In order to accomplish the goal set by India under countable climate treaties, India will have to continue its hard work around Climate Action, be it for controlling greenhouse emissions, promoting cleaner forms of energy, giving precedence to sustainable growth over arid development, preserving the existing ecosystems etc.
Wielding these goals will require extensive support including any financial advocacy possible in India. And hence the need for Environmental, social and Governance to assess and ascertain potential non-financial risks and opportunities.
The world saw ESG being born around the mid-2000s as investments began to be aligned with wider motives like investing in anti-Apartheid Companies or the ones with better labor conditions, beyond just making profits.
Since the inception of this idea, global sustainable investments have only grown and have reached $35 trillion in 2020 i.e. nearly 36 per cent of the total assets under management.
This is reflected through a range of sustainable investment options launched in the last two years in the country increasing interest and involvement.
In December 2021, SEBI’s Chairman Mr. Ajay Tyagi had claimed a bigger matrix in the field, totaling approximately 11 mutual fund schemes in the country to host ESG composed in their theme at Rs. 13,000 crores (Rs. 130 billion) under management.
A global study undertaken by CFA Institute with inputs from 200 retail and 75 institutional investors, it has been found that 60% of investors in India have begun considering the ESG funds for risk adjustment.
With the threats of climate change increasing and surfacing across the world, the need for Sustainable investing has also been realized strongly.
Understanding this, the Securities and Exchange Board of India (SEBI) has open itself for suggestions by publishing its consultation paper offering a proposed framework for regulating the ESG Rating Providers (ERPs).
An Expert in Climate Finance explains in an interview to Mongabay: “ESG rating is highly unregulated and there are no uniform methodologies that these rating agencies are using. There are several types of research that highlight the crisis of the existing ESG rating system.”
“It threatens the real purpose of rating. The purpose of any rating is to give the right signal to all stakeholders, which is not happening”.
Why this move needs to be welcomed?
The paper has clarified: “There is also an increasing demand from the investors on evaluation and ratings of ESG related parameters by ESG ratings providers (ERPs)”.
And a common ground for every agency is crucial in a country where the investors are still understanding the ambit of ESGs but find it quite enticing for their investments.
Such a proposition will bring synergy, transparency to the delivery of these ratings and above all, calculate the value of their investments made in terms of global ESG standards.
The decision, so far, has been held high and welcomed by the market leaders in this sector like Morningstar, CFA Institute etc.
The 19- paged consultation paper has raised certain crucial questions more of which remained in dark light until now like “What exactly does an ESG rating mean? (Risk Ratings, Impact Ratings etc.)” “Who should be accredited as ERPs”? “What should be the condition of giving this accreditation?”
It has asked if only Credit Rating Agencies (CRAs) and Research Analysts (RAs) registered by SEBI shall be approved for accreditation or any other entities. Similarly, if the only criteria for attracting accreditation for a company can be its Net Worth of Rs. 10 crores.
For induction of transparency, SEBI has asked agencies to display rating products and reports, symbols and definitions, rating methodologies (including the individual components: Environmental, social and governance) used on their website.
These methodologies, however, shall be dynamically updated as per the need.
As per SEBI, all the listed firms shall acquire ESG ratings only through accredited ERPs by the Regulator itself while the other unlisted firms need to provide public disclosures as stated under the Business Responsibility and Sustainability Reporting (BRSR) made compulsory from fiscal year 2022-23.
SEBI mandates an ERP to house at least one specialist in sustainability, finance, data analytics, information technology and law.
In short, the SEBI doesn’t want every ERP to follow any common dedicated path but be transparent about its methods and procedures. In the long run, this move will be beneficial for both: the Investors, they will get to know what the ratings convey and the ERPs as being regulated, they will enjoy a common playground.
Invoking and converging towards Sustainability cannot be at will and needs a proper guideline so that the world can stay relevant to its goals.