Sebi looks to iron out new ERP framework for ease of doing business

Revision to allow ERPs to rate unlisted securities and exempt them from disclosing ESG ratings to stock exchanges

The Securities and Exchange Board of India (Sebi) is planning a major revision to the framework for ESG Rating Providers (ERPs), including sharing of rating reports with the issuer and allowing them to rate unlisted securities and other products.

 

It will be the first major revision to the ESG (environment, social, and governance) Rating Providers (ERPs) framework after its introduction in July 2023. Last year, the regulator made it mandatory for all entities providing ESG ratings to register and obtain an ERP licence. The move was aimed at bringing transparency and standardisation.

 

Sebi has now proposed incorporating key changes and additions to the ERP framework. These include sharing of ESG rating reports with the issuer, and dealing with appeals of issuers.

 

ERPs follow two types of revenue models — issuer-pays and subscriber-pays. A subscriber can be a mutual fund, insurer, bank, or a foreign portfolio investor intending to invest in companies with high ESG scores. An issuer is a listed company that intends to get itself rated to court ESG-focused funds.

 

Under the existing framework, an ERP must share the ESG rating report with the issuer (rated entity) beforehand even though the rating is authorised by a subscriber. ERPs approached Sebi, stating that this rule resulted in a loss of business.

 

The regulator has now proposed that ERPs following a subscriber-pays model may share the ESG rating report with the rated issuer and the subscribers at the same time. This will enable the rated entity an opportunity to provide relevant clarifications or responses on any inaccuracies related to the data and assumptions considered by the ERP in their rating report.

 

Sebi has also proposed that ERPs following a subscriber-pays model grant an opportunity for representation to the rated issuer. “All comments or clarifications received from the rated entity within the specified timeline shall be included by the ERP as an addendum to the rating report,” Sebi has said.

 

The market regulator has also proposed to do away with the requirement of disclosing the ESG ratings to the stock exchanges by the issuer, in case of ERPs following a subscriber-pays model.

 

“Considering that ERPs following a subscriber-pays model assign ratings based on information available in the public domain and not pursuant to any agreement with/solicitation from the issuer, it may not be appropriate to mandate the ERP to report the ESG ratings to the stock exchange(s) where the rated issuer/ security is listed,” Sebi said in a consultation paper issued on Thursday.

 

Nearly a dozen entities have obtained or are in the process of obtaining regulatory ERP licences even as revenue streams appear limited as the market remains in its nascent stage.

 

Since the introduction of the new framework, close to a dozen entities have either obtained ERP registration or are in the process of obtaining one. Some of these include NSE's arm NSE Sustainability Ratings & Analytics, units owned by credit rating agencies ICRA, Crisil, and CareEdge, besides the units of MSCI and London Stock Exchange Group, as well as that of voting advisory firm Stakeholders Empowerment Services and Institutional Investor Advisory Services (IiAS).

 

Sebi has also proposed adding a provision to regulations allowing ERPs to undertake ESG rating of other products, including unlisted securities, under the respective guidelines of a financial sector regulator or authorities.