Large companies in India may be required to provide assurance on their ESG reporting and supply chain-level ESG disclosures, while ESG investing funds will face tighter portfolio and stewardship criteria, according to a new set of proposals released by securities and markets regulator, the Securities and Exchange Board of India (SEBI), aimed at improving transparency and addressing greenwashing risks.

In the new consultation paper released Monday, SEBI notes the “growing recognition of the significant economic and financial impact of climate change and environmental, social and governance (ESG) risks,” which has led to the launch of ESG funds and calls by investors and regulators for ESG-related disclosures. The regulator established an ESG Advisory Committee in May 2022, and the consultation paper reflects their proposals for a regulatory framework across ESG disclosures by public companies, ESG investing by mutual funds, and ESG ratings providers.

Under the current rules, the top 1,000 listed companies in India by market capitalization are required to provide reporting on ESG factors based on Business   Responsibility   and   Sustainability   Report (BRSR) guidelines introduced in 2021, with BRSR reporting becoming mandatory this year. Noting that investors and other stakeholders will be increasingly relying on these reports, SEBI’s consultation paper said that “assurance becomes key for enhancing credibility of disclosure and investor confidence,” and that more transparency is required in the supply chains of reporting companies.

To address the need for ESG disclosure assurance, SEBI introduced “BRSR Core,” consisting of select KPIs for various E, S and G factors that need to be assured, with proposed mandatory assurance for the top 250 companies beginning next year, followed by the top 500 companies the following year, and the top 1,000 after that.

In the supply chain, the regulator proposes ESG disclosures according to the BRSR Core for the top 250 companies on a comply-or-explain basis beginning in 2024, with assurance beginning the following year.

In the area of ESG investing, SEBI’s consultation paper provides a series of proposals to expand disclosure for ESG funds, and other measures to improve transparency, “with a particular focus on mitigation of risks of mis-selling and greenwashing and other related areas. Proposals include providing better clarity on votes cast on resolutions at AGMs, and providing case studies on stewardship activities including reporting on engagements and outcomes aligned with the fund’s objectives.

Additional proposed rules for ESG funds include having at least 65% of AUM invested providing assurance on BRSR Core disclosures, with the remaining assets in companies reporting on BRSR, providing third party assurance that the portfolio is in compliance with its stated strategy or objective, and a mandated internal ESG audit to ensure that funds’ Scheme Information Documents, Stewardship Reporting, and Responsible Investment Policy documents are accurate.

SEBI also proposes rules for fund names, and that funds provide annual manager commentary highlighting factors including how the ESG strategy is being applied, how engagements are carried out, and tracking of investee company ESG ratings.

The regulator’s consultation paper also includes proposals for ESG ratings providers, including a list of ESG parameters with an India context, and that providers offer a “Core ESG Rating” based on information that has been assured or audited.

SEBI said that it is seeking commentary on the proposals until March 6, 2023. Click here to access the Consultation Paper.