A regulatory framework for ESG Rating Providers has been developed by the market regulator SEBI (ERPs). The watchdog stated in a consultation document that although ERPs now play a significant role in investment choices, their operations are now not normally subject to regulation or supervision.
The most recent ideas also occur in a context of growing stakeholder interest in studying Environmental, Social, and Governance (ESG)-related issues, including investors and financial regulators.
According to SEBI, under the CRA (Credit Rating Agencies) criteria, ERPs may be permitted to register with the regulator.
"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.
Sebi stated that it has made an effort to adhere to a principles-based approach in order to balance the regulator's responsibility of protecting investors' interests in the securities market with the fledgling nature of the ERPs and to provide for further innovation.
A regulatory framework for ERP in the securities market can be developed with the help of an industry organisation, according to a suggestion made by Sebi. ESG rating providers can also participate in the regulator's ESG advisory group.
"... 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.
The regulator established an advisory council on ESG issues in the securities market in May 2022, where ESG disclosures, ESG investing, and ESG ratings were discussed holistically.
Comments from stakeholders on the consultation paper are requested until March 8.