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Capital market regulator SEBI has made it mandatory for ESG Rating Providers (ERPs) to register with it and allow only them to assign ESG rating of listed entities and securities.
In a consultation paper issued for regulating ESG rating providers, SEBI said ERPs are in nascent stage world-over, and in India, large institutional investors rely on in-house research.
They supplement their due diligence with ESG rating or data products offered generally by global and unregulated providers of ESG ratings or data. Indian companies are typically benchmarked to global and regional benchmarks and there is no differentiation in the performance of issuers within the domestic space.
‘Subscriber-pay’ model
Therefore, SEBI said there is a need not only by users of ESG Ratings (typically mutual funds, alternative investment funds) but also by corporates and index providers (focussed on constructing Index in Indian Market) for a proper rating framework, it said.
Market participants have to share their views on the consultation paper by March 10.
SEBI has proposed that ERPs may be mandated to follow a ‘subscriber-pay’ business model over the issuer pay. It may be noted that while investors may be the primary source of revenue in a ‘subscriber-pay’ model, a subscriber may include an issuer as well, it said.
‘Transparency, confidence’
Makarand Joshi, founding partner, MMJC and Associates LLP, a corporate compliance firm, said the initiative will give lot of transparency and confidence on the impact made by ESG initiatives of Indian Corporates and will help investors clearly differentiate between man and boy in corporates who are projecting their ESG initiatives.
However, he added the rating data will be available only in subscription model and therefore it can be disadvantageous to smaller investors. This apart, Joshi said the new norms can expose green washing approach adopted by any industry.
SEBI has proposed to allow existing accredited Credit Rating Agencies and Research Analysts as ERPs, subject to having a minimum net worth of ₹10 crore. While the accreditation shall be granted for every two years it can be revoked at any time in case of material non-compliances by ERPs or in case of non-maintenance of the minimum net worth, it said.
SEBI-registered entities engaged in fund-based investment activities such as mutual funds or alternative investment funds, desirous of using third-party ESG ratings as part of their decision-making process for investing in Indian securities, shall avail services of SEBI-accredited ERPs. Further, any passive funds launched by these entities shall be based on ESG related indices which use ratings of SEBI-approved ERPs only.
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