SEBI on Monday proposed a regulatory framework on ESG disclosures by listed entities, ESG ratings in the securities market and ESG investing by mutual funds in order to facilitate balance between transparency, simplification and ease of doing business in an evolving domain.

This comes amid growing recognition of the significant economic and financial impact of climate change and environmental, social and governance (ESG) risks.

Securities and Exchange Board of India (SEBI) has mandated the top 1,000 listed companies by market capitalisation to make filings as per the Business Responsibility and Sustainability Reporting (BRSR) from FY23. In FY22, more than 175 companies reported on the BRSR framework on a voluntary basis.

"With the BRSR becoming mandatory from this financial year and a number of stakeholders such as investors and ESG rating providers placing reliance on disclosures made in the BRSR, assurance becomes key for enhancing credibility of disclosure and investor confidence," SEBI said in its consultation paper.

Another area where more visibility and transparency is required is ESG disclosures by supply chain participants of companies, it added.

SEBI has proposed areas of assurance of certain key ESG disclosures by corporates along with reporting and assurance of ESG footprint of the supply chain of companies.

Twin objectives

In order to achieve the twin objectives of improving credibility and limiting the cost of compliance, BRSR Core has been developed for reasonable assurance which consists of select Key Performance Indicators (KPIs) under each E, S and G areas that needs to be reasonably assured, SEBI said.

The BRSR Core framework also specifies the methodology to facilitate reporting by corporates and verification of the reported data by an assurance provider.

The key performance indicator in the BRSR Core contains a number of intensity ratios, such as intensity of Green-House Gas (GHG) emissions, water consumption, and waste generation so as to help comparability, irrespective of the size of the company. These intensity ratios are based on both revenue and volume.

The comprehensive BRSR should be updated to incorporate KPIs proposed in BRSR Core that are currently not present in the comprehensive BRSR.

Glide path approach

The markets regulator has suggested a glide path approach with reasonable assurance of KPIs in BRSR Core can be mandated in a gradual manner.

For FY23, SEBI has made BRSR reporting mandatory for top 1,000 companies with no mandatory requirement on assurance area. For FY24, SEBI has suggested to make reasonable assurance in BRSR Core mandatory for top 250 companies and for top 500 firms from 2024-25 and top 1,000 firms from 2025-26.

Also, the regulator has proposed ESG parameters that could be relevant to Indian context that may be integrated in at least one of the ESG ratings for an Indian companies.

Since the proposed BRSR Core provides for disclosure of assured KPIs, SEBI had proposed that in addition to their other products, ESG Rating Providers (ERPs) should also provide a Core ESG rating, which should be based on information that are assured.

Expanding disclosure norms

The regulator has recommended for expanding the disclosure norms for ESG funds and on measures that may be brought in to improve transparency, with a particular focus on mitigation of risks of mis-selling and greenwashing and other related areas.

It has proposed for enhanced stewardship reporting for ESG schemes.

SEBI has proposed that asset management companies (AMCs) should provide better clarity on 'in favour' or 'against' votes cast on resolutions in a year by disclosing if the resolution has or has not been supported due to any environmental, social or governance reason.

To mitigate greenwashing at scheme level, SEBI has suggested that ESG scheme should invest at least 65 per cent of its asset under management (AUM) in companies which are reporting on comprehensive BRSR and are also providing assurance on BRSR Core disclosures.

The remaining investments of the scheme should be in companies reporting on BRSR.

SEBI has sought comments from public till March 6 on the proposals.