India is amongst the leading countries to have issued specific regulations for ESG rating providers (ERP), beating even developed economies like Europe and the US. With 15 rating providers registered with SEBI, ESG scoring is set to become more commonplace and likely find increased relevance in companies raising and managing sustainability-link funds.
The SEBI recently released a consultation paper, suggesting certain amendments to the Credit Rating Agency (CRA) regulations for ERPs. Broadly, the first three amendments pertain to ERPs following subscriber-pays model and the fourth (and last) provides clarification on the scope of ERPs’ activities governed by the SEBI.
For some background, ERPs are permitted to operate on two business models:
“Subscriber-pays” business model, where the ERP derives its revenues from ESG ratings from subscribers that may include banks, insurance companies, pension funds, or the rated entity itself.
“Issuer-pays” business model, where the ERP derives its revenues from ESG ratings from the rated entity, in terms of a written contractual agreement between such entity and the ERP, which may contain such provisions as may be specified by SEBI.
And to protect from a conflict of interest, hybrid business models are not permitted.
In its latest consultation paper, the SEBI has proposed the following changes to the CRA Regulations for ERPs:
Proposal 1: Simultaneous sharing of ESG rating report with the issuer and subscriber, in case of ERPs following a subscriber-pays model
As of now, regulations require ERPs following subscriber-pays model to share the draft ESG rating report with the rated issuer or the issuer whose securities are being rated, before publication. The SEBI has instead proposed simultaneous sharing of report to both the subscriber and issuer since the ERP is ultimately accountable to the subscriber only. The issuer shall however be given a fair chance to offer comments and clarifications.
Proposal 2: Opportunity of representation instead of an appeal to issuers, in case of ERPs following a subscriber-pays model
Since the ratings assigned by ERPs following a subscriber-pays model are based on information available in public domain, and not solicited by the issuer, the SEBI has proposed to dispense with the requirement for an appeal by the issuer.
However, issuers may offer their comments/ clarification on any inaccuracies in the data or assumptions in the report. If the issuer has a different viewpoint on the data or assumptions stated in the rating report of the ERP, then the ERP, after taking into account the said viewpoint, may either revise the rating report in the addendum report or issue an addendum to the report with its remarks, for circulation to all subscribers as considered appropriate.
Proposal 3: Dispensing with the requirement to disclose the ESG ratings to the stock exchange(s) where the issuer or the security is listed, in case of ERPs following a subscriber-pays model
Since all ERP reports under the subscriber-pays model are listed on the ERP website and use information in public domain only, the SEBI has proposed to dispense with the requirement to disclose ESG rating reports to stock exchanges.
Proposal 4: Instituting activity-based regulatory framework for ERPs
While the regulations permit ERPs to issue ratings under other recognised regulatory authorities (such as the RBI, IRDAI, etc.), the SEBI proposes to add an enabling provision that would allow ERPs to follow guidelines of those other regulatory authorities for rating. It further proposes a clarification that entities that do not propose to undertake SEBI-regulated activities need not seek registration with SEBI.
For more details, check out the complete SEBI consultation paper here.
Feel free to drop your feedback or suggestions at info@esgityadvisors.com
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