International ESG Day 2023: While certain concerns, like increased compliance costs and limited investment efficacy, have been raised regarding ESG, the importance of sustainable investing only increases by the day
In the global pursuit of sustainable and responsible business practises, International ESG Day serves as a significant occasion to reflect on the growth of Environmental, Social, and Governance (ESG) investing in India and recent developments in India’s endeavours in developing the ESG regulatory framework.
The fund size of ESG mutual funds has increased multifold, from INR 2,703 crore in 2019 to INR 10,635 crore in 2023. While there has been a slight decrease in the fund size from 2021, a recent report by a leading investment management company suggests that ESG investing in India is poised to grow at an annual rate of 30 percent, and ESG investments could constitute 34 percent of total assets under management (AUM) domestically by 2051.
This growth in the realm of sustainable investing is being driven by regulatory and market-led developments in sectors such as renewable energy and electric vehicles, underpinned by India’s commitment to attain net zero emissions by 2070 and the 2023 G20 Summit-New Delhi Declaration, which encapsulates a pledge towards sustainable development and the integration of ESG principles into broader economic and developmental agenda.
Structured around nine business sustainability principles identified by the Ministry of Corporate Affairs, mandatory ESG reporting and disclosures in India began in 2011 with the obligation on the top 100 listed entities (by market capitalisation) to publish a business responsibility report. This framework was replaced with a more detailed business responsibility and sustainability report (BRSR) in 2021, which is applicable on top 1000 listed entities from FY 2022–23.
In June, the Securities Exchange Board of India (SEBI) updated BRSR to include BRSR Core as a subset, providing key performance indicators across nine ESG attributes including energy footprint, GHG emissions, business openness, gender diversity, spending on employee welfare activities, gross wages paid to women employees as a percentage of the total wage bill, and details of sexual harassment complaints received, etc.
The updated framework also mandates applicable companies to provide reasonable assurances across the ESG attributes and provide both upstream and downstream value chain disclosures. While the revised BRSR disclosure is applicable to the top 1000 listed entities, disclosures for reasonable assurance and value chain have been set for the top 150 companies, with a glide path to the top 1000 listed entities and top 250 listed entities, respectively.
The updated reporting framework emphasises quantifiable, outcome-oriented metrics and enhances comparability amongst companies regardless of size by integrating intensity ratios adjusted for purchasing power parity based on revenue.
The reworked disclosure framework, aimed at minimising greenwashing, has also led to additional avenues for green financing. For instance, in July, SEBI permitted mutual funds to open new schemes under the ESG category under certain strategies such as ‘exclusion,’ ‘integration,’ ‘impact investing,' etc. Authorising mutual funds to operate such schemes signals increasing appetite and burgeoning demand for diversified sustainable investment opportunities.
However, 65 percent of the AUM of these schemes is to be invested in listed entities that are reporting comprehensive BRSR and are providing reasonable assurances under the new disclosure structure, while the rest can be invested in entities providing BRSR disclosures. Since the BRSR obligations are only on large companies, it has been reported that these investing limitations, while well intentioned, will restrict investing avenues to larger companies.
Another notable development is the framework governing ESG rating providers (ERPs) through an amendment in the SEBI (Credit Rating Agencies) Regulations, 1999.[1] EPRs, which provide ratings or scores assessing EPR profiles of companies, have been unregulated until now.
While regulations in foreign jurisdictions such as the European Union, United Kingdom, and Japan are either at the stage of consultation papers or a voluntary code of conduct, India has, in a pioneering move, brought in a regulatory framework to standardise the ESG rating ecosystem and enhance oversight.
The amendment outlines the criteria, transparency measures, governance measures, and processes expected from EPRs, ensuring credibility and consistency in the evaluation process. This step not only enhances the reliability of ESG ratings but also instills confidence among stakeholders, fostering informed decision-making regarding investments based on ESG performance.
On this International ESG Day, India stands at a pivotal juncture, making significant strides in embedding ESG principles into its regulatory fabric. While certain concerns, like increased compliance costs and limited investment efficacy, have been raised regarding ESG, the importance of sustainable investing only increases by the day.
The authors are Saurav Kumar (Partner); Shreya Chaturvedi (Senior Associate); Aryan Dhingra (Associate); INDUSLAW. (Views expressed are personal.)