Regulator says reliance on unregulated ESG rating providers poses risks to investors, transparency and market efficiency.
The Securities and Exchange Board of India (SEBI) has launched a new consultation proposing tighter regulations for ESG rating providers to curb increasing reliance on unregulated providers and address concerns over greenwashing.
To align with prevailing international norms and recommendations from organisations including IOSCO (International Organization of Securities Commissions) and ESMA (European Securities and Markets Authority), SEBI is proposing to establish a regulatory framework for ESG rating providers and to standardise the metrics they use.
SEBI says the increasing legislative and regulatory focus on ESG is expected to expand the “ESG related services industry” worldwide because of the increasing demand from investors. However, an increasing reliance on unregulated ESG rating providers poses risks to investor protection, transparency and the efficiency of securities markets.
Currently, the activities of ESG rating providers are not subject to regulatory oversight in India.
SEBI says the current lack of transparency over the practices of ESG rating providers gives rise to the risk of greenwashing and misallocation of assets that could lead to infirmity in ESG ratings and a consequent lack of trust – thus the need to establish the new regulatory framework.
The consultation paper proposes new requirements for ESG rating providers to be accredited by SEBI if they assign ESG ratings to listed entities and listed securities. Likewise, listed companies will only be allowed to obtain ESG ratings from accredited providers.
To be eligible for accreditation, providers would have to have a minimum net worth of INR 100 million (US$1.3 million). Existing credit rating agencies and research analysts would also be eligible to apply for accreditation, subject to the net worth requirement.
Eligible companies should offer at least one of the following:
- ESG impact ratings
- ESG corporate risk ratings or ESG financial risk ratings
- Any other ESG-related rating products, which should be specifically labelled (e.g. carbon risk rating products, which should not be referred to as ESG rating products)
SEBI also proposes that ESG rating providers be required to follow a proper rating process and ensure consistency in application of their methodologies. They should also have professional rating committees, comprising members who are adequately qualified and knowledgeable to assign a rating.
ESG rating providers should also formulate a detailed policy on managing conflicts of interest, adopt a ‘subscriber-pay’ business model, and prominently disclose their rating scales, symbols and definitions on their website and in their ESG rating reports.
The consultation is open for comment until 10 March.