ESG Stock Market Proposal

Little about me:

I am Rohit Singh, a BTech pre-final year student pursuing Computer Science from SRM University Chennai. I am passionate about sustainable finance as I am intrigued by its potential to align institutions towards catalysing India’s green transition. I read SEBI’s recent ESG Consultation paper and I found it insightful. Repeated corporate scandals expose the shortcomings of credit rating agencies (CRAs) and other functionaries mandated to protect investors’ interests which is the reason we need a stringent emphasis on ESG ratings and make them tamper-proof for a better world maintaining law and order.

Proposal Abstract:

I reached out since I have a concept proposal for SEBI to implement which will cater for the Indian ESG market whilst fulfilling all the new SEBI’s ESG guidelines and making it far more effective:

A stock market specifically for ESG Stocks!

Motivation:

We have a stock market for blockchains; the crypto fad has taken over this generation since the use cases of blockchain technology such as privacy, trust etc. are lucrative and it encourages participation of everyone in the market. We don’t find a similar level of interest in sustainability-related finance such as carbon trading, green bonds & ESG investing among commoners since it’s mostly limited to HNIs/Corporates/Govt. and involves a lot of complications due to its early stage of development. I was intrigued by the potential of this field as it can not only increase investors’ participation but at the same time benefit the ESG factors that will contribute to society’s betterment. Being passionate to maximize the progress of this space, I brainstormed various ways that will motivate every individual or company to participate in sustainable financing and I came up with the idea of building a separate stock market for companies focusing on ESGs.

Concept:

The whole idea of introducing sustainable finance is to incentivise entities to profit from sustainable development and it makes total sense in long term for SEBI to create an ‘ESG Stock Market’ where companies can sell a part of their equity/stock holdings [Optional] or list themselves in a separate ESG market as ‘ESG stocks’ that will be priced according to the respective company’s ESG performance along with some weightage to their financial performance. Participating companies will benefit from this market and will eagerly work on their ESG disclosures following the new SEBI guidelines. Their track record of ESG performance will be gauged by accredited ERPs & the latest news/updates that will push the ESG stock prices of these companies. Since the traditional stock market doesn’t reward the ESG performance of companies, this new market will add immense value to aid their green transition whilst profiting from the same!

Carbon Trade + ESG Stock = More Better Trade!

To make things even more exciting & effective, I also propose the idea to integrate the carbon trading mechanism with the ESG stock market. In the current Indian carbon trade system, the PAT framework was slightly able to achieve the emission objectives but various factors such as less participation and a high amount of credits (Carbon credits, ESCerts) not being able to trade posed to be a challenge for this scheme’s advancement. Irregularities in reporting/ratings, limited trading options and similar other factors were the major problems.

If each ESG stock also holds weight to their respective company’s carbon offset performance, it will be a great option for other companies to buy the ESG stocks of these entities with promising ESG + Carbon Offset performance to not only satisfy their emission targets under India’s cap and trade system but it will also prove to be a promising tradeable asset in future which solves all the issues of the current PAT scheme!

A hypothetical example of this concept in my imaginary ESG stock market:

• Being a top ESG performer, Microsoft’s ESG stock is priced at 100. Since recently they cut their GHG emissions drastically with new green technologies and the SEBI accredited ‘carbon’ rating companies provided them with carbon credits which they can trade, each of these ESG stocks now holds a Carbon credit value of 10 (After distributing the credits to each of their stock) which means 10 tonnes of emissions allowance can be bought by the holder from one stock.
• Now ONGC is required to buy more credits due to their emission-intensive oil drilling practices which exceed the ‘cap’ set by the Indian carbon trade system. Suppose they exceed 100 tonnes of GHG emissions, they will buy 10 ESG stocks of Microsoft to meet the cap and trade demand and can also ‘sell’ these credits later in the proposed ESG market.

This concept efficiently integrates the carbon trade and ESG investing where even retail investors can participate which will be possible once there are SEBI regulations for both ESG, Carbon markets and also the existence of my proposed ESG Stock market.

Lastly, Carbon Trade + ESG Stock + Green Bonds = A paradise for sustainable investing:

Now, this is the last feature I would love to add as well. Listed companies in the proposed ESG stock market can also be able to issue bonds to finance their green projects. Every investor will be able to invest in these bonds to reap benefits that historically showed better performance than traditional bonds. With a whole ESG stock market around, transparency and reporting under SEBIs regulation will make such offerings even more attractive.

Conclusion

Listed companies will be under periodic screening by ERPs in a regulated ESG stock market by SEBI. Investors will not be betting on financial indicators but will invest in the ESG performance of a company. From a retail investor buying stocks to profit from the ESG progress of companies to big entities buying these ESG stocks to fulfil their credit needs, a new investing paradigm will be formed that will bring more innovation in this field under the regulation of SEBI. The ESG stock market is a win-win for everyone: Accredited ERPs will profit from the new market, Plenty of ESG data through ratings/reports will be generated for investors, Companies will start following the ESG disclosure norms to participate in this lucrative market, and inefficiencies in the existing carbon trading market will be eliminated and green project developers will benefit from increased funding which in overall will benefit the world in achieving its climate/ESG targets starting from our home country India.

The concept of the ESG stock market is a revolutionary idea and to my knowledge, there’s not even a slight possibility that this concept will not work. I believe in this idea and I am highly motivated to put in all my effort to make this happen. I will work on more comprehensive details once I get support from SEBI since its the only entity with the power to implement it and make headlines worldwide with this innovation.