Mr Munot believes Sebi has “taken a holistic approach focusing on the Disclosure-Rating-Investment triniy”.
Turning first to disclosures, Sebi made ESG reporting using the BRSR (business responsibility and sustainability reporting) framework mandatory for the top 1,000 listed companies from FY23 onwards. In FY22, it was voluntary. While companies have just begun reporting, a few issues need addressing.
There are several issues that are likely to be addressed regarding disclosures. The first is how relevant the global ask is. Global disclosures do not always resonate with what is seen as being critical either to Indian companies or to our economy. Asking for a “racial equity audit to identify adverse impacts on non-white stakeholders” and “asking companies in the financial sector to set policies ending or restricting financing fossil fuels” are just two examples. Companies will have no reason to address the first and the second is at odds with our current national priorities.
There is then the issue of greenwashing, which is nothing but putting a spin to show that a company’s activities have a greater positive environmental impact than they actually do. Greenwashing is likely to be addressed through seeking reasonable assurance on nine parameters, referred to as “BRSR Core”. These nine parameters are reflective of India’s unique ESG challenges. The BRSR Core is expected to substantially facilitate this data capture. And as reasonable assurance can be provided only if there is clarity on parameters and their measure, these have been specified and such assurance has been made mandatory for the top 150 companies from 2023-24, expanding to 1,000, in two steps, by 2026-27. For many entities, in addition to their own operations, the supply chain needs monitoring.
“This proposed road map for enhancing BRSR disclosures, including assurance with a glide path, is aimed at addressing the need for relevant, credible, and comparable data, while keeping in mind the cost of compliance,” asserts Mr Munot.
On ratings, the focus is on India-centric parameters and standards. In calling for a more standardised approach, the focus is on a minimum specified criterion — although ERPs are free to add to these. As with almost all of Sebi’s regulations, the emphasis here too is on disclosures of such ratings and the underlying rationale.
The third pillar is investors. Although less than $1.5 billion of AUM (assets under management) invested in ESG-linked themes in our market, global estimates going as high as $8 trillion suggest that the Indian fund management industry is soon set to embrace this theme.
Funds can expect more disclosures on ESG, including engagement reporting. And in anticipation of a coming rush of funds, ESG schemes are likely to be moved to a category of their own (like large, mid, and small cap) rather than a theme, allowing more stringent reporting.
The question to ask is whether Sebi and other regulators will continue to guide companies on how to navigate the ESG waters. Do investors or stakeholders have a role?
In the US, shareholders this year filed 542 resolutions on ESG issues, in step with 2022, which had 627. Contrary to what one might expect, such proposals are less common in continental Europe, partly because funds are less activist or unwilling to dictate company strategy. This is also explained by the different regulatory thresholds for submitting shareholder proposals. Under Securities and Exchange Commission rules, equity ownership can be between $2,000 and $25,000, depending on the holding period. In Europe while this is higher at 5 per cent of the share capital, member states may have other restrictions. For example, in the Netherlands such proposals need board approval.
ClientEarth, a registered environmental charity, has created two guides, for Europe and Asia (with Cyril Amarchand Mangaldas covering India), for regulations on climate-related shareholders resolutions.
The rules in India require 10 per cent of the shareholders to propose a resolution. Climate and social matters are usually not the stuff investors ordinarily bring to vote. So, investors will engage with companies, seeking disclosures, targets, and transition strategies. Companies will do what they need to. But it will be the regulations that will drive the ESG agenda.
Amit Tandon is with Institutional Investor Advisory Services. The views are personal. Twitter: @AmitTandon_in
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