SEBI committee members come from the Union government of India, officers from the union finance ministry, and the Reserve bank of India. In May 2021, SEBI announced that the BRSR report is mandatory for companies holding the first 1000 places in the stock market. This report makes the ESG parameters of the company’s public information. The securities and exchange board of India created ESG advisory committees in the year 2022 for the welfare of participants, custodians, depositories, credit rating agencies and foreign portfolio investors. The different committees formed in the current year are the secondary market advisory committee, an advisory committee for leveraging regulatory and technology solutions, market data advisory committee, an alternative investment policy advisory committee, a high powered advisory committee on settlement orders and compounding of offences, environmental social and governance committee and advisory committee for SEBI investor protection and education fund. The committee will focus on the required changes with the business responsibility and sustainability report. The committee will examine the disclosures and suggest the plans and assurances relevant to the Indian context of business. SEBI formed an advisory committee for ESG that will check the ESG rating, SEBI guidelines for ESG, and credit ratings. The committee will also check the job creation in the financial sector.
Investors review the ESG ratings before investment. The characteristics which the ESG rating checks are as follows: resilience, corporate ethics, resource utilisation, corporate social responsibility, occupational health, safety measures, product governance, land and biodiversity. After the pandemic, the Investors are prone to losses. So, there is high awareness in the mutual fund sector for ESG ratings. The awareness of the capital market and mutual fund market is crucial for a finance student. We engage the readers with valuable insights about ESG ratings and the ESG committee. ICAI offers certification courses for professionals working in the capital market and mutual funds. The certificate course on forex and treasury management, certificate course on derivatives, certificate course on financial markets and securities laws, and certificate course on fundamental and technical analysis are the courses for the professionals from a background in capital markets.
Who are the members of the ESG Committee?
The committee is headed by NavneetMunot, CEO of HDFC Asset Management Company. Mr C. Siva Kumar, executive director of NTPC, CEO of Tata Chemicals, SharadKalghtagi, ESG J.N.Gupta, Managing director of stakeholders empowerment services, AmitTalgeri, chief risk officer of Axis bank, Amit Tandon, institutional investor advisory services, and Rama Patel, director of Crisil ratings, Ramnath are the members of the committee.
What is an ESG rating?
ESG oriented investments are proliferating in the market. The polarisation of ESG funds helps the wealth and fund managers to understand the ESG risks. The regulated and unregulated agencies provide the ESG ratings. SEBI had made it mandatory to register the providers with it. The research is confined to listed securities only. SEBI stated that the credit rating agencies and research houses as ERPs. The mutual fund entities can make use of the ERPs declared by SEBI. MSCI ratings, Bloomberg ratings, FTSE Russell’s ratings, moody’s ESG solution group, institutional shareholder services ratings and rankings, S&P global scores, CDP climate, water and forest scores are some of the popular entities for ESG rating providers.
What is the difference between credit rating, EBITA and ESG rating?
EBITA is the metric used to measure the performance of companies in capital market transactions. Investors believe in EBITA. But it is not calculated as per GAAP and IFRS. EBITA express the strength of the business. An industrial company is measured with the EBITDA rating. This value shows the income before interest, taxes, amortization and depreciation. It explains the operating performance of the company. ESG rating focus on material factors such as key performance indicators, determiners of indices, sustainability linked bonds, C-suite compensation, reputation and cost of capital. ESG does not focus on the history of the company. ESG providers do not follow the standard calculations. The indicators connect the data and provide a different picture of the company. Credit analysts get access to non-public information as they have standard methods. ESG analysts do not get ample information. The data about the emissions, social media and reports are difficult to get every year. Banks are not giving more importance to ESG rating. Banks check the market risk, credit risk and operational risk before providing the loan. Credit rating is the core area to knowing the creditworthiness of the company. ESG data and credit rating correlate in many cases. Credit rating is for the financial stability of the company. ESG rating is about the long term business environment of the company. Financial risk and material risk have both been given equal importance in recent days.
What is ESG and how does it contribute to risk management?
• Risk is prone to the domains that relate to ESG activities. The environment is climate change and resource usage. The protection of water, minimization of waste, prevention of pollution, protection of health systems, and transition of a circular economy are the concepts that reflect a healthy environment.
• Social factors are related to labour acts, human resource management, social integration, social equality and social cohesion.
• Governance is the management of the regulations, management structures, and reporting.
• Corporate social responsibility and ESG activities are confused as the same by some professionals. Both are different. ESG measures address the regulatory demands. The implementation of ESG improves the community interest and reduces material risks.
• Each company has experience with problems related to ESG. If they neglect the ESG issues then it leads ESG related incidents. Companies manage ESG risks with ESG programs. Grouping the ESG risk with ESG programs benefits the customers and business market.
• Implementing ESG programs, make the company a good corporate citizen.
Benefits of risk management:
ESG programs and activities contribute to risk management. The benefits of risk management are given paramount importance after the pandemic. The business climate thrives on the opportunities. The benefits of risk management in different industries are listed below:
• Risk management reduces performance variability
• Improve the deployment of human resource
• Decision making with quality data
• Identification of risk at an early stage
• Enhances opportunities for the business
SEBI constitutes an advisory panel on ESG-related matters to promote the mutual funds and financial markets. SBI magnum equity ESG fund, ICICI prudential ESG fund, Axis ESG equity fund, Quantum India ESG equity fund, and Kotak ESG opportunities fund are the popular ESG funds in India. Companies that perform with ESG standards are given high priority. Investors believe that these three pillars improve the business in the long term.