Sebi proposes framework to regulate ESG rating providers

The Securities and Exchange Board of India has suggested a framework to supervise Environment, Government and Social (ESG) rating providers. The market regulator seeks to tighten the rules as the ESG providers plan on minimising the risk of greenwashing and misuse of company ratings.

Are you interested in knowing more about this topic? Read on then.

SEBI Proposes Tighter Rules for ESG Rating Providers

In the consultation paper, SEBI has said that CRAs (Credit Rating Agencies) and research analysts with a net worth of a minimum of Rs. 10 crores will be eligible to be known as an ESG provider.

Further, a listed firm seeking an ESG rating can do so only via an accredited ERP. Here are key highlights of SEBI’s proposal regarding ESG rating providers:

• SEBI has also suggested that ERPs need to state the domain to which a product is connected. For instance, ratings of carbon risks should not be noted as ESG ratings.
• It has also proposed that ESGs must provide at least one of these rating products – corporate risk ratings, financial risk ratings and impact ratings. It may also provide any other additional rating product, which must be labelled appropriately.
• To steer clear of confusion between shareholders, SEBI has announced that ERPs must use appropriate terminologies regarding the products they offer.
• An ERP must disclose the rating scale predominantly on its website and ESG rating reports.
• An ERP must ensure consistency in the ESG rating scale applications.
• ESGs should display their rating scale and methodology for each and every product on their website. They should do this while balancing confidential and proprietary aspects of the ratings.
• As per SEBI, each ERP must have proper rating committees. This must include members with adequate knowledge and qualifications.
• Each ERP must lay down a detailed policy to manage conflict of interest. In addition, they must make this policy public on their website.
• SEBI has also proposed that ERPs should follow a subscriber-pay business model.

According to the market regulator, ERP activities currently do not fall under regulatory oversight. So, increasing reliance on such unregulated ESGs is a cause of concern and might become a potential risk to the investors. It may affect investors’ protection, market efficiency, transparency, capital allocation and much more.

Bottom Line

A rising lack of transparency can lead to greenwashing and asset misallocation. This could result in a weakness in ESG ratings, leading to a lack of trust. Therefore, there is a need to ensure that ESGs operate transparently while balancing the wants and needs of every shareholder.

Source – Financial Express

Frequently Asked Questions

1. Till when is the consultation paper open for comments?
   Regarding the regulations surrounding ESGs, the consultation paper is open for comments till 10 March 2022.

2. What is an ESG provider?
   ESG providers offer evaluations and ratings for domestic and international public and private companies depending on their environmental, social and governance performance.

3. What is ERP?
   Enterprise Resource Planning is software that organisations use to manage regular business activities, such as accounting, risk and project management, etc. ERP suite also includes enterprise performance management and financial results.

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.