<p>As the country hurtles towards its net zero commitments by 2070 and the corporates vie with each other to up their ESG (environment, social and corporate governance) profile, the variant parameters used by ESG rating providers (ERPs) give a pretty confusing picture on the ranking of each entity. The need to standardise their procedures has prompted the market regulator - Securities and Exchange Board of India (Sebi)- to come up with a master circular earlier this month, setting the procedure to be followed and lending a certain homogeneity to the process. In this edition of <em>DH Deciphers</em>, <strong>Shakshi Jain</strong> attempts to break down the mandates set down by the document.</p>.<p><strong>The historical perspective</strong></p>.<p>Prior to release of the master circular dated July 12, 2023, ESG rating providers were regulated under the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999. Subsequently, Sebi’s 2021 circular centered around ESG disclosures for companies was an instrumental development in India’s ESG journey. The latest master circular comes as a logical next step to regulate the ratings aspect of the existing structure.</p>.<p><strong>What does the circular propose?</strong></p>.<p>ESG rating services can now only be provided by entities that have been certified by the Securities and Exchange Board of India. In fact, foreign agencies that provide ESG rating services, will also require to obtain Sebi certification, if they aspire to provide rating services to entities located in India. </p>.<p>Furthermore, if an ERP is an associate or a subsidiary of a credit rating agency, it shall prominently display that ESG ratings are different from credit ratings through its website and ESG rating reports.</p>.<p><strong>What are some key provisions in the circular?</strong></p>.<p>Following a sector-agnostic approach an ERP must adhere to a rating scale of 1-100, where 100 represents the maximum score. The ERP shall follow either of the following two, mutually exclusive, business models:</p>.<p>Subscriber-paid: The ERP derives its revenues for ESG ratings from subscribers such as banks, insurance companies, pension funds or the rated entity itself.<br />Issuer-paid: The ERP derives its revenues from the rated entity via a written contractual agreement between such entity and the ERP.</p>.<p>Lastly, an ERP shall offer at least the following six rating products - ESG Rating, Transition or Parivartan Score, Combined Score, Core ESG Rating, Core Transition or Parivartan Score and Core Combined Score. However, if the ERP relies only on third-party assured parameters, then it shall not be required to provide a non-core variant.</p>.<p><strong>What is the Business Responsibility and Sustainability Report (BRSR)?</strong></p>.<p>BRSR is a reporting framework for businesses, released by Sebi in 2021 and mandated for the top-1,000 listed companies in India (by market capitalisation) starting FY23. It aims to establish links between the financial results of a company with its environmental, social and governance responsibilities. </p>.<p>The market watcher first introduced the requirement of ESG ratings in 2012 through a Business Responsibility Report, which served as the base for BRSR to pave the way for a comprehensive ESG framework for businesses in India. </p>.<p><strong>What is the BRSR Core framework for assurance?</strong></p>.<p>The BRSR Core is a subset of BRSR, comprising a set of key performance indicators or metrics under the nine ESG attributes. It has been designed keeping in mind a relevance to the Indian/emerging market context, including new metrics for assurance such as job creation in small towns, open-ness of business, gross wages paid to women, etc. Furthermore, for better global comparability intensity ratios based on revenue adjusted for purchasing power parity have been included.</p>.<p>From FY 2023-24, the top 150 listed companies shall file a BRSR Core report, as part of their annual reports.</p>.<p><strong>Explain the latest ESG disclosure requirements for value chain.</strong></p>.<p>The Sebi circular dated July 12, 2023 urges the top-250 listed entities in India to disclose their supply-chain emissions on a comply-or-explain basis from FY25. For this purpose, the supply or value chain encompasses the top upstream and downstream partners which collectively comprise 75% of the listed entity’s sales/purchases by value respectively.</p>.<p>The comply-or-explain approach refers to a regulatory practice in corporate governance which necessitates voluntary compliance with a given provision or alternatively disclosure of reasons for non-compliance, if any.</p>
