India’s Capital Markets Regulator Proposes Tighter ESG Rules

(Bloomberg) -- India’s capital market watchdog proposed tighter environmental, social and governance rules as it seeks to minimize the risk of greenwashing and misuse of ratings by companies.

In a consultation paper released Monday, the Securities and Exchange Board of India sought to regulate ESG ratings providers, mandate disclosures and compel listed companies, registered funds or index-providers to use only these accredited ESG raters. It also proposed a subscriber-pay model, which contrasts with the one used by traditional credit-rating firms where the issuer of the bond pays a fee.

“Increasing reliance on such unregulated ESG rating providers in securities markets raises concerns about the potential risks it poses to investor protection, the transparency and efficiency of markets, risk pricing, and capital allocation, among others,” the Sebi paper said. “Therefore, a need has been felt not only by users of ESG ratings (typically mutual funds, alternative investment funds, etc) but also by corporates and index providers for a proper rating framework.”

Public comments were invited through March 10.

Amid rising concerns of climate change and with many nations including India committing to mitigating this challenge, Sebi’s paper said that sustainable financing is expected to gain prominence, which in turn, will mean demand for more ESG products and ratings.

Key Proposals:

• Sebi proposed that credit rating companies, research analysts, with a minimum net worth of 100 million rupees may be eligible to apply for accreditation
  • They must offer at least one of the following:
    • ESG Impact Ratings
    • ESG Corporate Risk Ratings or ESG Financial Risk Ratings
    • Any other ESG-related rating products, which may be specifically labeled. E.g. Carbon risk ratings shall not be referred as ESG ratings as the products assess the environmental aspect only
• Must prominently disclose rating scale

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