Environmental, Social, Governance (ESG) framework 

Environmental, Social, Governance (ESG) framework 

Subject : Economy

Context:

An economy like India should have its own independent view of Environmental, Social, Governance (ESG) matters

Details:

• ESG be measured in terms of purchasing power parity basis to make companies in emerging market economies like India comparable to companies in the US.
• ESG rating providers were the second-most crucial part of the ESG ecosystem
• The third leg–ESG-focussed funds.

Environmental, Social, and Governance (ESG) goals are a set of standards for a company’s operations that force companies to follow better governance, ethical practices, environment-friendly measures and social responsibility. It focuses on non-financial factors as a metric for guiding investment decisions wherein increased financial returns is no longer the sole objective of investors.

ESG (Environment, Social and Governance) Funds

• It is a kind of Mutual Fund.
• ESG-focussed funds fall under the thematic fund category defined by the Association of Mutual Funds in India (AMFI).
• Its investing is used synonymously with sustainable investing or socially responsible investing.
• While selecting a stock for investment, the ESG fund shortlists companies that score high on environment, social responsibility and corporate governance, and then looks into financial factors.
• Therefore, the key difference between the ESG funds and other funds is ‘conscience’ i.e the ESG fund focuses on companies with environment-friendly practices, ethical business practices and an employee-friendly record.
• The fund is regulated by Securities and Exchange Board of India (SEBI).

ESG regulation in India:

• The Ministry of Corporate Affairs has issued voluntary guidelines for ESG compliance while the Securities and Exchange Board of India (SEBI) has mandated ESG-related disclosure for the top 1,000 listed companies.
• Investors often rely on third-party ESG rating providers (ERP) to determine ESG compliance by portfolio companies.
• ESG ratings are new to India, with the first ERP being established in January 2021. ERPs are presently unregulated.
• SEBI has in January 2022, issued a consultation paper proposing a regulatory framework for ERPs that rate listed companies. 
  • SEBI has proposed that ERPs be SEBI-accredited and that only credit rating agencies and research analysts be eligible for such accreditation.
  • Further, SEBI has proposed criteria for the accreditation of ERPs including net worth, knowledge, sustainability, infrastructure, quality of staff and technical know-how.
  • SEBI has proposed two categories of ratings, namely impact rating and risk rating.
• The subject of ERP regulation has now been referred by SEBI to an advisory committee on ESG constituted in May 2022.