The SEBI (Credit Rating Agencies) Regulations, 1999 specifies provisions related to ESG Rating Providers (ERPs).? Further, SEBI introduced a regulatory framework for ESG rating providers (ERPs), under Chapter IVA of the Credit Rating Agencies (CRA) Regulations, in terms of an amendment notified in July 2023. ?
To address the issues raised by the ERPS, SEBI has released a Consultation Paper proposing four key amendments to facilitate ease of doing business by ESG rating providers (ERPs).? The link to the consultation paper is here.
The details of these four proposals are as below.
- Proposal 1: Requirement of sharing draft ESG rating report with the issuer in case of ERPs following a subscriber-pays model
- It may be specified that ERPs following a subscriber-pays model shall share their report with the subscribers and the rated issuer at the same time. Further, this sharing policy should be disclosed by the said ERPs on their website.
- ERPs following a subscriber-pays model shall ensure that the rated entity/ issuer itself or its group companies or associates are not permitted to be a subscriber to ESG rating and/ or rating of securities of the rated entity/ issuer.
- Proposal 2: Dealing with appeal and representation by the rated issuer in case of ERPs following a subscriber-pays model
- ERPs following a subscriber-pays model shall also grant an opportunity of representation to the rated issuer. In this regard, ERPs shall define a timeline to receive comments from the rated entity/ issuer pursuant to sharing of the ESG rating report with the entity. All comments/ clarifications received from the rated entity within the specified timeline shall be included by the ERP as an addendum to the rating report. If the rated issuer has a different viewpoint on the data/ 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.
- Further, if the rated entity/ issuer desires clarification, inter alia, on the methodology or assumptions, the ERP should provide such a facility.
- 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
- ?Accordingly, it is proposed to amend the Regulations to dispense with the requirement for disclosure of the ESG rating assigned and any changes in ESG ratings or reviews to the stock exchange(s) where the issuer or the security is listed, in case of ERPs following a subscriber-pays model. Such ERPs should affirm lack of any non-public information being in their possession or being harnessed for ESG Ratings.
- Proposal 4: Specifying Activity-Based Regulation for ERPs
- Enabling provision may be added in the CRA Regulations for ERPs to undertake ESG rating of other products/ issuers, including unlisted issuers/ securities, under the respective guidelines of a financial sector regulator or authorities as may be specified by SEBI, and
- Further, SEBI-registered ERPs rating other products/ issuers should not project themselves as SEBI-regulated ERPs and explicitly specify the regulator/ authority under whose purview such ratings are undertaken and do so in adherence to the rules or regulations or guidelines issued by such regulator/authority.
- ?Entities that do not propose to undertake SEBI-regulated activities need not seek registration with SEBI.
Our recommendations for ease of doing business and transparency both for the investors as well as the rated entity.
These changes have been proposed from the point of view of ease of doing business by the ERPs and not from the ease of doing business by the rated entities and the subscribers.? While most of the proposals are good, a few provisions may impact these stakeholders adversely.? We have tried to assess the likely impact on these stakeholders and suggest options to address their issues.
- Proposal 1 among other guidelines include sharing ERP reports with the subscribers and the rated issuer at the same time ie without considering the response of the rated entity.? Since this report may not be complete and authentic, it will adversely influence the decision-making of subscribers.? The poor decision of the subscriber will also impact the rated entity's ability to raise funds or its market position.
Hence, only the final report after considering the response of the rated entity should be shared with the subscribers.
- Proposal 1 also includes that the rated entity/ issuer itself or its group companies or associates are not permitted to be a subscriber to ESG rating and/ or rating of securities of the rated entity/ issuer ie the rated entity would neither know about their rating nor the rating of their competitors.? This will severely restrict the ability of the rated agency to improve its ESG performance, and manage the ESG risks and will be a restrictive practice for the ease of doing business.?
Hence, the rated entity should be permitted to be a subscriber to ESG reports.
- Proposal 2 among other guidelines includes that all comments/ clarifications received from the rated entity within the specified timeline shall be included by the ERP as an addendum to the rating report ie there will be a time gap between the initial ESG report and its addendum.? This will neither be in the interest of subscribers nor the rated entity.
Hence, only the final ESG report incorporating the comments/ clarification of the rated entity should be released to the subscribers.
Other provisions in the proposals are good initiatives and are welcome.? These will be beneficial to all stakeholders including rated entities, investors and subscribers.
