Amid inconsistencies, ESG rating framework not on Sebi's agenda, for now

Companies currently are inconsistent with comprehensive disclosures on ESG

Markets regulator Securities and Exchange Board of India (Sebi) is currently not planning a framework for ESG (environment, social and governance) ratings, even as investors are increasingly looking at companies with high ESG scores.
 
According to regulatory sources, Sebi is of view that such rating action requires high-quality, comprehensive data, along with other preferred parameters, which is currently lacking.
 
Further, it does not want rating firms to get into any new product beyond the quantified assessment of the creditworthiness of a borrower, the sources said.
 
At present, credit rating agencies are not allowed to undertake ESG-driven rating action. The regulator had recently raised apprehensions after rating agencies approached it, seeking a framework amid the rush for ESG investing.
 
Demand ESG criteria and ratings is getting louder among the investor community for finalising their investments. This has become more popular across the world in the aftermath of the pandemic.
 
Although companies volunteer ESG information under Sebi’s reporting norms, this process often lacks consistency, say industry experts.
 

“Disclosures in India by the listed entities are not that voluminous or comprehensive that something meaningful and credible can be stitched together. The regulator is mindful of this and has taken several initiatives. It introduced a business sustainability and responsibility report, which showed a path to various corporates to align with new reporting requirements,” said an official from a rating firm.
 
The new reporting requirements are expected to bring in greater transparency through disclosure of material ESG-related information to enable market participants to identify and assess sustainability-related risks and opportunities. It will come into effect from the financial year 2023.
 
Earlier this year, Sebi held a discussion with industry participants to chalk out ways to improve ESG disclosures in the country.
 
“Until that time, the existing level of disclosures may not be comprehensive enough to do a very regress exercise, unless you seek services from a specific data provider who would be sharing data of various entities and also monitoring them. But even data providers would be dependent on the entities themselves to make those disclosures, which at this level are not very insightful for ESG ratings,” a source highlighted.
 
Though disclosures lay emphasis on quantifiable metrics across sectors and time periods and are certainly helpful to investors who are interested in ESG compliance, at this stage, “even the regulator is perhaps handicapped because these changes take time to implement”, he said.
 
ESG are three key factors used to measure a company’s sustainability and responsibility performance. Despite gaining traction, ESG risk failures are also widely known.
 
Currently, some rating firms are undertaking ESG rating action on a voluntary basis. For instance, they introduced a service which is providing scores to companies on ESG parameters.
 
Industry experts say ESG investment approaches are constructive and also useful in getting valuable information from a long-term value creation perspective. However, current practices, in terms of disclosures, are quite inconsistent and that puts the role theme at risk, they say. To make it effective, regulators can integrate them with existing risk management frameworks, such as governance, they added.