The Securities and Exchange Board of India (SEBI) is attempting to bring the country in line with a growing global movement for greater transparency and integrity in sustainability reporting.
- SEBI has launched a consultation to decide on frameworks that would regulate ESG disclosures for companies, ESG ratings and rating providers, and investing in ESG-themed products.
- India has already mandated that the top 1,000 listed companies make ESG disclosures and is looking to expand regulations to cover financial services firms and ESG rating providers.
- Most major economies are forging ahead with plans to mandate ESG disclosures, driven by net zero targets, investors’ concerns over greenwash and an acceleration in standards frameworks.
SEBI was established in 1988 and became a statutory body in 1992, capable of setting regulations and implementing government legislation. In addition to regulating the securities market, its objective is also to protect the interests of investors in securities and financial investments.
Its actions to bring its reporting requirements more in line with international standards and regulations are in line with India’s February 2023 budget, in which the government targeted green and sustainable investing as a growth opportunity.
What has the country already undertaken in terms of ESG disclosure regulation?
In May 2022, SEBI formed an ESG advisory committee (EAC) to advise it on setting up ESG regulations and directives in relation to the securities market. It followed the Business Responsibility and Sustainability Reporting (BRSR) guidelines for listed entities established a year before.
In February 2023, SEBI undertook a consultation to get feedback from market participants on establishing a broad regulatory framework around ESG disclosures by listed entities, ESG Ratings in the securities market and ESG investing by mutual funds.
The aim is to create transparency in the data provided by companies and firms that provide financial products, to facilitate investor understanding of their sustainability claims
Tightening existing disclosure mandates leave out Scope 3 disclosures
The top 1,000 listed companies in India began making voluntary ESG disclosures aligned with BRSR guidelines beginning with financial year 2021-22, and on a mandatory basis from financial year 2022-23. The EAC was charged with looking at the robustness of the requirements of the BRSR guidelines, while also reviewing the need for a regulatory framework to address ESG ratings and ESG investing.
The regulator set two objectives in its approach to developing an ESG framework: improving the credibility of disclosures and reducing or limiting the cost of compliance. In order to achieve these twin objectives, the BRSR Core framework has been developed to provide reasonable assurance for selected key performance indicators (KPIs) under each area of E, S and G factors.
SEBI acknowledged that, by requiring reasonable assurance on disclosures rather than limited assurance, it opted for greater confidence and integrity in reported data, even though it may be more expensive to implement.
The BRSR Core framework also requires external verification of exported data by an external assurance provider, while companies should provide the methodology used to facilitate the verification process. In doing so, India joins many of the major economies of the world that are in various stages of setting ESG-disclosure mandates of their own.
Joining the world’s leading economies in setting ESG reporting mandates
With the exception of the US, where proposed legislation could slow implementation of the SEC’s proposed disclosure rule, regulators worldwide are forging ahead with plans to mandate ESG disclosures. The EU appears to be furthest along in codifying its disclosure rules, with the UK following closely behind.
The Japanese Financial Services Agency will require listed companies to provide ESG-specific disclosures with their financial statements starting with the fiscal year ending 31 March 2023, while Canada will require all federally regulated financial institutions and major pension plans to provide climate disclosures aligned with the Task Force for Climate Disclosures (TCFD) framework from 2024 onwards.
SEBI’s consultation may require it to add to its BRSR Core framework of ESG reporting requirements. For example, details on Scope 3 reporting requirements appear to be scarce, which may need to be added, as the requirement becomes part of international standards such as the EU’s Sustainable Finance Disclosure Regulations, and those from the International Sustainability Standards Board.