With increasing demand for sustainable or environmental, social, and governance (ESG) investments, there are concerns about ‘greenwashing’, and regulators need to ensure ESG disclosures by funds and issuers, said Ajay Tragi, chairman, Sebi on Wednesday.
Greenwashing is the process of portraying an organization’s product or services as environmentally friendly.
“While the regulators may be agnostic to where investors invest, they have an important role to play to ensure ESG disclosures by funds and issuers, and guard against greenwashing,” Tyagi said. He was speaking at the FICCI’s event on Driving Climate Action through Disclosures: BRSR as Bedrock for ESG Action in India. The event took place in the backdrop of COP26, the 26th United Nations Climate Change conference.
Climate change concerns and sustainable development have taken centre stage in global priorities, especially after the covid-19 pandemic.
“These developments have far reaching implications for corporates. Companies now face sustainability related risks to their businesses, which could manifest in the form of transition risks as we move to a low carbon economy, physical risks from climate related events to their assets or even as reputational risks,” Tyagi said.
To bring in greater transparency and enable market participants to identify and assess sustainability-related risks and opportunities, The Securities and Exchange Board of India (Sebi) in May had introduced Business Responsibility and Sustainability Report (BRSR).
The BRSR seeks disclosures from listed entities on their performance against nine principles. These nine principles echo the UN’s sustainable Development Goals (SDGs) and cover both environment and social aspects such as climate action, responsible consumption and production, gender equality, working conditions etc.
Tyagi noted that 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 globally,” he added.
As per Morningstar data, the global sustainable fund assets have more than quadrupled in the past two years, from a little under $900 billion at the end of September 2019 to $3.9 trillion at the end of September 2021. In India, as well, out of the 10 ESG themed mutual fund schemes, eight were launched after January 2020.
Meanwhile, to protect investors against greenwashing, the regulator recently had come out with a paper, in which he had proposed that ESG funds should have at least 80% of their total assets in securities following the sustainable theme.
Moreover, the rest 20% assets should not be in stark contrast with the ESG philosophy.
Tyagi in his speech today also highlighted that the consultation paper also proposed that the disclosures in the schemes information document (SID) by fund houses should include investment strategy (such as exclusionary, positive screening, impact investing), sustainable objective, decision making process for investing including use of proprietary or third party ESG scoring process/methodology, etc.
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