CONSULTATION PAPER ON ESG DISCLOSURES, RATINGS AND INVESTING on Feb 09, 2023
ESG Advisory Committee chaired by Shri. Navneet Munot gave its recommendations in the areas of ESG Disclosures, ESG Ratings and ESG Investing. This Consultation Paper is based on the recommendations of the EAC and internal deliberations. The same is divided into three parts -
A. ESG Disclosure B. ESG Rating C. ESG Investing
PART A - ESG Disclosure
For FY 2021-22 Top 1000 listed companies have to fill Business Responsibility and Sustainability Reporting (BRSR), Out of which 175 companies voluntarily apply in FY 2021-22.
BRSR disclosure provided information to a number of stakeholders such as investors and ESG rating. EAC focused its discussions on the said issues and identified few critical areas for mandatory are following
- Assurance becomes key for enhancing the credibility of disclosure and investor confidence
- More visibility and transparency are required in ESG disclosures by supply chain participants of Companies
Other Areas are the following:
- Enhancing BRSR by shifting few leadership indicators to essential,
- Sector-specific disclosures to bring in greater standardization in reporting,
- Reporting boundaries including segment-wise disclosures for conglomerates operating in multiple segments & disclosures on a consolidated basis, along with the assurance of the entire BRSR.
Proposal for public consultation for ESG Disclosure
I. Assurance of sustainability disclosure
a. BRSR core (annexure 1) has been developed for reasonable assurance which consists of select Key Performance Indicators (KPIs) under each E, S and G attributes/area that needs to be reasonably assured
i. Methodology to facilitate reporting by corporate
ii. Verification of the report data by the assurance provider
b. Approach was adopted by the EAC in developing BRSR Core2
i. Quantifiable and outcome-oriented metrics:
ii. Relevance of the attributes/ area in the BRSR Core
iii. Comparability across jurisdictions
II. ESG Disclosures for supply chain
a. Meteric related to supply chain covered under leadership indicators in BRSR Number of companies, significate ESG footprints such as the use of natural resources, employment practices, emissions and wastages may be found in their supply chain. A complete picture of ESG risk and impact associated with products and services provided by the company.
b. Recognized that there are a number of complexities associated with ESG disclosure
c. Proposed to introduce a limited set of ESG disclosures i.e. BRSR Core in a gradual manner and on a “comply-or-explain” basis.
PART B - ESG Ratings
Enhance transparency in ESG rating and mitigate conflict of interests
Factory in the domestic context while assigning ESG ratings:
I. ESG ratings with Indian context
a. Gearing toward identifying a minimum set of parameters to bring in consistency and aid ERPs in adopting a broad common approach.
b. List of 15 ESG parameters that have an Indian context is appended at annexure 2
c. Approach adopted while identifying the aforementioned list is below:
i. Environmental Parameters:
Perform Achieve and Trade (PAT) scheme, Extended Producer Responsibility (ERP) imperative for ERPs to assess companies based on these standards as mapped against the global standards used to adjust/annotate the ratings suitably.
ii. Social Parameters:
The social realities of India are different and unique from developed nations. Like gender diversity
iii. Parameters on Governance:
The parameters identified cover areas related to RPTs and Independent Directors such as the percentage of against votes non-promoter shareholders on RPTs and IDs, royalty payments etc. Further, given that RegTech systems can aid companies in automating and improving compliance, another parameter identified is whether a Company has RegTech /Systems solution for monitoring and evidencing compliance.
II. ESG Ratings on assured indicators
BRSR Core provides for disclosure of assured KPIs, it is proposed that in addition to their other products, ERPs shall also provide a Core ESG rating, which shall be based on information /reports that are assured/audited/verified
Part C - ESG Investing
AMFI in consultation with SEBI has inter-alia prescribed the following norms for ESG schemes of Mutual Funds:
a. Disclosures in Scheme Information Document (SID)
- Scheme name
- Investment Objective
- Investment Strategy – Exclusions, Integration, Best-in-Class & Positive Screening, Impact investing, Sustainable Objectives etc.
b. Disclosures related to engagement undertaken by AMCs for ESG schemes
c. General obligations in line with global standards etc.
ESG schemes are required to use scores arrived at by AMFI-empaneled ERPs and publish securities-wise and scheme-wise scores in the monthly portfolio disclosures w.e.f August 01, 2022. Standardize the ESG scoring process under each of the three pillars viz. Environment, Social and Governance.
The committee provided recommendations on expanding the disclosure norms for ESG funds and on measures that may be brought in to improve transparency, with a particular focus on mitigation of risks of mis-selling and greenwashing and other related areas.
Proposal for public consultation for ESG Disclosure
I. Enhanced Stewardship Reporting for ESG schemes
a. Voting disclosures by ESG schemes
Mutual Funds under the current regulatory framework are required to mandatorily follow a Stewardship Code in relation to their investments in listed companies
(which inter-alia includes having a clear policy on voting, compulsory voting in respect of the resolutions including Social and Corporate responsibility issues, related party transactions of the investee company etc., and public disclosure of voting decisions along-with rationale for decision.)
It is proposed that AMCs provide better clarity on ‘in favour” or “against” votes cast on resolutions in a year by disclosing if the resolution has or has not been supported due to any environmental, social or governance reason.
AMCs should provide details and rationale for “in favour” or “against” votes cast on resolutions for ESG schemes and non-ESG schemes separately.
Voting disclosures to be mandated from FY 23-24 i.e, for annual general meetings held from April 01, 2023 onwards.
b. Disclosure of case studies
For further enhancement of stewardship reporting requirements, a few points are proposed.
II. Mitigation of risks of mis-selling and greenwashing
The possibility of risk of greenwashing can exist at both the investee company level as well as the scheme level and thus needs to be mitigated at both levels. With regard to greenwashing at the investee company level, SEBI in this consultation paper has proposed mandatory assurance of disclosure in BRSR Core for top 250 companies from FY 2023-24. Further, ERPs are proposed to be mandated to provide BRSR Core rating based on information/reports that are assured/verified/audited.
III. Classification of ESG schemes
Each AMC may be permitted to launch one ESG scheme each under the following ESG subcategories:
iii. Best-in-class & Positive Screening
iv. Impact investing
v. Sustainable objectives
In this regard, the standardized criteria for different ESG strategies may be prescribed by the Association of Mutual Funds in India (AMFI)
ESG schemes under the proposed new category may be permitted with a minimum 80% investment of total assets in equity/debt stocks of a particular theme as per the sub-categories. However, the residual portion of the investment should not be starkly in contrast to the scheme's philosophy from the theme. AMCs should endeavour to have a higher proportion of the assets under the ESG theme and make suitable disclosures.