance in India and ESG ratings based on assured data.

Considering that emerging markets have a different set of environmental and social challenges, Sebi said that ERPs will be required to consider India or emerging market parameters in ESG ratings. 

However, there would be no constraints on their issuing other or additional ratings as required by their clients, Sebi said.  

In order to facilitate the credibility of ESG Ratings, ERPs will have to offer a separate category of ESG rating -- Core ESG Rating -- which will be based on the assured parameters under BRSR Core.   

With regard to ESG investing, Sebi has decided to introduce a new scheme category, enabling the launch of multiple schemes on ESG-related factors.

It has decided to mandate ESG schemes to invest at least 65 per cent of assets under management (AUM) in listed entities, where assurance on BRSR Core is undertaken.

The regulator said it will mandate third-party assurance and certification by the Board of AMCs on compliance with the objective of the ESG scheme and mandate enhanced disclosures on voting decisions with a specific focus on environmental, social and governance factors.

Also, it will mandate disclosure of fund manager commentary and case studies, which highlight how the ESG strategy is applied to the fund or investments.