India tables draft regulation on ESG ratings, assurance and disclosure

It could introduce the world’s first mandatory requirements to audit ESG disclosures.

Major Indian companies, ESG data providers and asset managers could face regulations on a broad range ESG investing topics from later this year, according to a consultation paper published on Monday.

The Securities and Exchange Board of India (SEBI) is considering regulations to mandate assurance of corporate sustainability reporting, which will then feed into a new class of ESG rating products. It is also mulling new disclosure requirements covering supply chains and stewardship.

According to SEBI’s proposed timeline, the largest listed 250 Indian companies will be required to seek mandatory assurance for a limited number of key and measurable ESG metrics including gender pay gaps, GHG emissions, water consumption, incidence of sexual harassment and others, from the next financial year starting July 2023.

This requirement will be gradually broadened to the largest 500 local companies in the 2024-25 financial year, and for the largest 1,000 companies in the subsequent period.

Assurance is expected to play a key role in the upcoming global ESG disclosure standards being developed by the International Sustainability Standards Board and parallel regional standards in the EU, but SEBI’s proposals will be the first to make audits mandatory if adopted.

India’s largest 1,000 listed companies are already required to file mandatory ESG disclosures from this year, following a voluntary reporting period in 2021-22 which resulted in only 175 company disclosures.

The financial regulator has proposed that audited ESG filings could become the basis of a new category of ESG assessments, called “Core ESG ratings”, aimed at increasing the reliability of ESG ratings. This would be offered in addition to other sustainability-focused ratings already available in the market.

In addition, SEBI is scrutinising the need for an India-specific ESG ratings framework which would take into account local market realities. According to the regulator, metrics used by developed countries to measure performance on areas such as workforce diversity and others could be less relevant in India.

India was the first jurisdiction to put forward draft regulation aimed at the ESG ratings market in January 2022, following a landmark IOSCO report on the subject, but is yet to make any announcement on its implementation. ESG ratings providers would be required to seek government accreditation, institute internal governance processes and consider a “subscriber pays” model under the earlier proposals.

Other regulators have since closed the gap, including Japan’s Financial Service Agency which adopted a voluntary code of conduct for ratings providers in December.

The proposals from SEBI could separately introduce new value chain reporting requirements for the largest 250 locally listed companies on a comply-and-explain basis from the 2024-25 financial year, with assurance to be phased in the following reporting year.

ESG fund disclosure

ESG fund managers could be required to disclose their voting and stewardship activities to comply with a raft of transparency initiatives included in SEBI’s paper.

This includes their proxy voting records and details on whether voting decisions had taken ESG factors into account for annual general meetings held in April onwards. The information would allow investors to assess fund compliance with India’s stewardship code and overall stewardship performance, the regulator said.

SEBI has also proposed new disclosure requirements on the number of engagements conducted by fund managers, engagement approach and outcomes which will be implemented on a staggered basis from the 2024-25 financial year.

The latest batch of proposals is an attempt by SEBI to streamline its regulatory approach to ESG and has been developed by an ESG advisory committee convened by the regulator in 2022. Members include representatives from asset managers, rating providers, academics and corporates.

Stakeholders have until 6 May to respond to the draft rules.