Sebi mandates certification for ESG rating providers within six months

Regulation to level playing field for Indian companies, say experts

The Securities and Exchange Board of India (Sebi), through a notification issued on July 3, has mandated that all entities providing ESG (environmental, social, governance) rating services will have to get a certification from the regulator within six months.

The markets regulator has introduced two categories for the rating entities depending on their networth and functions.

ERPs located outside India but issuing ESG ratings for Indian companies and having a user base in India will also have to comply with the new regulation.

Until now, India did not have any specific regulations for the ERPs. Experts are of the opinion that a defined framework will prevent biased rating and ensure that the methodologies are transparent, practical, accurate and in-line with the Indian ecosystem.

“This regulation is likely to act as a booster, particularly for government enterprises. Despite the fact that Indian companies are doing a lot, they still tend to get a lower score as compared to their European counterparts due to the lack of understanding around scoring methodology, Indian landscape and policies from the raters,” said Shailesh Tyagi, climate change & sustainability leader, consulting, Deloitte South Asia.

While the minimum liquid networth to be maintained by a category I ERP has been kept at Rs. 5 crore, a category II ERP will have to maintain it at Rs. 10 lakh at all times. However, at the time of application, the requirement is more.

Category II ESG rating providers have been restricted from undertaking certification of green debt securities but have been given some relaxation on eligibility conditions of office space, employee strength and experience.

Moreover, the promoter of the ERP will have to maintain a minimum shareholding of 26 per cent for at least five years from the date of registration.

Under the new framework, ERPs have also been barred from undertaking any activity or offering any product or service except that related to ESG ratings.

“The restriction is provided to avoid conflict of interest in the rating. This would keep a check on the rating provider so that it doesn’t indulge in other services such as advisory services, index solutions, etc. The framework also reviews greenwashing and transparency around the methodology followed by independent rating service providers,” said Asish Philip Abraham, partner, Lakshmikumaran & Sridharan.

Sebi has also put restrictions on holding more than 10 per cent by an ERP in any other ESG rating entity and prohibited them from rating entities connected with a promoter or a rating agency.

The market watchdog has also specified norms for rating processes, review, disclosure, reporting, confidentiality, maintenance of books of accounts and audit for ERPs.

Earlier this year, Sebi had introduced a more comprehensive but assurance driven Business Responsibility and Sustainability Report (BRSR) Core for the listed companies and the value-supply chain to keep a check on greenwashing.

Sebi had first discussed the framework for rating providers in a consultation paper issued in February and later approved it in its March board meeting after considering responses from 18 entities.