Sebi plans to make registration mandatory for ESG rating providers

Sebi proposes framework for ESG scoring parameters and rating providers in fresh consultation paper

The Securities and Exchange Board of India (Sebi) is planning to make the registration for environmental, social, and governance (ESG) rating providers, or ERPs, mandatory under a new regulatory framework that will also look to address norms related to disclosures, methodology for ESG scoring, and developing a parallel approach for ESG rating suitable to emerging markets.

In a fresh consultation paper, the capital markets regulator has proposed a framework for ESG scoring parameters and rating providers.

Presently, ERPs are not subject to any regulatory oversight but continue to provide services for the securities market — a risk Sebi has identified towards investor protection, capital allocation, greenwashing, and risk pricing.

Under the proposed norms, ERPs will have to take certification under the Sebi (Credit Rating Agencies) Regulations.

Sebi has said rating providers may provide core ESG ratings which will have to be based on assured or verified data.

Since there is divergence in ESG ratings and the rationale, Sebi has further prescribed certain minimum disclosures in ESG reporting, including key drivers from each pillar, respective weighting, methodology, qualitative and quantitative factors considered, and industry comparison, among others.

The report will also have to disclose details like the current score, change from the previous evaluation, and last review date.

Sebi has done intensive market consultations on ESG-related parameters for over a year now. This is the second consultation paper on ESG issued by the regulator this week.

Earlier, Sebi had proposed the introduction of a Business Responsibility and Sustainability Reporting Core, a comprehensive set of parameters, and a focus on the domestic narrative in the ESG space.

Notably, the regulator has also proposed developing a separate or parallel approach suitable for Indian companies in the domestic context, like employment generation.

“Evaluating Indian corporates on an absolute yardstick without recognising the efforts they make, and the results they achieve, in transition may not lead to the appropriate incentives for transition finance,” noted Sebi.

For this, an ESG transition, or Parivartan score, has been suggested to reflect the incremental changes and investments a company has made in its conversion to net-zero goals or improving ESG risk management.

It would also bear in mind the change in revenue from environmental or social services and products.

A combined ESG score will be reached, based on the ESG and Parivartan scores.

Sebi has also proposed that ERPs will be able to follow only one business model — a subscriber pays or issuer pays — to mitigate potential conflict of interest.

The regulator has invited public comments by March 8.