Sebi may soon introduce framework on ESG rating providers, say sources

Standardisation woes slow ESG reform push; industry for uniform assessment criteria

The Securities and Exchange Board of India (Sebi) could soon issue a framework for environmental, social, and governance (ESG) rating providers (ERPs)--third-party agencies that help determine ESG compliance of listed companies.

According to sources, the market regulator could place the proposals on ERP regulations before its board at its next meeting scheduled for later this month.

In January, Sebi had floated a consultation paper on these rules. Later in March, it extended the timeline for submission of public comments.

People in the know said Sebi is readying a framework in this regard and aims to introduce it later this month.

“ESG is an important reform area identified by Sebi given the increasing importance both domestically as well as globally. However, lack of standardisation around ESG scoring has slowed the reform push. The ERP framework will be a key step in that direction,” said a regulatory source.

Sebi couldn’t be reached immediately for a comment.

In the discussion paper, the regulator has proposed that only Sebi-accredited ERPs will be allowed to give ESG ratings. Further, only credit rating agencies and research analysts will be eligible for such accreditation. The regulator has also spelt the criteria for the accreditation, which emphasises on net worth, knowledge, and technical know-how.

While most proposals in the discussion paper were well-received by the market, a key concern highlighted lack of uniformity in the rating process, said people aware of the development.

For instance, the way in which one ERP assigns ratings based on various parameters and its final score could differ widely from another rating provider. Most don’t follow uniform assessment criteria.

The issue around lack of standardisation was also highlighted by Ajay Bhushan Pandey, chairman, National Financial Reporting Authority, at a recent CII Conference on financial reporting and governance framework.

“There are no common standards. Companies are following different parameters of disclosures, but in such cases comparability is a problem. The International Financial Reporting Standards (IFRS) has been requested to develop these. In two areas, drafts have been made, but work is going on for other areas. Unless there are uniform standards, the existing framework has to be carried. For auditing we require standards in place," Pandey told Business Standard on the sidelines.

Industry players said a standardised framework will boost ESG compliance in India.

“Standardisation of data disclosures would aid comparability across players – enabling appropriate benchmarking of ESG performance across entities in arriving at ESG ratings,” said Rama Patel, director, Crisil Ratings.

Starting this fiscal, the Business Responsibility and Sustainability Reporting (BRSR) has become mandatory for top 1,000 listed companies. The data for this ongoing fiscal will be shared the next financial year. Some firms have already started giving such disclosures voluntarily. Experts say there are some gaps that need to be plugged under the BRSR framework.

“Because of greenwashing, there is some skepticism about data. In BRSR, it is only asked if the claims have been third-party validated or not. The credibility of the third party scoring and what data they are looking at for reaching these scores—all that is a little up in the air,” said one of the members of the advisory committee formed by Sebi on ESG.

As globally the space is evolving, many see a better case of identifying greenwashing with data. Last month, three European supervisory authorities published a call for evidence on greenwashing to understand risks associated, and to collect examples of potential greenwashing practices. In June, ASIFMA’s Asset Management Group (AAMG), a lobby group for the world’s largest investment managers, issued a paper on Investors’ ESG Expectations.

Recently, Sebi chairperson Madhabi Puri Buch highlighted the need for an independent view specific to India along with aligning with global goals on ESG matters.

The need for ESG standardisation comes at a time when domestic mutual funds are seeing huge traction in ESG-oriented schemes.

Total assets under management by these funds is around Rs 11,300 crore, up nearly three fold since March 2020.

“Once companies start publishing detailed data on ESG parameters, then those numbers will be effective in detecting greenwashing. Over that time frame, we may also have more third-party agencies to audit these statistics,” said Amit Nigam, fund manager, Invesco Mutual Fund.

Currently, fund houses take support from credit rating agencies and research agencies to match their ESG scores.

“We have an in-house questionnaire which has a number of ESG questions that we answer. Based on the sector of the company, varying weightages are assigned to each component—environment, social, and governance. The automobile sector, for instance, is given a higher weightage for the environment as compared to the financial sector. Based on the ESG score, we may assign a premium or discount to the valuation,” said Jinesh Gopani, head of equities, Axis Mutual Fund.

A look at the last one year returns across the ESG thematic schemes a wide variation, indicating the difference in approach by the fund houses.

Around nine fund houses offer ESG thematic schemes at present. Over the last one year, the best performer gave over 25 per cent returns while the lower performers eroded capital by 7-8 per cent.

Bringing credibility to ESG claims

• Sebi had proposed that only accredited ERPs will be allowed to give ESG ratings
• Accreditation norms may be discussed in the next board meet by Sebi
• Move to bring credibility of the third party scoring
• Currently, AMCs use in-house research to give ESG scores to companies
• Lack of standardisation pointed out by experts as a major challenge in ESG reform
• ESG ratings and auditing to prevent greenwashing on Sebi agenda, say experts