Evaluating Indian regulators’ ESG quotient

Rabindra Jhunjhunwala

Khaitan & Co, Mumbai

rabindra.jhunjhunwala@khaitanco.com

Saranya Mishra

Khaitan & Co, Mumbai

saranya.mishra@khaitanco.com

The Securities Exchange Board of India (SEBI, the market regulator), the Reserve Bank of India (RBI, the financial regulator), and the Ministry of Corporate Affairs (MCA, the corporate affairs regulator) constitute the corporate regulatory trinity of India. Over the past few years, the regulators have opened channels of communication through consultation papers and attempted to increase corporate sustainability responsibilities by way of regulations. The key green initiatives of the Indian regulators are as follows.

Introducing sustainability reporting requirements

Based on voluntary guidelines issued by MCA in 2009[1] and then in 2011,[2] SEBI released a circular[3] in 2012 that required the top 100 listed entities to include a ‘business responsibility report’ (BRR) in their annual reports. The requirement to file a BRR was progressively extended to the top 500 listed entities in 2015 and to the top 1,000 listed entities in 2019.

In May 2021, based on public consultation[4] and the report of the Committee on Business Responsibility Reporting,[5] SEBI issued a circular[6] replacing the BRR with ‘Business Responsibility and Sustainability Reporting’ (BRSR). BRSR[7] emphasised non-financial aspects of reporting such as social and environmental factors, and placed India on the world map for corporate sustainability reporting.

Revamping corporate social responsibility: the transition from a ‘comply or explain’ to a ‘comply or penalty’ regime

While RBI had issued advisory guidelines[8] for banks in 2007, the Indian company law brought into force in 2013 introduced provisions for corporate social responsibility (CSR) as a voluntary activity for select companies. CSR is essentially permitted philanthropic activities that work towards sustainable development goals. With effect from January 2021, CSR became mandatory for eligible companies, and non-compliance thereof became punishable for both the company as well as ‘officers in default’.

Regulating green securities

Based on a 2015 SEBI public consultation,[9] and voluntary guidelines[10] issued by the Indian Banks Association in 2016, SEBI mooted[11] specific provisions for issuance and listing of green debt securities. In May 2017, it released a circular[12] which:

• explicitly defined ‘green debt securities’;
• iterated responsibilities for the issuer; and
• listed offer letters as well as continuous disclosures.

In 2021, the general regulations for issue and listing of securities were consolidated into one master regulation,[13] and the definition of ‘green debt security’ was compiled therein with amplified end use[14] and discretion to SEBI to add more categories. The 2017 SEBI circular was superseded by an omnibus operational circular issued by SEBI in August 2021[15] and amended in December 2021.[16] Chapter IX of this circular detailed guidelines for the issue and listing of structured/market-linked debt securities, in addition to carrying forward the provisions of the 2017 SEBI Circular.

Encouraging sustainability-related disclosures

From 2014, Indian company law has mandated disclosure in respect of conservation of energy in the report of the board of directors. In 2015, SEBI (through listing regulations[17] applicable to listed entities) required general disclosures of opportunities and threats, risk and concerns and any material information/event having significant impact. In this respect, some guidance was provided by BSE in its Guidance Document on ESG Disclosures.[18]

Regulating ESG mutual fund schemes

In 2021, SEBI released a consultation paper on introducing disclosure norms for ESG mutual fund schemes.[19] This suggested increased disclosure requirements, as well as the adoption of a true-to-label approach requiring at least 80 per cent of asset under management to be invested in ESG-compliant companies.

Attempts to regulate ESG rating providers

SEBI recently released a consultation paper[20] to standardise the ESG rating and related products ecosystem, and regulate ESG rating providers (ERP), which are currently unregulated.

It has, inter alia, proposed that listed entities shall use ESG ratings only from SEBI-accredited ERPs, and sought comments on eligibility criteria for:

• ERP accreditation;
• ESG rating scales; and
• the process, governance and business model of ERPs.

This goes hand in hand with BRSR and is a step towards establishing a new intermediary that would operate in the ESG space.

Based on recent public statements,[21] it is clear that the regulators are not only encouraging the adoption of sustainability, but also standing guard against the possibility of greenwashing. This goes a long way to establish the all-encompassing commitment of Indian regulators to adopt ESG and sustainability principles. Indian regulators are taking synchronised steps for adopting sustainability as a core value of doing business in India, epitomising ‘Who Cares Wins’.[22]​​​​​​