Growth in ESG strategies outpaced all other segments of the global asset management industry until recently. The fuss around ESG has only recently been imported into the local market, with several AMCs taking a shine to ESG strategies. Of late, however, doubts have been raised about the credibility of this money-spinning machine. ESG investing has been found wanting in several areas lack of uniformity in disclosures, poor quality of data reporting, uneven rating standards and limitations in quantifying certain aspects.Critics have warned of enabling greenwashing—the practice where a company makes deceitful, exaggerated claims about its environmental practices far removed from ground realities.
Aswath Damodaran, professor of finance at Stern School of Business at New York University, called ESG “the most oversold and overhyped concept in the history of business.” Acknowledging the prevailing constraints, Sebi has introduced a raft of measures to give more bite to ESG. Foremost, to enhance reliability of disclosures, listed entities will be required to give “reasonable assurance” on a set of key performance indicators as part of the Business Responsibility and Sustainability Report. These cover roughly 50 quantifiable and comparable parameters spanning different attributes including greenhouse gas and water footprint, waste management, employee wellbeing, gender diversity, inclusive development, among others.
Shailesh Tyagi, Partner, Climate Change and Sustainability Services, EY India, observes, “The framework will improve the quality, consistency and comparability of ESG disclosures, which are currently limited and often inconsistent.” These will initially be applicable to the top-150 listed entities by market capitalisation from 2023-24, and then gradually extend to the top 1,000 by 2026-27. This glide path approach would allow companies and investors to adapt to the new reporting requirements and build capacity for ESG reporting and investing.
Disclosures around multiple ESG parameters now mandatory
Move will compel businesses to follow sustainable practices like those mentioned.
“This will not only expand the investable universe for investors but will also compel businesses to follow sustainable practices,” contends Saurabh Dhole, Investment Analyst at True Beacon. Further, ratings are being sought to be indigenised by demanding that ESG rating providers integrate parameters that are unique to the Indian or emerging market context. This pays heed to the reality that emerging markets have a different set of environmental and social challenges. A separate regulatory framework for ESG rating providers is also being introduced.Besides, Sebi has introduced measures to make sure ESG funds walk the talk. The schemes will be required to invest at least 65% of the corpus in listed entities where assurance on core metrics of the BRSR is undertaken. Additionally, it is now mandatory for the AMC to seek thirdparty assurance and certification for compliance with the objective of the ESG scheme. Further, fund houses have been tasked to make enhanced disclosures on voting decisions with specific focus on ESG factors. Fund manager commentary highlighting how the ESG strategy is applied to the fund is now mandatory, along with case studies explaining the same. Tyagi remarks, “As companies work on the quality of disclosures and ESG rating standards improve, ESG funds will also be in a position to offer better alignment with the mandate.”Experts reckon Sebi has made the right moves to address existing gaps and make ESG a more worthwhile proposition. Investors keen to invest responsibly should get more confidence that their money is being deployed in the right areas. However, only time will tell if makes for a compelling case for ESG investing. Dhole remarks, “Collectively, these new norms will encourage companies to follow ESG principles which could have a positive impact on their businesses, clients and deliverables. But it’s too early to decide if this will translate into better performance.” Tyagi admits it will take time to set the house in order, but these measures are a step in the right direction. “Regulatory disclosure requirements are in their nascent stage, and considering ESG is a journey, this will bring new challenges and opportunities. This will eventually lead to capacity and capability enhancement, improving transparency in ESG reporting.”
