SEBI mulls measures to facilitate ease of doing business for ESG Rating Providers (ERPs)

Market watchdog SEBI has come out with a consultation paper in a bid to ease the functioning of ESG Rating Providers (ERPs), pushing for the development of a subscriber-pays model.

As of July 2024, nine ERPs are registered with SEBI to operate in the country. These include CRISIL ESG Ratings & Analytics, ESG Risk Assessments and Ratings, GlobeTrend Climate Impact
Institutional Investor Advisory Services, NSE Sustainability Ratings and Analytics, PGS Impact, Pragati Development Consulting, CARE ESG Ratings, and SES ESG Research.

Per the paper's proposal, ERPs won't be required to disclose ESG (environmental, social, and governance) ratings to the bourses, provided they confirm that there is no non-public information that could potentially affect the rating. Another proposal was the simultaneous sharing of the ESG rating reports both to the rated companies and to the subscribers who pay to access these reports.

ERPs should ensure that rated entities, their group companies, or associates cannot subscribe to their own ESG ratings, SEBI said in its consultation paper. Some of the other suggestions put forth by SEBI include:

1. Companies will have a specific timeframe to respond to the ESG report, and any such comments should be included in the report as an addendum.

2. In case the ERP does not agree with the remarks issued by the rated company, they can add their comments to the report as well.

3. ERPs can rate unlisted issuers or other products, provided they meet specific guidelines from relevant regulators.

SEBI is receiving public comment on these proposals until November 15, 2024.

Steady returns

Of the 11 ESG mutual fund schemes available to Indian mutual fund investors, the Quant ESG Equity fund has generated the highest returns of about 45.44% over one year, data from ValueResearch showed. Simply put, had you invested Rs 10,000 every month in this fund for three years, you would have accumulated a corpus of Rs 5,47,525. Over three years, the returns on this fund come to around 26%.

This was followed by the ICICI Pru ESG Exclusionary Strategy fund, which yielded 44.73% returns over the same period. However, over ultra-short terms, i.e., 1-3 months, ESG funds have largely delivered negative returns, underscoring their suitability only as a long-term investment avenue.

Only the SBI ESG Exclusionary Strategy Direct Fund and Quantum ESG Best In Class Strategy Direct Fund have been around for 5 years, during which they have generated returns of about 16.67% and 18.7%, respectively.

ESG mutual funds typically select and invest in companies that are ESG-compliant, i.e., who weave in environmental conversation, social welfare, and robust corporate governance practices into their working philosophy and work ethos, while simultaneously generating decent financial returns for stakeholders as well.