Name – Sanjana Seth

ID no. – DDE2023-6564
Subject – Financial Markets &
Institutions

In recent years, there has been an increasing acknowledgment of the substantial economic and
nancial rami cations of climate change and environmental, social, and governance (ESG)
hazards. Over the previous three years, several ESG funds have been introduced, including in
India. As ESG Investing becomes more prevalent, corporations have been encouraged by both
investors and regulators to provide comprehensive ESG-related disclosures to their stakeholders.
The utilization of ESG ratings and rating products is also on the rise, as investors progressively
incorporate ESG parameters into their investment decisions. Against this backdrop, securities
market regulators have recognized the necessity for streamlining these three aspects of ESG
Disclosures, ESG Ratings, and ESG Investing.
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 In recent times, the process of adapting to and mitigating the impact of climate change and
transitioning towards sustainable development has emerged as signi cant concerns on a global
scale. One can observe a growing emphasis from investors on the concept of sustainability
investment, as evidenced by the notable increase in total assets and in ows in sustainable funds.
It is noteworthy that the overall value of assets in sustainability funds has witnessed a substantial
rise from USD 550 billion at the commencement of 2018 to USD 1,258 billion by the conclusion of
September 2020 - a remarkable surge of 129%, which is equivalent to a compound annual growth
rate of 35% . Additionally, the Covid-19 pandemic has further accelerated the importance of
Environmental, Social, and Governance (ESG) considerations for investors.

In India, the Securities and Exchange Board of India (SEBI) has mandated that the top 1000 listed
companies, based on market capitalization, must make Environmental, Social, and Governance
(ESG) disclosures in accordance with the Business Responsibility and Sustainability Reporting
(BRSR) starting from the scal year 2021-22 on a voluntary basis, and it will become mandatory
from the scal year 2022-23. SEBI is currently in the process of developing a regulatory
framework for ESG Rating Providers (ERPs) following public consultation. Additionally, SEBI,
through the Association of Mutual Funds in India (AMFI), has required disclosures for ESG-
labelled Mutual Funds.

Nevertheless, there are still chances for enhancement in every one of the aforementioned areas. In
terms of ESG disclosures, it is essential to provide assurance and expand the scope of
disclosures beyond individual listed entities. Moreover, taking into account that di erent
jurisdictions possess distinct Nationally Determined Contributions (NDCs) and have embraced
various transition paths, along with having varied operational realities and sustainability-
associated risks, opportunities, and impacts, there arises a necessity for ESG Rating providers to
consider the local/domestic context when assigning ESG ratings. In the realm of ESG Investing, it
is crucial to ensure the robustness of disclosures and take measures to mitigate the potential risks
of greenwashing and mis-selling.

To address these concerns, SEBI established the ESG Advisory Committee (EAC/Committee) in
May 2022. The purpose of the committee was to make recommendations for streamlining the
regulatory framework for ESG Disclosures, ESG Ratings, and ESG Investing. The committee
consisted of representatives from corporates, investors, rating providers, Mutual Funds, industry
bodies, academicians, technical experts, and other stakeholders. It was chaired by Shri. Navneet
Munot, Managing Director and Chief Executive O cer of HDFC Asset Management Company
(AMC).

The Committee provided recommendations in the areas of ESG Disclosures, ESG Ratings, and
ESG Investing. This Consultation Paper is based on the recommendations of the EAC and internal
discussions. It is separated into three parts - Part A, Part B, and Part C - concentrating on ESG
Disclosures, ESG Ratings, and ESG Investing, respectively.

In March 2023, the Securities and Exchange Board of India (SEBI) introduced a comprehensive
regulatory framework for Environmental, Social, and Governance (ESG) disclosures by Indian
companies, investors, and rating agencies. This framework aims to promote a balanced approach
to ESG.

According to SEBI, the initial phase of this framework requires the top 150 listed companies to
disclose and obtain reasonable assurance on BRSR Core parameters starting from FY24. Over
time, this requirement will be extended to the top 1,000 listed entities by FY27.

The parameters under this framework can be quanti ed and fall under nine broad themes,
including the change in greenhouse gas footprint, change in water footprint, investment in
reducing environmental impact, adoption of circularity principles (speci cally waste management),
improvement of employee well-being and safety, promotion of gender diversity in business,
support for inclusive development, and fairness in engagement with customers and suppliers.
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Within these themes, there are approximately 50 Key Performance Indicators (KPIs) that facilitate
comparability of disclosures. These KPIs capture important metrics that re ect sustainable
outcomes in companies.

The BRSR Core encompasses factors that are relevant to both the manufacturing and service
sectors, particularly in the Indian context where attributes such as job creation and inclusive
development are highly valued.

SEBI also emphasizes the need for ESG disclosures and assurance (limited to BRSR Core) to be
extended to the value chain of listed entities, with speci c thresholds to be speci ed. Initially,
these requirements will apply to the top 250 listed entities (based on market capitalization) from
FY25 and FY26, respectively, with a comply-or-explain basis.

Considering the unique environmental and social challenges faced by emerging markets like India,
ESG Rating Providers (ERPs) should be mandated to consider India/Emerging Market parameters
in their ESG ratings.

Furthermore, SEBI requires ESG-focused investment schemes to invest at least 65% of their
Assets Under Management (AUM) in listed entities that undertake assurance on BRSR Core. Fund
managers are also expected to provide commentary and case studies that highlight how the ESG
strategy is implemented in the fund's investments.

These initiatives by SEBI aim to enhance credibility, address the risks of mis-selling and
greenwashing, and respond to the increasing in ow of investments into ESG funds. Additionally,
these measures will encourage fund managers to adopt a holistic perspective on ESG, particularly
in the Indian context, and promote ESG investing.

It is essential for all stakeholders to embrace this agenda with a clear vision in order to boost the
comprehension and implementation of ESG investing.
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