Background:
Over the past decade, there has been a growing emphasis towards the significant economic and financial
impact of Environmental, Social and Governance (ESG) related risks and opportunities. This has resulted in
ESG investing becoming increasingly popular among the investors and other stakeholders and led to
increase in the number of ESG funds being launched and related rating products being used.
Consequently, there is a growing expectation from the companies to provide comprehensive, accurate
and reliable ESG related disclosures.
However, since ESG information is a blend of various quantitative and qualitative metrics and subject to
diverse operational realities, sustainability related risks, opportunities and with varied transition paths been adopted by different jurisdictions, the consequent impact may vary across geographies. In India, the
Securities and Exchange Board of India (SEBI) mandated Business Responsibility and Sustainability Reporting (BRSR) to make ESG disclosures for top 1,000 listed companies from Financial Year (FY) 2021-22 on a voluntary basis and mandatorily from FY 2022-23 onwards.
The EAC gave its recommendations in the following areas:
Overview:
Assurance of sustainability disclosures: The EAC has developed a BRSR Core framework (comprising
select Key Performance Indicators (KPIs) under E, S and G attributes) for reasonable assurance. The
BRSR Core framework format has been provided in Annexure 1 to the consultation paper – which
identifies the parameter, measurement and assurance approach for each attribute.
Timelines for compliance: The consultation paper has proposed reasonable assurance of mentioned
KPIs in the manner discussed below:
FY 2022-23
| BRSR: Mandatory reporting for top 1000 companies.Assurance: Not Mandatory |
FY 2023-24
| BRSR: Reasonable assurance on BRSR coreAssurance: Mandatory for top 250 companies |
FY 2024-25
| BRSR: Reasonable assurance on BRSR coreAssurance: Mandatory for top 500 companies |
FY 2025-26
| BRSR: Reasonable assurance on BRSR coreAssurance: Mandatory for top 1000 companies |
ESG disclosures for supply chain: Currently, the supply chain metrics are covered under the leadership indicators in the BRSR which are to be reported on a voluntary basis. However, for many companies,
there may be significant ESG footprints, for example, the use of natural resources, emissions and
wastages which may be found in their supply chain. In order to ensure a complete and
comprehensive picture of the ESG risks and related impact, the consultation paper has proposed to
introduce a limited set of ESG disclosures for the supply chain of companies i.e., BRSR Core in a
gradual manner on a ‘comply or explain’ basis. The implementation is proposed as below:
| FY 2024-25 ESG disclosures as per BRSR core, for supply chain of top 250 companies on comply or explain basisAssurance not mandatory |
| FY 2025-26ESG disclosures as per BRSR core, for supply chain of top 250 companies on comply or explain basisAssurance on comply or explanation basis |
ESG Ratings: Sustainability considerations and evaluation is garnering increasing prominence in
investment decisions. As a result, the role and influence of ESG ratings and data products providers in
financial markets has increased. Further, it was noted that while assessing a company’s ESG
risks/opportunities and impact, ERPs are expected to consider domestic context.
ESG Rating with Indian Context: The consultation paper provides a unique set of metrics that can be
applied in Indian context. These parameters are developed to bring in consistency and aid ERPs in
adopting a broad common approach and to make ESG ratings comprehensive and contextual.
| ESG Pillars | Environment | Social | Governance |
| Factors | EnergyWaterWaste ManagementCSRLand use | CSRDiversityInclusive development | RoyaltyComplianceRelated party transaction |
It further states that ERPs would be permitted to develop additional customised ratings for specific
user groups depending on user needs.
ESG Ratings on assured Indicators: It is observed that currently, ESG Ratings are generally assigned
based on self-reported data by corporates, without any third-party assurance of such data. Since
investors are placing increased reliance on these ratings for making investment decisions, it is
imperative that these ratings are reliable. In this context, since the proposed BRSR Core provides for
disclosure of assured KPIs, it is proposed that in addition to their other products, ERPs shall also provide
a Core ESG rating, which shall be based on information / reports that are assured / audited / verified.
ESG Investing: The third set of proposal is relating to ESG investing by mutual funds. As ESG investing
becomes mainstream, investors and regulators expect companies to provide consistent, comparable,
and decision-useful scheme disclosures. This would enable stakeholders to make informed investment
decision and prevent greenwashing. Considering this, following key proposals have been stipulated in
the consultation paper:
| Proposal | Effective date |
| Voting disclosures by ESG schemes: The Asset Management Companies (AMCs) would need to provide clarity on ‘in favour’ or ‘against’ votes cast on resolutions in a year, by disclosing if the resolution has or has not been supported by any ESG related reason. | To be mandated from FY 2023-24 i.e. for annual general meetings held from April 1, 2023 onwards. |
| Disclosure of case studies: The ESG schemes to provide disclosure of case studies where portfolio companies have been engaged. Further, it requires disclosure of number of engagements carried out, the modes of communication employed, and if any outcomes achieved in the reporting year. | To be implemented in staggered manner from FY 2024-25 onwards. |
| Mitigation of risks of mis-selling and greenwashing ESG schemes to invest at least 65 per cent of its Asset Under Management (AUM) in companies which are reporting on comprehensive BRSR and are also providing assurance on BRSR Core disclosures, with the remaining investments to be in companies reporting on BRSR. | To be made effective from October 1, 2024 onwards and in case of schemes which are not compliant with the mentioned norms as on October 1, 2024 would be provided one year time period for compliance. |
| Proposed a third-party reasonable assurance with respect to scheme portfolio following stated strategy and objective of the scheme | This would be applicable on a ‘comply or explain basis’ from April 1, 2023 and proposed to make mandatory from April 1, 2024. |
SW Point of View:
The above pronouncement by SEBI indicates that there is a need to strengthen ESG practices in India so that they are consistent and comparable at the global level. SEBI would need to devise a plan to educate general public investors on ESG funds and the manner of scoring of retail ESG funds.
