ESG: An Overview

ESG or Environmental, Social and Governance is a mechanism that helps to assess the organization’s business performance and practices on various ethical and sustainability issues. It further helps in providing a way to measure risk and opportunities associated with the business in those areas. It further helps various stakeholders in understanding the way an organization manages opportunities and risks considering the sustainability issues.

Wherein Environmental factor includes those factors which eventually effects an organization’s risk management practices and environmental impact(s). It includes indirect and direct emissions of greenhouse gases, overall resiliency against physical climate risks of an organisation like climate change, flooding, and fires and managing stewardship over and above natural resources.

Wherein the term social includes those factors which eventually effects an relationships of the organization with various stakeholders. It includes factors like employee engagement, fair wages and impact of the organisation on the communities in which it operates.

Wherein the term Corporate Governance includes the fact as to how an organization is managed and led. It helps to analyse as to how the right of the shareholders are viewed and honoured, alignment of leadership’s incentives with expectations of the stakeholders, and existence of internal controls to promote accountability and transparency on the part of leadership.

SEBI Master Circular on ESG Rating Providers

The Security and Exchange Board of India issued a master circular vide circular no. SEBI/HO/DDHS/POD2/P/CIR/2023/121 dated July 12, 2023 for ESG Rating Providers wherein every ESG Rating Provider is required to be registered under the SEBI regulations and such registration shall be made through the intermediary portal i.e., https://siportal.sebi.gov.in. Further, according to Regulation 28H (c) of Credit Rating Agencies Regulation, all registered ESG Rating Providers (s) are required to obtain prior approval of SEBI in case of change in control.

Wherein prior approval granted by SEBI shall be valid for a period of 6 months from the date of approval within which the applicant shall file application for fresh registration pursuant to change in control.

Surrender of Certificate of Registration

“If an ERP wishes to surrender the registration voluntarily, it shall transfer, wherever relevant, its existing client /business accounts to another SEBI registered intermediary, before it makes arequest to SEBI for accepting the surrender of the certificate of registration.

Further, if at the time of request for surrender of certificate, the ERP has any outstanding rating ofany product or issuer, which falls within the ambit of another regulator or authority, as specified at Para 5.5, then such ERP shall obtain approval/ NOC from such regulator or authority and submit a self-attested copy of the same to SEBI along with the request for surrender of certificate. If the ERP does not have any outstanding rating of any such product or issuer, it shall provide a confirmation to that effect.”

Type of rating offered by ERP

1. ESG Rating

2. Transition or Parivartan Score

3. Combined Score

4. Core ESG Rating

5. Core Transition or Parivartan Score

6. Combined Core Score

Reporting and Disclosure requirement by ERP

ESG Rating Providers shall make disclosures as provided under the master circular on their websites. In case of listed entities/securities, the ERP shall make disclosures to the stock exchanges as specified under CRA Regulations. For ratings assigned and their periodic reviews, the ERP shall disclose ESG ratings on their websites. Where a specific format has been prescribed, the disclosures shall be made in that format.

The said master circular can be assessed through the following Link: