Markets regulator Sebi is keenly watching international developments on environment sustainability and governance (ESG) ratings as well as data providers and will take a call on the issue at a relevant time, its chief Ajay Tyagi said on Wednesday. Also, he said BRSR or Business Responsibility and Sustainability Report has raised the game in sustainability disclosures.

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The regulator will keep a close watch on how companies respond to this. Globally, the ESG taxonomy and industry is still evolving. ESG ratings and providers are generally not regulated in any jurisdiction. Tyagi said the international forum for securities regulators, International Organization of Securities Commissions (IOSCO) is in the process of publishing its report on 'ESG Ratings and ESG Data Providers', which would include recommendations on ESG ratings and ESG data providers along with regulatory and supervisory approaches with respect to same.

"We are keenly watching the international developments and would take appropriate view in the matter at relevant time," he said at an event organized by FICCI. Apart from the need for adequate corporate disclosures, ESG aspect of the asset management industry is another area of focus of Sebi.

"While, on one hand, there is an increasing demand for ESG investments, on the other hand, there are also concerns about greenwashing". The regulator, last month, came out with a consultation paper for introducing disclosure norms for ESG mutual fund schemes. The move aimed at ensuring that ESG-focused mutual fund schemes remain true to label.

In its consultation paper, the regulator proposed various disclosures in the Scheme Information Documents (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 BRSR disclosures or equivalent in case of overseas securities. Link to BRSR disclosure or equivalent should be provided for each security.

The Sebi chairman said the pledges made and decisions taken in COP26 including on climate finance are steps in the right direction to address climate change related challenges. "The expectations from company boards on sustainability issues will continue to increase going forward. BRSR has raised the game in sustainability disclosures. We will keep a close watch on how companies respond," he added.

The BRSR norms, which are applicable to the top 1,000 listed entities in terms of their market capitalization, are voluntary for current financial year 2021-22 and mandatory from next year onwards. BRSR seeks disclosures from listed entities on their performance against nine principles. These nine principles cover both environment and social aspects such as climate action, responsible consumption and production, gender equality, working conditions etc.

According to Tyagi, investors are realizing the implications of sustainability related risks and have started treating these as material to their investment decisions. This is reflected in the recent increase in total assets and inflows in sustainable funds global.

As per Morningstar data, the global sustainable fund assets have more than quadrupled in the past two years, from a little under USD 900 billion at the end of September 2019 to USD 3.9 trillion at the end of September 2021. Europe accounts for over 88 percent of this AUM and the USA accounts for over 8 percent.

As for Asia, while sustainable funds comprise 2.1 percent of global AUM, the region is witnessing significant growth in terms of new fund inflows and ESG product launches. Taking the Indian example, he said that out of the 10 ESG themed mutual fund schemes in India, 8 were launched after January 2020. Till now, regulators typically followed the voluntary or comply-or-explain approach towards ESG disclosures but now "we are seeing a shift to mandatory ESG disclosures. Such a shift is also being witnessed in Asian jurisdictions," he added.

First Published:Nov 10, 2021 6:49 PM IST