Jobs in small towns, gender diversity to earn India Inc better ESG ratings

Market regulator Sebi proposes new rating parameters better suited to domestic context

The Securities and Exchange Board of India (Sebi) has proposed to overhaul the framework for ESG ratings by introducing parameters relevant to the Indian context, such as job creation in smaller cities and gender diversity.

In a fresh consultation paper, the market regulator has recommended a unique set of metrics for assigning environmental, social and governance (ESG) scores for listed companies. The parameters will be more aligned to the domestic economy.

“This need is felt since ESG in emerging markets is different as compared to developed jurisdictions. Emerging markets have a different set of environmental & social challenges and it is critical for ERPs (ESG Rating Providers) to consider these while assessing company’s ESG risks/opportunities and impact,” Sebi has said in a paper.

The regulator has suggested looking at more comprehensive social standards such as the percentage of gross wages paid to women by the companies.

On the governance front, it has identified parameters covering related party transactions (RPTs) and independent directors such as percentage of against votes by non-promoter shareholders.

Sebi’s paper on ESG ratings comes within months of Sebi chair Madhabi Puri Buch's emphasis on the need for including domestic narrative in ESG disclosures.

“We will follow the global alignment, along with adapting our metrics and reporting, to have a narrative for the energy markets, based on what is relevant and material to our markets,” Buch had said in November.

The market regulator has made so-called Business Responsibility and Sustainability Reporting (BRSR) disclosures have been mandatory for top 1,000 listed companies from the current financial year. Last financial year, more than 175 companies reported on the BRSR framework, on a voluntary basis.

Sebi has also proposed assurance or auditing of sustainability reports to bring credibility and maintain investor confidence along with a limited set of ESG disclosures called BRSR Core.

Sebi has suggested a glide path for mandating assurance of key performance indicators (KPIs) for 'BRSR Core'. Under the glide path, reasonable assurance on BRSR core will be mandatory for top 250 companies from the next financial year, for top 500 companies by FY25, and for top 1,000 companies by FY26.

The regulator is also working on developing a regulatory framework for ERPs.

Fresh proposals for MFs

Further, the ESG Advisory committee has recommended increasing disclosure norms and internal audit for ESG-specific mutual funds (MFs) to bring more transparency and mitigate the risk of mis-selling and greenwashing.

An ESG scheme will have to invest at least 65 per cent of its assets under management in companies which are reporting on comprehensive BRSR and are also providing assurance on BRSR Core disclosures.

As BRSR Core will be effective only from the next financial year, the schemes which are not compliant as on October 1, 2024 will be provided a year’s time for compliance.

Sebi is also mulling on providing five sub-categories to fund houses under the ESG thematic category. These sub categories will be Exclusions, Integration, Best-in-class & Positive Screening, Impact investing, and Sustainable objectives.

The Association of Mutual Funds in India (Amfi) will be tasked with prescribing the standardised criteria for different ESG strategies.

“ESG schemes under the proposed new category may be permitted with minimum 80 per cent investment of total assets in equity/debt stocks of a particular theme,” said Sebi.

Sebi has also proposed to mandate ESG schemes to disclose the name of ESG rating provider alongside the ESG score disclosures in the monthly portfolio disclosures.

Currently, fund houses take support from credit rating agencies and research agencies to match their ESG scores. According to experts, ESG scores are assigned based on in-house questionnaires sent to companies on ESG parameters.

Further, Sebi has proposed mandating voting disclosures by MFs from the next financial year.

Key focus areas

Introduction of BRSR Core — Aimed at smaller firms. To have limited set of ESG disclosures in order to improve credibility and limiting cost of compliance

Aligning to Indian context — Emphasis on job creation in smaller cities, gender diversity not only on number of people hired but also on salaries drawn

MF-specific ESG framework — Enhanced stewardship reporting for ESG schemes. Five sub-categories under ESG-themed mutual fund schemes