SEBI proposes framework to regulate ESG rating providers

New Delhi: Markets regulator SEBI on Monday proposed a framework to regulate ESG (Environmental, Social and Governance) rating providers which seeks to allow credit rating agencies and research analysts to provide such services.

SEBI in its consultation paper has proposed that Credit Rating Agencies (CRAs) and Research Analysts with a minimum of Rs 10 crore would be eligible to be recognized as ESG Rating Providers or ERPs.

A listed entity that intends to obtain an ESG rating can obtain it only from an accredited ERP.

SEBI has also proposed that the ERP should specifically mention the domain to which the product pertains. For example, a carbon risk rating should not be referred to as an ESG rating.

It has further proposed that ERPs should offer at least one rating product – ESG Impact Rating, ESG Corporate Risk Rating or ESG Financial Risk Rating – and any other ESG related rating products that may be appropriately labeled. Is.

To avoid any confusion among the stakeholders, it has been proposed that ERP should always use proper terminology for the products offered by them.

Since ERP activities are not currently subject to regulatory oversight, the increasing reliance on such unregulated ESG rating providers in securities markets raises concerns about investor safety, transparency and efficiency of markets, risk pricing and potential risks to capital . allotment, among others, said SEBI.

Further, lack of transparency in this sector increases the risk of green washing and mis-allocation of assets which can lead to downgrade of such ESG ratings and result in lack of confidence.

“Therefore, there is an imperative need more than ever to ensure that providers of such products operate in a transparent and regulated environment that balances the needs of all stakeholders,” Sebi said.

An ERP must prominently disclose the rating scales (symbols and their definitions) used by the ERP on its website and in the ESG rating report.

Additionally, an ERP must ensure uniformity in the application of its ESG rating scale.

An ERP should display prominently on its website and the ESG rating reports the type of product (whether impact-based or risk-based) in the ESG rating. It must disclose its rating methodology for all of its products on its websites, while maintaining a balance regarding proprietary or confidential aspects of the methodology.

With regard to the rating process, SEBI has proposed that the ERP should follow a proper rating procedure and ensure consistency in the application of its methodology for the same product (as publicly disclosed) assigned by it. in the ESG rating.

Every ERP should have professional rating committees consisting of members who are sufficiently qualified and knowledgeable to give ratings.

In addition, each ERP should formulate a detailed policy on the management of conflicts of interest and such policy should be prominently displayed on its website.

SEBI has also proposed that ERPs should be mandated to follow the ‘subscriber-pay’ business model. While investors may be the primary source of revenue in the ‘subscriber-pay’ model, a subscriber may also include an issuer.

The Securities and Exchange Board of India (SEBI) has sought comments from the public on the consultation paper by March 10.

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