India Consults on ESG Disclosures, Ratings Framework

BRSR framework enhancements will require ESG disclosures assurance, with mandatory requirements for ESG rating providers. 

The Securities and Exchange Board of India (SEBI) has issued a consultation paper – open for comment until 6 March – proposing a regulatory framework for ESG disclosures by listed entities, ESG ratings in the securities market, and ESG investing by mutual funds. 

The board has already mandated the top 1,000 listed companies by market cap to make filings under the Business Responsibility and Sustainability Reporting (BRSR framework) on a voluntary basis from fiscal year 2021-2022 and mandatory basis from fiscal year 2022-2023. 

The consultation paper proposes to improve assurance of ESG disclosures through the integration on KPIs for each of the E, S, and G in the framework. One example is ‘gross wages by gender’ to reflect the gender diversity practices of companies being considered as a new metric.  

Attributes such as job creation, and inclusive development are being considered under the ‘S’ parameters, with ‘G’ parameters include ‘openness’ and concentration of business including related party transactions 

Disclosures of intensity ratios relating to greenhouse gas (GHG) emissions, water consumption and waste generation are already required under the existing BRSR framework. SEBI proposes the requirement of these ratios being adjusted for purchasing power parity, as they are “used by global investors and global ESG ratings providers”.  

As recommended by a committee established in May 2022, SEBI proposes to require verification of the reported data by an assurance provider. This “reasonable assurance” requirement will apply to the top 250 companies by market cap for fiscal year 2023-2024, the top 500 companies for fiscal year 2024-2025, and the top 1,000 companies for fiscal year 2025-2026. 

The consultation paper also proposes requirements for the top 250 companies to also make ESG disclosures relating to their supply chains on a ‘comply or explain’ basis. For fiscal year 2024-2025, assurance will not be mandatory, but will be on a ‘comply or explain’ basis for fiscal year 2025-2026. 

The proposal includes 15 ESG parameters that “have an Indian context” which ESG rating providers will have to factor in when assigning ESG ratings to Indian companies. For example, one of the parameters is “whether a company has RegTech/Systems solution for monitoring and evidencing compliance”. 

The consultation paper also proposes to enhance disclosure requirements for ESG funds to increase transparency on the votes they cast and the engagements they have with portfolio companies to mitigate the risks of mis-selling and greenwashing. 

In addition, ESG funds will have to invest at least 65% of their AuM in companies that have comprehensive BRSR disclosures and are also providing assurance. The remaining investments can be in other BRSR reporting companies. 

It is further proposed to require third party assurance on compliance of ESG fund schemes with their stated strategy and objective – on a ‘comply or explain’ basis from 1 April 2023, and mandatory from 1 April 2024. 

Other proposals cover the classification of ESG funds, the naming of ESG fund schemes, annual commentaries published by fund managers, and a requirement for ESG funds to disclose the names of the ESG rating providers they use alongside each ESG score. 

SEBI also issued a consultation paper that looks to offer a more comprehensive regulatory framework for ESG rating providers in the securities market, based on proposals made by SEBI in January 2022.  

The framework proposes that ESG rating providers may adopt either an issuer-pays or subscriber-pays business model, but not both, such as ESG ratings not being assigned to some firms based on one model and other firms based on the other. The proposal is designed to mitigate potential conflicts of interest. 

It will require ESG rating providers to give greater transparency in their rating process, furnishing additional information about the ESG scores they assign, including changes from previous scores, a summary of the key quantitative and qualitative drivers for the scores, how they weight different ESG factors, explanations of rating intent, and methodologies used. 

ESG rating providers are also asked to provide ESG transition scores reflecting the incremental changes companies have made towards their targets, and a combined score which comprises both the ESG score and the transition score. 

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