As per a recent revelation, Securities and Exchange Board of India (SEBI) introduced a fresh consultation paper containing the disclosure norms for ESG (environment sustainability and governance) involved mutual fund schemes.
The security regulator is even looking forward to its disclosure provided in the rating press release which is undertaken by credit rating agencies.
Its Chairman Ajay Tyagi, made it even more clear at the inauguration of ESG Centre for Research and Innovation at IIM Ahmedabad.
He talked of how in-depth research on ESG norms is required in the country, especially in dealing and developing the high quality and content-oriented rating matrices.
He explained: “Research in ESG can go a long way towards converting intangible and amorphous variables of business to measurable and quantifiable returns, both financial and social”.
Across the world, there are more than a hundred of organizations which aim to offer the ESG ratings and relevant research.
Many of these are niche players who only focus on specific ESG deliverables or geographies while using integrated rating methodologies, but this sector may also cater to major data providers or credit rating agencies.
These ESG ratings quantify and assess a particular company’s exposure to ESG risks and parameters, by contemplating each of the environmental, social, and governance separately.
What can be called an ESG fund?
ESG Mutual Funds are thematic Mutual Funds only spurring investment in socially and environmentally responsible companies, based on their ratings.
An entity can be called to be ESG compliant if it fulfils all the criteria of environmental, social, and governance standards, discretely on their sustainability profile before being given the tag.
It is a ‘preamble’ to the organization’s vision, ethics, culture alongside depicting the risks involved and a brief glimpse of its administration.
These attempts can help laud those corporates which take sustainability very seriously.
What have been recent ESG proposals by SEBI?
SEBI stated the ESG funds to hold at least 80% of their total complementary to the sustainable theme, while the rest 20% assets can also not be in stark contradiction with the ESG philosophy.
As per SEBI’s norms, starting from October 1 2022, the ESG mutual funds are allowed to invest only in companies those have filed their respective Business Responsibility and Sustainability Reports (BRSR).
Where is the ESG momentum going and why this change by SEBI?
These new norms by SEBI are a greater step towards limiting the ambiguities and bringing in transparency in the business world on grounds of sustainability.
With SEBI’s attention called for, the world investors can trust these ratings easily and the approach will be consequently liberal.
Though SEBI’s Chairman clarified further: “However, these disclosures often do not bring out clearly all aspects related to ESG investing including investment strategy, usage of proprietary / third-party scoring in investment decision-making and monitoring of ESG investments.”
“SEBI is in the process of stipulating disclosures specific to ESG schemes”.
With the climate change bringing chaos in economic world, it is a crucial need to move towards sustainable growth and hence a surge in ESG investing globally.
Similarly, keeping in mind the diversity in our business models, their ecological footprints, cultural distinctions like employees’ satisfaction, customers’ content, investors’ sustainable responsibility, there is a lot to research around ESG.
By the end of 2020, total ESG assets were worth $35 trillion worldwide, based on a United Nations report and are anticipated to attract higher interest in India in upcoming time.
On these lines, the Asset management companies (AMCs) launch equity schemes as well as exchange traded funds (ETFs) in the ESG space.
Mr. Tyagi adds how the introduction of mandatory BRSR and ESG mutual fund schemes in Indian market has spurred an interest in ESG ratings by the listed companies issuing these to supplement investment decisions.
“In this backdrop, SEBI is examining the disclosure of ESG related aspects in the rating press release by credit rating agencies”.
But with its regulation at a nascent stage, globally and nationally, it may fall vulnerable to short-term gains.
The International Organization of Securities Commissions (IOSCO), an international organization composing of various security Regulators went on to publish a report by the name ‘ESG Ratings and ESG Data Providers’, which advocated for an oversight of such rating providers.
“In line with global trends, SEBI is looking at what could be the regulatory and supervisory approaches for ESG rating provider”.
What more to look for?
According to various experts, there is a need to consider and rope-in supply chains while estimating sustainability, which most of the ratings lack in.
Although selective reporting does exist, there is no adequate standardization in reporting carbon emissions, climate change impacts, pollutants or human rights in such reporting.
This happens because of inadequate data as only 19% of global companies operating in the manufacturing sector and 22% companies in the service sector, prefer to disclose this data.
For instance, Amazon being a customer centric company follows decentralized supply chain, matching buyers’ and sellers’ expectations.
Yet major rating agencies, while assessing, will rule this anomaly out.
That is a problem we need to correct while quantifying the harms one by Humans and strengthen the measures undertaken to prefer entities hailing sustainability.