How India is leading the way in ESG practices and ratings for a greener tomorrow
ESG practice revolution that has swept across Western economies and international investment norms has come to India and it’s time for the fifth-largest and fastest-growing economy in the world, which is in charge of the G20’s ESG agenda, to take the initiative. India is fortunately fully aware of its obligations, and the regulators are constantly eager to take on new tasks.
Businesses are urged by the Securities and Exchange Board of India (Sebi) to reveal intricate facts for sustainability and transparency. Top corporations must now make these disclosures under the business responsibility and sustainability reporting (BRSR) regulations. Sebi introduced the BRSR core framework, which consists of nine key ESG factors. Transparent and trustworthy disclosure is just the beginning of a conscious ecosystem; improving ESG grading processes is the next step.
Via its most recent circular on the subject, Sebi addressed the standardization, comparability, and efficacy of ESG ratings.
Participants have been left to rely on their interpretations for some time due to the ambiguity of the ESG grading and classification area. There are advantages and disadvantages to using several rating systems, such as S&P DJI ESG Score, Morningstar’s Sustainalytics, and Crisil’s ESG Scoring, however, the lack of a unifying framework and underlying principles raises questions about their dependability.
Here, the S&P BSE 100 ESG index presents an intriguing case study. This index can be significant from the perspective of ESG. Particularly given that this index is based on the S&P DJI ESG grading, only contains stocks covered by Sustainalytics, and draws from the bellwether S&P BSE 100 index. It’s interesting to note that 17 out of the 53 corporations featured on this index, or roughly one-third, have Sustainalytics ratings above 30. Five are ranked higher than 40. Sustainalytics advises interpreting ESG Risk ratings of 30 to 40 as “high risk” and 40 or higher as “severe risk.”
As a logical extension, think about ESG-focused mutual funds that exhibit various interpretations of ESG criteria, resulting in little overlap and individualized strategies.
The segment’s varied universe, which includes 160 locally listed and 40 foreign businesses, represents the unique portfolio of each fund. Perception has a role in how ESG parameters are interpreted.
78, or over 50%, of the 161 constituents that ESG-focused mutual funds invest in received a CRISIL ESG rating of 60 or worse out of a possible 100 points. 100 is the maximum allowed here.
In its most recent Master Circular for ESG rating providers, Sebi set criteria to provide a standard framework and contextual evaluation factors. The second hemisphere of an ESG-conscious ecosystem is predicted to advance as a result of this action.
The inclusion of a Parivartan score, which rewards development alongside absolute status in ESG ratings, is the circular’s most noteworthy proposal. This action encourages transition financing and compels businesses to seek money for ESG objectives. Further encouraging dedication to achieving net zero in the future is the progress-based award system. The provision of explicit guidance on business model selections, ensuring that ESG rating providers choose a different payment plan to avoid conflicts of interest, is another important step. The annexures to the circular establish a common framework by outlining contextualized ESG factors for Indian dynamics, allowing ESG rating providers to create reliable models with minimal coverage requirements.
Sebi’s recent guidelines, which allow mutual funds to launch numerous ESG-oriented funds, each concentrating on particular strategies including exclusion, integration, best-in-class, positive screening, impact investing, sustainable aims, or transition investments, add some more action to the agenda. This opens the door for a more complex ESG-conscious investing environment by requiring these funds to devote at least 80% of their corpus to the selected strategy.
The next stage is to increase awareness in the investing ecosystem with better ESG-focused disclosures and a solid ESG grading structure. We are headed in the right direction if the mutual fund industry’s efforts are any indication.
Discussions around ESG are quickly moving from academic settings and professional gatherings to boardrooms and investment models. The effectiveness of rules and the speed of implementation guarantee India a significant seat at the international ESG-conscious table.