<p>As the country hurtles towards its net zero commitments by 2070 and the corporates vie with each other to up their ESG (environment, social and corporate governance) profile, the variant parameters used by ESG rating providers (ERPs) give a pretty confusing picture on the ranking of each entity. The need to standardise their procedures has prompted the market regulator - Securities and Exchange Board of India (Sebi)- to come up with a master circular earlier this month, setting the procedure to be followed and lending a certain homogeneity to the process. In this edition of <em>DH Deciphers</em>, <strong>Shakshi Jain</strong> attempts to break down the mandates set down by the document.</p>.<p><strong>The historical perspective</strong></p>.<p>Prior to release of the master circular dated July 12, 2023, ESG rating providers were regulated under the Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999. Subsequently, Sebi’s 2021 circular centered around ESG disclosures for companies was an instrumental development in India’s ESG journey. The latest master circular comes as a logical next step to regulate the ratings aspect of the existing structure.</p>.<p><strong>What does the circular propose?</strong></p>.<p>ESG rating services can now only be provided by entities that have been certified by the Securities and Exchange Board of India. In fact, foreign agencies that provide ESG rating services, will also require to obtain Sebi certification, if they aspire to provide rating services to entities located in India. </p>.<p>Furthermore, if an ERP is an associate or a subsidiary of a credit rating agency, it shall prominently display that ESG ratings are different from credit ratings through its website and ESG rating reports.</p>.<p><strong>What are some key provisions in the circular?</strong></p>.<p>Following a sector-agnostic approach an ERP must adhere to a rating scale of 1-100, where 100 represents the maximum score. The ERP shall follow either of the following two, mutually exclusive, business models:</p>.<p>Subscriber-paid: The ERP derives its revenues for ESG ratings from subscribers such as banks, insurance companies, pension funds or the rated entity itself.<br />Issuer-paid: The ERP derives its revenues from the rated entity via a written contractual agreement between such entity and the ERP.</p>.<p>Lastly, an ERP shall offer at least the following six rating products - ESG Rating, Transition or Parivartan Score, Combined Score, Core ESG Rating, Core Transition or Parivartan Score and Core Combined Score. However, if the ERP relies only on third-party assured parameters, then it shall not be required to provide a non-core variant.</p>.<p><strong>What is the Business Responsibility and Sustainability Report (BRSR)?</strong></p>.<p>BRSR is a reporting framework for businesses, released by Sebi in 2021 and mandated for the top-1,000 listed companies in India (by market capitalisation) starting FY23. It aims to establish links between the financial results of a company with its environmental, social and governance responsibilities. </p>.<p>The market watcher first introduced the requirement of ESG ratings in 2012 through a Business Responsibility Report, which served as the base for BRSR to pave the way for a comprehensive ESG framework for businesses in India. </p>.<p><strong>What is the BRSR Core framework for assurance?</strong></p>.<p>The BRSR Core is a subset of BRSR, comprising a set of key performance indicators or metrics under the nine ESG attributes. It has been designed keeping in mind a relevance to the Indian/emerging market context, including new metrics for assurance such as job creation in small towns, open-ness of business, gross wages paid to women, etc. Furthermore, for better global comparability intensity ratios based on revenue adjusted for purchasing power parity have been included.</p>.<p>From FY 2023-24, the top 150 listed companies shall file a BRSR Core report, as part of their annual reports.</p>.<p><strong>Explain the latest ESG disclosure requirements for value chain.</strong></p>.<p>The Sebi circular dated July 12, 2023 urges the top-250 listed entities in India to disclose their supply-chain emissions on a comply-or-explain basis from FY25. For this purpose, the supply or value chain encompasses the top upstream and downstream partners which collectively comprise 75% of the listed entity’s sales/purchases by value respectively.</p>.<p>The comply-or-explain approach refers to a regulatory practice in corporate governance which necessitates voluntary compliance with a given provision or alternatively disclosure of reasons for non-compliance, if any.</p>