Mumbai Securities and Exchange Board of India (SEBI) on Monday issued a consultation paper to streamline and standardize ratings of companies on environmental, social and governance metrics.
As per the paper only SEBI approved entities can provide ESG rating. These entities may include rating agencies, SEBI registered research analysts. These criteria will be applicable for the top 1000 companies by market capitalization.
SEBI has sought comments on this paper by March 10.
On 23 January, Mint had reported that the market regulator would soon issue a discussion paper for standardized criteria, while entities rate companies on ESG factors, and another to put in place a mechanism to avoid conflicts of interest.
The consultation paper is an outcome of SEBI’s discussions with various stakeholders, which brought to the notice of the regulator that most of the ESG rating providers or ERPs are rating hundreds of publicly listed companies on the basis of subscription based public information.
Issues related to ESG ratings mostly included the ambiguity of the wide range of rating products offered, as well as inconsistency in disclosure and transparency of the methodology and rating process.
The 19-page consultation paper from SEBI states that “although the purpose and definition of ESG rating products offered by different ERPs may be similar, the underlying methodology used may differ significantly between ERPs without adequate disclosure”. likely to differ.”
SEBI further said, in view of the unregulated nature of ESG ratings and ERPs being randomly ranked globally, at present many ERPs provide services other than ESG space such as index resolution, advisory services related to ESG etc.
In addition, there is a significant risk of mis-allocation and greenwashing, due to the lack of transparency about the way the rating is used by investors, as well as the types of ESG rating products of various ERPs.
In the context of the continued use of the terminology in ESG ratings, it has been proposed by SEBI that ESG rating products may be referred to as ‘ESG Corporate Risk Rating’ or ESG Financial Risk Rating, to distinguish them from ESG Impact Ratings. To be. ,
With regard to governance and prevention of conflicts of interest, SEBI proposed that there should be a comprehensive policy for management of conflicts of interest and the same should be clearly disclosed on websites.
The newly proposed norms may force many ERPs to rethink their models as the products they are offering and the business models they are following are different. For example, many rating providers have started including ESG relevant disclosures in rating commentary, which cannot be allowed to proceed.
Crisil, India Ratings and ICRA did not comment. Some rating agencies said that they are still evaluating the paper.
“Acuite Group and ESGRisk.ai are carefully evaluating the ideas proposed in the discussion paper released today. Finalization of the guidelines will provide Indian markets with an opportunity to use India-specific rating criteria, the model, rather than To be trusted only ESG Rating Reports, which are designed for Europe and the US. We also believe, it will help Indian companies to re-examine their strategies and reflect on the expectations of global investors and the international community. will help align with the commitments,” said Shankar Chakraborty, CEO, Acute Ratings.
SEBI further said that ERPs should not assign ESG rating to any related party or securities issued by them or ERPs.
Analysts involved in ESG Rating evaluation shall disclose conflicts of interest relating to any company/issuer to the ERP and shall not be permitted to rate such companies.
All ratings as a business model will be awarded under the ‘Subscriber-pay’ business model.
“It may be noted that while investors can be the primary source of revenue in the ‘subscriber-pay’ model, a subscriber may also include an issuer,” the consultation paper said.
“We welcome this consultation paper and believe it is a good move and will go hand in hand with mandatory disclosures for the top 1000 listed companies. With more clarity on these aspects, issuers will be able to make more informed decisions about their ESG performance. Will be tempted to disclose the finer details. “Such companies will help build stronger credibility and attract more investments,” said Ajay Mahajan, CEO, Care Ratings.
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