ESG: What SEBI's Consultation Paper Proposes For ESG Ratings Providers

The Securities and Exchange Board of India has floated a consulation paper proposing a regulatory framework for ESG ratings providers.

Accredition for ESG ratings providers, better categorisation of ratings products and more transparency are some of the key proposals made in the consulation paper on which SEBI is now seeking public comments. The regulator will be open to comments till March 10, 2022.

India has seen a spurt of such ratings providers over the last one year as institutional investors are tying funding to explicit ESG goals. Edelweiss Financial Services, Crisil Ltd. and ESG Risk AI, are among those which have launched their own scorecards last year. Besides, there are several international ratings agencies like Standard & Poor's, Fitch Ratings, Moody's Investors Services, Bloomberg LP and Thomson Reuters that are all putting out such ratings.

SEBI said that there is an "imperative" need for a regulatory framework for ESG ratings providers as investors are increasingly relying on these assessments. A lack of transparency also raises risk of greenwashing and misallocation of assets on the basis of such ratings, it said.

The capital market regulator's paper has relied on the International Organization of Securities Commissions' report on ESG ratings from November 2021. The IOSCO had encouraged regulators to give greater attention to the use of ESG ratings as they have so far played an important role in the growth of the ESG ecosystem.

That said, the SEBI said it will not formulate a standardised rating scales or symbols as the area is still evolving. The lack of a common ground for assessment has been one reason that makes ESG ratings harder to put into context.

BloombergQuint had earlier reported on how ratings providers use a myriad of variables and data points to assess ESG scores. And the methodologies are different for each provider. This multiplicity of scorers and ratings, through up generally similar trends, but also make it possible for companies to shop around for what suits them best.

SEBI said that for credit rating agencies as well, regulations were put into place in 1999 but definitions and ratings were only standardised in 2011. "A similar approach may be sensible for ESG ratings scales, given the dynamics of the industry."

Here are they key proposals in SEBI's consulation paper:

• SEBI has proposed to accredit ESG ratings providers for assigning ratings to listed entities. Any listed entity who wants to avail an ESG rating will obtain it only from a SEBI-accredited provider. The same may apply to index providers who may want to use ESG factors for formulating indices on Indian securities.

• Credit rating agencies and research analysts have been proposed to also be eligible for being accredited as an ESG rating provider as the analysis carried out by them is similar, albeit on varying scales.

• The regulator has also proposed more clear and consistent use of terminologies for ESG ratings products. It wants to create distinction between ESG Impact Ratings—that measure a company's impact on the environment and society—from ESG Financial Risk Rating—that measure impact of ESG factors on a company's business and financials. Most of the ratings providers currently are from the latter category.

• SEBI has also proposed to seek more transparency by ratings providers on their methodologies, sectoral classification, key performance indicators used, annual reports, sector agnostic comparisons and disclosures on potential conflict of interest.