SEBI introduces regulatory framework on ESG disclosure, ratings

Markets regulator, the Securities and Exchange Board of India (Sebi), put out a regulatory framework on Wednesday for ESG Rating Providers (ERPs) amid the growing importance of their role in making investment decisions.  

ESG ― Environmental, Social and Governance ― factors-based investing is gradually gaining momentum in different parts of the globe and the regulator said that Indian policymakers are also incentivising sustainable investing. In order to address the risk of miss-selling and greenwashing, to enhance stewardship reporting requirements, and to promote ESG investing, Sebi has laid out some norms, which are expected to impact mutual funds.

As per extant rules of categorisation of mutual fund schemes, ESG schemes belong to thematic funds. And fund houses can launch only one ESG scheme.

Now with the regulator allowing multiple schemes based on ESG-related factors, investors have alternatives in this space that suit their requirements.

On ESG Disclosures, the market regulator has mandated the introduction of BRSR (Business Responsibility and Sustainability Report) Core with the aim to enhance the reliability of ESG disclosures.

The BRSR will contain a limited set of Key Performance Indicators (KPIs), for which listed entities need to obtain “reasonable assurance”, a SEBI release said.

“A glide path is prescribed for applicability of BRSR Core, beginning with the top 150 listed entities (by market capitalization) from FY 2023–24, which shall be gradually extended to the top 1,000 listed entities by FY 2026-27,” the SEBI release said.

The requirements of disclosure and assurance will be applicable to the top 250 listed entities (by market capitalization), on a comply-or-explain basis from FY 2024-25 and FY 2025-26, respectively.

ESG Ratings Under the regulatory framework, the ESG Rating Providers (ERPs) will be required to consider India/emerging market parameters in ESG Ratings, considering that emerging markets have a different set of environmental and social challenges.

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 also said that 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.