Sebi proposes regulatory framework for ESG Rating Providers

Markets regulator Sebi has proposed putting in place a regulatory framework for ESG Rating Providers (ERPs). In a consultation paper, the watchdog said the role of ERPs has become important in making investment decisions but their activities are not typically subject to regulatory or supervisory at present.

The latest proposals also come against the backdrop of rising interest of stakeholders, including investors and financial regulators, in examining Environmental, Social and Governance (ESG)-related issues.

According to Sebi, ERPs can be allowed to register with the regulator under the CRA (Credit Rating Agencies) norms.

"While regulators in certain jurisdictions have opted for a voluntary code of conduct for ERPs, Sebi proposes an enforceable regulatory and supervisory framework for ERPs, in view of Sebi's experience with credit rating agencies...," the consultation paper, dated February 22, said.

Given the nascent nature of the ERPs and to provide for scope for further innovation, Sebi said it has attempted to follow a principles-based approach while balancing the regulator's mandate of protection of interest of investors in the securities market.

Among others, Sebi has suggested that ESG rating providers can form an industry association and play an active role in development of a regulatory framework for ERP in the securities market as well as engage with the regulator at its ESG advisory committee.

"... It is further proposed that while Core ESG ratings must necessarily be based on assured or verified data, ERPs may be allowed to provide an additional commentary / outlook / observations on data that may not be verified/ assured," it said.

In May 2022, the regulator had constituted an advisory committee on ESG matters in the securities market, wherein ESG disclosures, ESG investing and ESG ratings were deliberated upon in an integrated manner.

Stakeholders' comments have been sought on the consultation paper till March 8.