Capital market regulator SEBI has extended the deadline for submitting public comments to April 10 on the proposed framework to regulate environmental, social and governance (ESG) rating providers.
The regulator had posted a consultation paper for providers of ESG ratings for securities markets on its website in January, asking for public comments by 10 March.
Now, the regulator has decided to extend the deadline for submitting comments to April 10, 2022, according to a release.
In its consultation paper, SEBI had suggested that credit rating agencies (CRAs) and research analysts with minimum assets of Rs 10 crore would be eligible to be accredited as ESG rating providers or ERP.
A publicly traded entity seeking an ESG rating need only obtain it from an accredited ERP. SEBI had suggested that ERPs specifically list the domain to which the product is related. For example, carbon risk assessments should not be referred to as ESG assessments, as the products only assess the environmental aspect.
It further suggested that ERPs should offer at least one of the rating products: ESG impact ratings, ESG business risk ratings or ESG financial risk assessments, and any other ESG-related rating products, which can be appropriately labeled.
To avoid confusion among stakeholders, ERPs had suggested that they always use the correct terminologies for the products they offer.
“As the activities of ESG rating providers (ERPs) are currently generally not subject to regulatory oversight, the increasing reliance on such unregulated ESG rating providers in securities markets raises concerns about the potential risks this poses to investor protection, market transparency and efficiency, risk pricing and capital allocation, among others,” SEBI had noted.
In addition, a lack of transparency in this area leads to the risk of greenwashing and misallocation of assets, which could lead to a deficient ESG rating and a consequent lack of confidence. “Therefore, there is a compelling need, more than ever before, to ensure that the suppliers of such products operate in a transparent and regulated environment that balances the needs of all stakeholders,” SEBI had said.
It had suggested to begin with that SEBI should not standardize rating scales (rating/score symbols and their definitions) at this stage. However, the ERP must be prominently featured on its website and in the ESG rating reports, the rating scale (symbols and their definitions) used by the ERP. In addition, an ERP must ensure consistency in the application of its ESG rating scale.
An ERP must prominently display the type of ESG rating product (either impact-based or risk-based) on its website and in ESG rating reports. It must disclose its rating methodology for all of its products on its websites, while balancing proprietary or confidential aspects of the methodologies.
With regard to the review process, SEBI had suggested that ERP follow a proper review process and ensure consistency in the application of its methodology for the same product (as disclosed) for all ESG ratings awarded by the company.
Every ERP should have professional review committees made up of members who are qualified and knowledgeable enough to award a review.
In addition, each ERP must formulate a detailed policy for handling conflicts of interest. Such a policy should be prominently displayed on its website.
SEBI had recommended that ERPs should be mandated to follow a “subscriber-pay” business model. While investors may be the primary source of income in a subscriber-pay model, a subscriber may also include an issuer.