On May 16, 2024, the Securities and Exchange Board of India (SEBI) issued a Master Circular for ESG Rating Providers (ERPs), consolidating regulatory guidelines under the SEBI (Credit Rating Agencies) Regulations, 1999. This circular integrates ESG considerations into the financial ecosystem, ensuring alignment with global sustainability standards while catering to India-specific priorities.
Objective and Scope
The circular aims to enhance the credibility, transparency, and accountability of ESG ratings. It provides a unified framework for ERPs, listed entities, stock exchanges, and investors. By emphasizing transparency, governance, and Indian contextual relevance, the framework seeks to bolster investor confidence and align with global sustainability practices.
Key Provisions
1. Registration, Approval, and Surrender Requirements
- Registration: ERPs must register through SEBI’s Intermediary Portal. Pending full portal operationalization, applications must be submitted both digitally and physically.
- Change in Control: Ownership changes, such as mergers or acquisitions, require SEBI approval and compliance with fit-and-proper criteria. Clients must be informed of such changes to ensure uninterrupted service.
- Business Transfers: ERPs transferring operations must ensure compliance, maintain service continuity, and avoid imposing additional costs on clients.
- Suspension or Surrender: Suspended or surrendered ERPs must prominently disclose their status, facilitate client transitions, and retain records for three years post-surrender.
2. Rating Operations
- Types of ESG Ratings: ERPs must offer core products such as ESG Ratings, Transition (Parivartan) Scores, Combined Scores, and Core ESG Ratings based on verified data. Ratings must account for Indian-specific priorities like Zero Liquid Discharge and Extended Producer Responsibility (EPR).
- Rating Scale and Methodologies: Ratings must use a 0–100 scale for clarity and comparability. Methodologies should detail weightages for ESG factors, stress testing, and sensitivity analysis and be updated regularly.
- Monitoring and Updates: Material events, such as penalties or updated sustainability reports, require rating reviews within 10 days to maintain accuracy.
- Transparency in Rationale: Rating rationales must detail pillar scores, qualitative and quantitative drivers, and sensitivities for potential upgrades or downgrades.
3. Reporting and Disclosures
- Periodic Disclosures: Annual reports must include rating summaries, issuer-wise revenue breakdowns, and detailed transition matrices.
- Continuous Disclosures: ERPs must provide accessible rating histories, disclose reasons for delayed reviews, and comply with International Organization of Securities Commissions (IOSCO) standards.
- Historical Data: ESG rating histories must be archived for at least 10 years, enabling long-term trend analysis.
4. Governance and Internal Audits
- Governance: ERPs must establish independent boards, rating committees, and firewalls between rating and non-rating activities. Conflict mitigation policies ensure objectivity in operations.
- Internal Audits: Annual audits assess regulatory compliance, grievance mechanisms, and adherence to the code of conduct. Findings and corrective actions must be reported to SEBI.
Conclusion
SEBI’s Master Circular for ERPs sets a robust framework to align India’s ESG ratings ecosystem with global best practices. By emphasizing transparency, governance, and local relevance, it strengthens the credibility and utility of ESG ratings. This initiative ensures a sustainable financial future, bolstering investor trust and advancing India’s sustainability goals.
