SEBI’s flexible ESG regulations: Will it deter global investors?

• The adoption of environmental, social, and governance (ESG) rules has been embraced globally.
• In India alone, ESG investments have grown from $330 million in 2019 to a staggering $1.3 billion in 2023.
• Recently, SEBI, the Indian securities regulator, just proposed some changes to ESG regulations that could make things a whole lot smoother for businesses.

The Rise of ESG Investments in India

The adoption of ESG rules and practices has become an absolute necessity in today’s business landscape.

Consumers as well as investors are increasingly favoring brands/companies that are environmentally and socially conscious.

The proof?

ESG investments in India have grown from $330 million in 2019 to a staggering $1.3 billion in 2023.

Global ESG assets surpassed $30 trillion in 2022 and are on track to surpass $40 trillion by 2030 — over 25% of projected $140 trillion assets under management (AUM) according to a latest ESG report from Bloomberg Intelligence (BI).

SEBI’s ESG framework

ESG rules in India are still in their early stages. However, there have been significant developments in recent years, and the framework is evolving.

In 2021, SEBI developed the Business Responsibility and Sustainability Reporting (BRSR) a reporting framework that requires certain companies to disclose their ESG performance in a quantitative and standardised format.

Development of ESG regulations 

1. Since FY 2022-23, the BRSR format has been a mandatory disclosure requirement for the top 1,000 listed entities by market capitalisation.
2. From the fiscal year 2024-25 onwards, the top 150 listed companies by market capitalization are required to prepare disclosures and undergo reasonable assurance on BRSR Core KPIs.
3. Since FY 2024-25, the top 250 listed entities have been included in the BRSR Core KPIs value chain extension.
4. The BRSR framework has been updated to include Core Key performance indicators (KPIs) and a glide path for BRSR Core reasonable assurance.

SEBI’s ESG mandate relaxation

Recently, SEBI proposed a few modifications to the ESG regulations.

1. Optional Third-Party Assurance on Key Disclosures

SEBI’s proposal: SEBI intends to make third-party assurance voluntary on some key disclosures, particularly related to ESG metrics.

Arguments for the proposal: Aims to potentially ease the compliance burden on companies, especially for smaller firms.

Additional points to consider: This proposal is specifically for key disclosures, not all ESG metrics. There might still be mandatory reporting requirements.

2. Reduce Disclosure Requirements for Supply-Chain Partners

Reduce the scope of disclosures companies need from their supply chain partners regarding ESG actors.

This decision comes after concerns raised by industry bodies like CII (Confederation of Indian Industry) about the initial timelines and challenges in gathering data.

Here’s a breakdown of the situation:

• Initial Requirement: SEBI mandated the top 250 listed companies to disclose ESG data for a significant portion (75%) of their value chain, aiming for a comprehensive picture.
• SEBI proposed a relaxation. Considering an alternative where companies would only need to report on partners exceeding a 2% threshold of their purchases or sales.

A move welcomed by corporates, this allows them more time to work with value chain partners to meet required standards.

3. Green credits

What is Green Credits you ask?

Essentially, Green Credits are a way to measure a company’s environmental supervision. They are earned by companies and their value chain partners through environmentally sustainable activities, primarily tree plantation on waste or degraded lands.

SEBI recently proposed including them as a leadership indicator within the existing BRSR framework.

Why the recent proposed changes can be controversial

SEBI seems to be prioritizing making it easier to do business over addressing issues in sustainability reporting.

While these changes can help businesses follow ESG norms more easily, they raise concerns about lowering sustainability standards. Some argue it weakens investor confidence.