Recently, climate change and sustainable development concerns have become a priority at global and national level. There has been an increase in the interest of international bodies and financial regulators in examining Environmental, Social and Governance (ESG)-related issues. The Securities and Exchange Board of India (SEBI) is one of the regulator on the forefront of ESG and hence, it has mandated the top 1,000 listed companies by market capitalisation to report Business Responsibility and Sustainability Report (BRSR) from the financial year 2022-23.

Investors factor financial implications of sustainability related risks and opportunities and these are impacting their investment decisions. This has led to an increase in the investor interest and demand for ESG reporting. However, the activities of ESG Ratings Providers (ERPs) are not subject to regulatory oversight at present. Reliance on such unregulated ERPs in securities markets has raised concerns about the potential risks to investor protection, the transparency and efficiency of markets, risk pricing, and capital allocation, etc. Additionally, lack of transparency in this area gives rise to the risk of greenwashing and misallocation of assets which could lead to infirmity in such ESG rating and a consequent lack of trust thereof. Therefore, SEBI has issued a consultation paper which describes the proposed regulatory framework to regulate ERPs and oversight thereon, periodicity of such disclosure, etc.

The consultation paper is open for comments upto 11 March 2022.

This issue of First Notes aims to provide an overview of the proposed framework issued by SEBI.

To access the text of the SEBI consultation paper, please click here.

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