Introduction
Environmental, Social, and Governance (ESG) practice have become increasingly important over the past few years as investors and consumers have become more aware of the impact that business activities have on the environment, society, and governance practises. This has led to an increase in the importance of ESG practises. It is now expected of businesses to include environmental, social, and governance standards into their operations in order to assure long-term profitability and sustainability. The Securities and Exchange Board of India (SEBI), which is in charge of regulating the country’s securities markets, has acknowledged the increasing significance of environmental, social, and governance (ESG) aspects and has been actively promoting environmental, social, and governance practises among Indian businesses. This article will examine the regulatory framework put in place by SEBI, the guidelines issued by SEBI, as well as the initiatives taken by SEBI to promote ESG practises in Indian companies. The goal of this article is to investigate the role that SEBI plays in promoting ESG practises in Indian companies. In addition, recent cases in which SEBI has levied fines on businesses for failing to comply with ESG requirements will be discussed in this blog as well.
SEBI’s Proposed Regulatory Framework
The Securities and Exchange Board of India (SEBI) has put in place a legislative framework that mandates Indian corporations to disclose their environmental, social, and governance activities inside their annual reports. The Listing Obligations and Disclosure Requirements (LODR) laws, which were first implemented in 2015 and have been modified numerous times since then, serve as the foundation for the regulatory framework, for listed companies in India to disclose various information, including financial results, shareholding patterns, and corporate governance reports. According to Regulation 34(2) of the LODR regulations, businesses are required to publish their ESG performance within their annual reports. The rule was initially applicable only to the top 100 publicly traded firms, but in 2018, it was expanded to include the top 500 publicly traded corporations. Businesses are expected to publish their performance in a variety of categories, including social welfare and governance, resource conservation, energy efficiency, and carbon reduction.
A company is required to have an environmental, social, and governance policy in place if it is subject to SEBI’s regulatory framework. The Securities and Exchange Board of India (SEBI) released a circular in 2020 mandating that the top 1,000 publicly traded businesses must have an environmental, social, and governance strategy in place by April 1, 2022. The environmental, social, and governance (ESG) policy needs to address issues including climate change, social welfare, human rights, and diversity.
Guidelines
Companies operating in a wide variety of industries are now required to comply with the ESG disclosure rules that SEBI has set. These rules offer businesses with unique criteria for environmental, social, and governance (ESG) disclosure, depending on the industry in which they operate. For instance, SEBI issued a guidance note on environmental, social, and governance disclosure for the power sector in the year 2017. Companies are required to publish their performance in areas such as the conservation of water, the generation of renewable energy, and the reduction of emissions as a requirement of the guidance note.
Moreover, SEBI has distributed recommendations for reporting on sustainability. The Sustainable Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) are two examples of internationally recognised reporting standards that the Securities and Exchange Board of India (SEBI) issued a circular in the year 2021 requiring the top 1,000 listed companies to report on their performance in terms of sustainability (SASB).
Various initiatives had been taken by SEBIin order to encourage environmental, social, and governance (ESG) standards among Indian businesses, SEBI has launched a number of different projects. The Green Initiative was initiated by SEBI in the year 2020 with the purpose of promoting green bonds, sustainability-linked bonds, and other options for environmentally conscious financing in the Indian market. The Green Initiative is a part of SEBI’s efforts to support sustainable development and address environmental concerns such as climate change. These activities are a part of SEBI’s broader Green Initiative.
In addition, SEBI has introduced the Stewardship Code, an initiative designed to encourage responsible investment practises among institutional investors. The Stewardship Code encourages institutional investors to report on their activities, participate in dialogue with corporations on environmental, social, and governance problems, and reveal their voting policies. The code, which is based on best practises from around the world, encourages institutional investors to promote environmental, social, and governance initiatives in the companies they invest in.
SEBI has also proposed the idea of a “Social Stock Market,” the purpose of which is to offer a venue where social businesses and organisations that work to benefit the community can solicit financial support. Impact investment will be made easier through the Social Stock Exchange, which will also work to advance social welfare.
MAJOR CHALLENGES WITH THE ESG REPORTING
Methodological Data Issues – There are significant problems with the ESG data that organisations generate today, such as a lack of verification and variations in the manner in which data is collected and then reported. It generally causes investors to lack confidence in the data’s quality, making investment judgements more difficult. The methodological validity of data remains a formidable obstacle.
Lack of Standardization Issues– A significant obstacle is the absence of consistent ESG reporting regulations. This makes it difficult for businesses to measure and report their ESG performance. There is a need for a common language to discuss ESG performance, and a standard reporting framework would help to cover this void.
Lack of Skilled Talent Pool – Today, the industry is concerned about the dearth of skilled ESG professionals. While demand for ESG services is growing, the number of qualified professionals is relatively modest. This scarcity may increase costs while diminishing service quality.
The majority of businesses lack the skilled internal resources needed to properly implement ESG efforts. They must instead rely on outside advisors. Even though it costs money, this can be a good approach to outsource and meet the need.
ESG REGULATIONS: A Necessity Of The Hour
The ESG rating providers (ERPs) evaluate the performance of businesses based on a small number of parameters/criteria, ESG rating providers (ERPs) evaluate the performance of businesses based on a small number of parameters/criteria. ERPs are independent agencies that provide unbiased ratings to the entities based on various ESG parameters that help investors in analyzing the ESG performance of the companies . Next, for each criterion, it assigns a rating. The ERPs do not appear to employ a standardised method of evaluation, and the ratings offered vary internally. The utilised matrix is impartial and cannot be used to draw conclusions about a company’s actual ESG initiatives.
The securities market regulator SEBI launched a consultation document proposing a regulatory framework for ERPs that rate listed businesses in January 2022. The consultation document outlined a number of reasons why ERP regulation is necessary. Among the causes cited include a lack of grading transparency and competing interests among ERPs.
The consultation document recommends the development of a regulatory framework with five suggestions:
The consultation document suggested that ERPs employ a committee of qualified individuals to assign ratings; this committee would be responsible for designing and modifying rating procedures as it sees proper. It further, stated that ERPs in India must be accredited by proposing specific qualifying standards such as adequate money, skilled labour, and necessary infrastructure. The Consultation Paper proposes that credit rating agencies and research analysts registered with SEBI may function as ERPs if they meet the eligibility standards.
Although SEBI has not established an uniform grading matrix, it has urged that accredited enterprise resource planning (ERP) systems reveal the type of grade they assign and the methodology used to award such ratings. Hence, a proper rating evaluation must be guaranteed. To make this entire process more efficient and standard, the SEBI recommended that ERPs perform proper research prior to assigning a specific rating.
Following to the publication, the SEBI submitted the topic of ERP regulation to a committee formed in May 2022. The proposed regulatory framework is a commendable initiative by SEBI, as it will boost the transparency of ERP and strike a balance between the requirements of all stakeholders.
Conclusion
In conclusion, SEBI’s ESG regulations are a significant step toward promoting sustainable business practices in India. These regulations enhance transparency and disclosure through measures like the Business Responsibility Report requirement. Challenges remain, such as standardization, data quality, materiality determination, and stakeholder engagement. Ongoing collaboration is needed to establish best practices and ensure a consistent approach to ESG reporting. By integrating sustainability into core business strategies, SEBI’s regulations can drive positive outcomes for the environment, society, and shareholders. Continued monitoring and adaptation of the regulations will be essential to stay aligned with global best practices. Overall, these regulations contribute to building a sustainable and resilient Indian market for the benefit of the economy and society.
Author Bio
