SEBI sets new ESG standards for equity funds and listed companies
India’s securities market regulator, the Securities and Exchange Board of India (SEBI), has recently issued new guidelines for equity funds and listed companies to enhance their environmental, social and governance (ESG) practices and disclosures.
Equity funds must invest at least 65% in ESG-compliant companies
According to a circular issued by SEBI on October 5, 2021, equity funds that are labelled as ESG schemes must invest at least 65% of their net assets in companies that meet certain ESG criteria. These criteria include:
1) Compliance with environmental laws and regulations, such as those related to pollution, waste management, renewable energy, climate change, etc.
2) Compliance with social laws and regulations, such as those related to labor rights, human rights, health and safety, diversity and inclusion, etc.
3) Compliance with governance laws and regulations, such as those related to board composition, independence, accountability, transparency, ethics, etc.
The circular also requires ESG funds to disclose the ESG evaluation methodology, the ESG criteria and weightings, the ESG scores of the portfolio companies, and the impact of ESG factors on the fund performance. The disclosure must be made on the fund’s website and in the scheme information document.
The circular aims to standardize the ESG investment practices and disclosures of equity funds in India and to prevent any mis-spelling or greenwashing by fund managers. The circular will come into effect from January 1, 2022.
Listed companies must report on more than 120 ESG metrics
SEBI has also revised its Business Responsibility Reporting (BRR) framework for listed companies to align it with global reporting standards. The BRR framework requires listed companies to disclose their performance on various ESG parameters in their annual reports.
The revised framework called the Business Responsibility and Sustainability Report (BRSR), has been made voluntary for the financial year 2021-22 but will be mandatory from the financial year 2022-23. The BRSR will apply to the top 1,000 listed companies by market capitalization.
The BRSR requires listed companies to report on more than 120 ESG metrics, including from the past two years. Some of the metrics include:
- Greenhouse gas emissions
- Water consumption
- Waste generation
- Renewable energy usage
- Employee diversity
- Gender pay gap
- Employee turnover
- Customer satisfaction
- Board independence
- Whistleblower policy
- Anti-corruption measures
- Stakeholder engagement
The BRSR also requires listed companies to disclose their material ESG risks and opportunities, their ESG goals and targets, their ESG strategy and policies, and their ESG initiatives and outcomes.
The BRSR aims to improve the transparency and accountability of listed companies on their ESG performance and to enable investors and other stakeholders to make informed decisions based on ESG factors.
India joins the global ESG movement
The new SEBI guidelines reflect India’s growing awareness and commitment to ESG issues. India is one of the signatories of the Paris Agreement on climate change and has set ambitious targets to reduce its carbon footprint and increase its renewable energy capacity. India is also one of the first countries to mandate corporate social responsibility (CSR) spending for certain companies under the Companies Act 2013.
India’s new ESG rules are expected to boost the demand and supply of ESG products and services in the country and to create a positive impact on society and the environment. They are also expected to help India align its ESG practices with global standards and expectations.