The Role of ESG (Environmental, Social, and Governance) Factors in Governance: an overview
The Role of ESG (Environmental, Social, and Governance) Factors in Governance: an overview
Index
Timeline of ESG Implementation 4
ERP Type and its Business Models 5
ESG Ratings Provider (ERP) List Registered with SEBI 8
Introduction
Bharat is set to become a world power in the coming decades, it's already a leader in its various domains. On many platforms it has been accepted as an unbiased entity towards world policy. This has shown a remarkable increase in acceptance of Indian Leadership. A country with the highest youth power should have the responsibility towards Environment, Social and Governance, with a view of sustainability, Bharat introduced ESG concepts for better transparency across sectors.
Background
As we all know, Bharat has surpassed China in terms of population, making it imperative for the country to be honest and proactive with its environmental policies. It is indeed the nation’s duty to ensure a better and healthier life for its population. Social practices across sectors are necessary for inclusive growth, and job creation is necessary across all sectors. Governance, on the other hand, is a process through which a corporate or institution must maintain its transparency. The organisation should work in an ethical way to benefit the whole of mankind. In the situation of cut-throat competition, one should not take their human resources for granted and other necessary policies as secondary. In view of the above conditions, it was necessary to introduce the ESG Rating mechanism.
Timeline of ESG Implementation
Elements of ESG
ESG Regulation
ESG is not regulated by a single statute
ESG is regulated by the Companies Act 2013
SEBI Regulations
CRA (Credit Rating Agency) Act
ESG is also regulated by other acts of environment, governance and many more.
ERP (ESG Rating Provider)
ESG Rating Provider is controlled by SEBI (Credit Rating Agency) Regulations, 1999 (Amended 4th July, 2023)
SEBI Intermediary Portal https://siportal.sebi.gov.in/ is used for registration, cancellation approval of ERP
ERP should apply on the intermediary portal with some declarations, which are as follows
Shareholding pattern of the ERP.
Information about past applications which was not granted by SEBI.
Any action pending for not following SEBI guidelines and its correction course taken.
Investors complaints, if any.
Details of litigations.
ERP Type and its Business Models
Governance of ERP
ESG Rating provider (ERP) must be an unbiased institution. It can not be a single person, and it must be registered as per the CompaniesAact, 2013. The board should constitute as follows-
There should be a total of 1/3rd Independent directors if the Chairman is non-executive.
If the chairman is executive, then half the board should be Independent directors.
MD/CEO who has business responsibility will not interfere in ESG Ratings.
Board should constitute
ESG Rating Sub-Committee
Nomination and Remuneration Committee
The Rating Committee should report to the Chief Ratings Officer (CRO).
The Chief Rating Officer (CRO) should report to the ESG Rating sub-committee.
Nomination and Remuneration committee must be chaired by an Independent Directors.
Ratings Parameter
Ratings Parameter must contain the following
New Ratings
Upgrades
Downgrades
Changes assigned post request/review
Ratings after request of review/appeal by issuer
Ratings that have undergone revision after request
Ratings Withdrawn
Ratings Distribution as of 31st March
100-90
89-80
79-70
69-60
59-50
49-40
39-30
29-20
19-10
9-0
ESG score of 0-50 is considered poor, 51-69 is average, and 70 and more is considered good.
Uses of ESG Ratings
On the basis of these ratings, an investor can assess the risk of investing in the companies with the given ratings.
An investor can make an informed decision based on ESG Ratings in a meeting of shareholders.
Investors with a sustainability mindset or wants to invest in a company with longer and better sustainability can opt for ESG Ratings.
Higher ESG Ratings gives comfort to Financial Institutions while giving credit to the companies.
ESG Criteria can be used to evaluate governments, companies or financial product providers with regard to three aspects of the environment (e.g. protection of resources and species), Social issues (e.g. working conditions and safety) and governance (e.g. protection against exploitation or corruption.
ESG Ratings mandate that corporates adopt better policies regarding transparency, which leads to better resource efficiency, cost savings and better positioning in changing market conditions.
It helps investors to understand the Risk management abilities of Management of the companies.
If a company policy is towards Net Zero Carbon emission, such claims can be easily made through ESG metrics data backup.
Human, Social, Economic and Environment are the four pillars of ESG.
ESG aims to cover all Non-Financial risks and opportunities in day-to-day activities.
Institutional Investors uses ESG Ratings for Risk Management and long term performance objectives.
Considering ESG factors, companies can mitigate potential risk, attract investors, reduce costs and build a positive reputation.
Investors believe that companies that perform well on ESG are less risky.
Placing ESG and sustainability as a core business strategy offers a wide range of benefits that pay significant dividends down the line.
Ethical issues are less in institutes with better ESG scores making them more sustainable than those with lower ESG scores.
Good ESG data is a better way to convince new customers, as good ESG Data means a long term and sustainable model of business.
One of the factors of ESG is less waste generation, it directly leads to the maximum output from the Input resources.
ESG Ratings Methodology
First, the ESG Rating Provider (ERP) gives weightage to the three sections of ESG, i.e. Environment, Social and Governance.
For instances-
Assume a Rating agency gives the Environment a weightage of 40%, Social 30% and Governance 30%.
And in its evaluation, if a company obtains 70 points out of 100 in Environment, 80 points out of 100 in Social and 90 points out of 100 in governance.
