Sebi in process of stipulating disclosures specific to ESG scheme, says chief Ajay Tyagi

Markets regulator Sebi is in the process of putting in place disclosure for mutual fund schemes with the ESG (environment sustainability and governance) theme, its chief Ajay Tyagi said on Friday.

Also, the regulator is examining the disclosure of ESG related aspects in the rating press release by credit rating agencies, he added.

Speaking at the inauguration of an ESG Centre for Research and Innovation at IIM Ahmedabad, Tyagi stressed on the need of in depth research on ESG norms with focus towards developing high quality, objective, content-specific rating matrices.

"Research in ESG can go a long way towards converting intangible and amorphous variables of business to measurable and quantifiable returns, both financial and social," he said.

The Sebi chief noted that Indian investors are showing increased interest in ESG compliant companies and investment products. Also, ESG funds are rapidly expanding in the Indian mutual fund industry.

Asset management companies (AMCs) have been launching equity schemes in the ESG space under thematic category. The AMCs are also launching exchange traded funds (ETFs) and ETF fund of funds in ESG space.

As on October 31, 2021, there were 11 mutual fund schemes in India having ESG as their theme with assets under management of over Rs 13,000 crore.

Tyagi said that these schemes have disclosures in their scheme information documents (SIDs) in line with the other scheme categories, such as investment objective, asset allocation, investment strategy, investment restrictions, and subsequent disclosures.

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"However, these disclosures often do not bring out clearly all aspects related to ESG investing including investment strategy, usage of proprietary / third-party scoring in investment decision-making and monitoring of ESG investments. Sebi is in the process of stipulating disclosures specific to ESG schemes," he added.

Sebi came out with the consultation paper for introducing disclosure norms for ESG MF schemes in October, whereby it proposed various disclosures in the SID that will ensure that the type of strategy followed by the scheme, with regards to sustainability or ESG characteristics merit the nomenclature of an ESG fund.

The proposal requires schemes to only invest in securities that have business responsibility and sustainability report (BRSR) disclosures or equivalent in case of overseas securities. Link to BRSR disclosure or equivalent should be provided for each security.

Though the mandated allocation for securities with ESG theme is at least 80 per cent and the disclosure norms apply to these securities only, the regulator has proposed not too much deviation from the scheme philosophy for the remaining 20 per cent allocation.

According to Tyagi, the introduction of BRSR and launch of ESG mutual fund schemes have generated interest in ESG ratings as a way for ESG disclosures by listed issuers to aid investors meaningfully integrate ESG into their investment decisions.

"In this backdrop, Sebi is examining the disclosure of ESG related aspects in the rating press release by credit rating agencies," he added.

He, further, said that ESG ratings have become equally important for unlisted companies.

Considering the diversity in business models, ecological implications, cultural nuances which have implications for companies' dealings with employees, customers and channel partners, among others, the landscape for research in ESG is vast and extensive, Tyagi said.

Research should focus on identifying factors or constituents of measuring ESG which are specific to the company's region, country and industry, their calculation and relative weights in the overall ESG framework, he added.

"In line with global trends, Sebi is looking at what could be the regulatory and supervisory approaches for ESG rating provider," the chairman said.

The international forum for securities regulators International Organization of Securities Commissions (IOSCO) has recently published its report on 'ESG Ratings and ESG Data Providers', wherein it called for oversight of such rating providers.

The report recommended greater attention by regulators on the use of ESG ratings and activities of ESG rating providers in their jurisdictions. This could help to increase trust in ESG ratings going forward.