Sebi board to approve new ESG framework at upcoming meeting on March 29

Adani-Hindenburg saga may be discussed

The Securities and Exchange Board of India (Sebi) will finalise a new framework around environmental, social, and governance (ESG) ratings and disclosures at its upcoming board meeting on March 29, said people in the know.

The Sebi board is also likely to finalise the annual budget for the next financial year (2023-24). The board meeting is coming at a time when the Supreme Court (SC) has directed the markets regulator to complete its investigation into the Adani-Hindenburg saga within two months and submit the status report.
 

Sources said the regulator’s board could also deliberate on the issue and SC’s directions. Sebi has already undertaken an investigation into the allegations made in the Hindenburg Research report and is investigating stock price manipulation and short-selling activity. 
 

At present, India Inc has been disclosing ESG-related information under the so-called Business Responsibility and Sustainability Reporting (BRSR) framework, made mandatory for the top 1,000 firms from the current financial year (2022-23).

However, there is no auditing mandated for this reported data.
 

To bring more credibility, maintain investor confidence, and mitigate the risk of greenwashing, the watchdog is likely to prescribe mandatory assurance or auditing of sustainability reports. It is also planning to introduce a limited set of ESG disclosures called ‘BRSR Core’, which will prescribe key performance indicators (KPIs) under each category — E, S, and G.

The framework for BRSR Core could also specify the methodology for reporting by corporates and verification of data provided.
 

“Data quality, consistency, and the level of controls that exist for financial data do not yet exist for non-financial data. Non-financial data comes from several sources and is sometimes collated at the end of the year. It never got the kind of importance it has received now. The ability to measure this data to the extent possible without manual intervention and improve its quality and consistency will be a maturity journey that corporates are embarking upon. It will require changes to processes, systems, and controls. It should happen over time,” said Shubhranshu Patnaik, partner, Deloitte Consulting.
 

The KPIs in the BRSR Core contain several intensity ratios, such as the intensity of greenhouse gas emissions, water consumption, waste generation, etc.
 

Further, Sebi may also tweak ESG rating and parameters to realign them with the domestic environment, incentivising job creation in smaller cities and gender diversity.
 

Industry experts are of the opinion that adding domestic context will not bring large deviations from what is followed globally. They believe that Indian companies will have to follow slightly stricter norms, which will require data sharing in real-time.

Meanwhile, Sebi is also likely to make registration mandatory for ESG rating providers (ERPs). At present, ERPs are not subject to any regulatory oversight but continue to provide services for the securities market — a risk that Sebi has identified towards investor protection, capital allocation, greenwashing, and risk pricing.
 

However, industry players highlighted implementation on this front.
 

“It should be on the rating provider to build credibility in the market. ESG space is still evolving in India and a mandatory requirement for holding registration will be difficult to comply with at this stage. Many such entities will not be able to qualify but provide trusted data. Globally, even Morgan Stanley Capital International provides ESG rating, although it is an index provider,” said the head of a rating provider.
 

Typically, credit rating agencies also act as ERPs.
 

Sebi in its meeting may also discuss the introduction of five sub-categories for ESG-themed mutual funds (MFs), along with the requirement for increased disclosures and internal audits. Presently, ESG schemes offered by MFs are required to use scores arrived at by ERPs empanelled by the Association of Mutual Funds in India and publish securities-wise and scheme-wise scores in the monthly portfolio disclosure.
 

Under the new norms, they may be subject to enhanced disclosures.

ON THE AGENDA

• Markets regulator may introduce the BRSR Core — a more comprehensive environmental, social, and governance (ESG) disclosure
• Assurance and auditing of ESG disclosures under BRSR Core may be mandated
• Domestic factors like job creation, gender parity to be considered under ESG parameters and ratings
• Some ESG rating providers (ERPs) have submitted disagreements on the proposed norms for ERPs
• More transparency and disclosures for ESG-themed mutual funds, new sub-categories on the anvil