Then its Ratings will be ( 0.4 * 70 + 0.3 * 80 + 0.3 * 90 ) = (28 + 24 + 27) = 79
So the ESG Score / Ratings of the company is = 79
Each Rating agency has its own methodology for giving weightage to ESG, so the Ratings may vary from ERP to ERP for the same company.
ESG Ratings Provider (ERP) List Registered with SEBI
CARE ESG RATINGS LIMITED
Registration No.
IN/ERP/Category-I/0005
Model
Issuer-pays
Address
4th floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway Sion Mumbai Maharashtra — 400 022
Contact Person
Ms. Meenal Dandekar
Correspondence E-mail
meenal.dandekar@careedge.in
Correspondence Telephone
022 67543456
Validity
May 02, 2024 - Perpetual
Website: https://www.careedge.in/
CRISIL ESG RATINGS & ANALYTICS LIMITED
Registration No.
IN/ERP/Category-I/0001
Model
Subscriber-pays
Address
CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai - 400076
Contact Person
Mr. Dhanish Shah
Correspondence E-mail
dhanish.shah1@crisil.com
Correspondence Telephone
+91 7977590363
Validity
Apr 25, 2024 - Perpetual
Website: https://www.crisil.com/en/home/our-businesses/global-research-and-risk-solutions/solutions-hub/data-and-analytics/analytics-solutions/esg-analytics.html
ESG RISK ASSESSMENTS & INSIGHTS LIMITED
Registration No.
IN/ERP/Category-I/0003
Model
Subscriber-pays
Address
802, Lodha Supremus, Lodha iThink Techno Campus, Kanjurmarg, (East), Mumbai - 400042
Contact Person
Mr. Sankalp Sharma
Correspondence E-mail
regulatory.affairs@esgrisk.ai
Correspondence Telephone
+91 98199 60324
Validity
Apr 29, 2024 - Perpetual
Website: https://esgrisk.ai/
IIAS SUSTAINABILITY SOLUTIONS PRIVATE LIMITED
Registration No.
IN/ERP/Category-II/0006
Model
Subscriber-pays
Address
Ground floor, DGP House, 88-C, Old Prabhadevi Road, Mumbai - 400 025
Contact Person
Ms. Mavia Creado
Correspondence E-mail
mavia.creado@iias.in
Correspondence Telephone
022-61235512
Validity
May 08, 2024 - Perpetual
Website: https://www.indiafilings.com/search/iias-sustainability-solutions-private-limited-cin-U66190MH2024PTC418591
PGS IMPACT PRIVATE LIMITED
Registration No.
IN/ERP/Category-II/0007
Model
Subscriber-pays
Address
H.No.228, Sector-4, MDC, Panchkula, Haryana - 134009
Contact Person
Mr. Gautam Singh
Correspondence E-mail
info@pgsepl.com
Correspondence Telephone
9876121668
Validity
Jun 06, 2024 - Perpetual
Website: https://www.falconebiz.com/company/PGS-IMPACT-PRIVATE-LIMITED-U88900HR2024PTC118082
PRAGATI DEVELOPMENT CONSULTING SERVICES LIMITED
Registration No.
IN/ERP/Category-I/0004
Model
Issuer-pays
Address
Building No. 8, 2nd Floor, Tower A, DLF Cyber City, Phase II, Gurugram 122002, Haryana
Contact Person
Mr. Ravi Singh
Correspondence E-mail
ravi.singh-esg@icraindia.com
Correspondence Telephone
+91 9650860164
Validity
Apr 29, 2024 - Perpetual
Website: https://www.icraesgratings.in/
SES ESG RESEARCH PRIVATE LIMITED
Registration No.
IN/ERP/Category-II/0002
Model
Subscriber-pays
Address
109, 1st Floor, Shyam Baba House, Upper Govind Nagar, Malad East, Mumbai - 400079
Contact Person
Mr. Mukesh Solanki
Correspondence E-mail
mukesh.solanki@sesgovernance.com
Correspondence Telephone
+91 7208637514
Validity
Apr 25, 2024 - Perpetual
Website: https://www.sesesg.com/
Challenges
ESG Ratings has been made mandatory by SEBI for all the entities which gives a transparent view of governance of companies. But when considering Coal and Petroleum Companies which will certainly score less on ESG, it is up to the ERPs to take consideration of the fundamental need for Coal and petroleum for the development of the nation.
Suggestion
Comparatively Indian ESG Rating system is uniform as compared to the globe, SEBI has given a uniform scale of 0-100 for ESG Rating (which is not in the case of the globe).
These ESG Ratings should be disclosed to retail investors in equity markets, since this will affect the investors (especially Long term).
ESG Ratings should be declared while the IPO is issued.
Each company website should disclose these ratings on the Home Page.
Awareness on ESG Ratings is needed among Investors.
SEBI should take programmes for awareness on ESG Metrics.
Conclusion
ESG Ratings are rightly adhered to by Indian Governments and effectively implemented as needed. This initiative has come at the right time now and should be more stabilised through rigorous monitoring. Through this Rating system, loopholes and corruption in obtaining Environmental clearance will end as companies itself will lead to more Environment friendly decisions. Through this system, companies will expand in rural and small towns to adhere to job creation in small cities. Equal pay for equal work to both men and women will benefit women’s empowerment. Corruption and red-tapism will be watered down through transparent governance mechanisms.
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