COMPLIANCES FOR ESG RATING PROVIDERS

The Securities and Exchange Board of India notifies SEBI (Credit Rating Agencies) (Amendment) Regulations, 2023 on 4^th July 2023 which emphasizes the rising relevance of ESG considerations in investing decisions, as well as the necessity for credible and transparent ESG evaluations.

SEBI’s implementation of legislation particularly for ESG rating providers is a big step forward.

These laws seek to guarantee that ESG rating providers satisfy specific standards, maintain enough infrastructure, and have competent employees to deliver accurate and consistent ESG ratings. By mandating ESG rating providers to get a certificate from SEBI, the laws provide a regulatory framework that promotes legitimacy and responsibility in the ESG rating business. The certificate’s restrictions, such as compliance with rules and the maintenance of a minimum net worth, aim to protect investors’ interests while also ensuring the integrity of the ESG grading process.

The division of ESG rating providers into Categories I and II recognizes the diverse magnitude and complexity of these companies’ operations. It allows for regulatory flexibility based on the degree of knowledge and resources available to ESG rating providers.

Chapter IV A focuses primarily on the Environmental, Social, and Governance Ratings (‘ESG’) Rating Providers including regulations for application, registration, confidentiality etc. as given below:

1. Rule 28 A (Applicability)– It states that the provisions of these regulations, with the exception of Chapters II, III, and IV would apply to ESG rating providers.

The provisions of this chapter would apply solely to ESG rating providers covered in the Fourth Schedule. Also, any reference to a “credit rating agency” under chapters I, V, VI and VII shall be interpreted as a reference to an “ESG rating provider”.

2. Rule 28 B (Definitions)– The following regulation defines and explains the terms “client, environmental, social, and governance ratings or “ESG ratings”, ESG Rating Provider, Net worth, liquid net worth, liquid asset, issuer, promoter”.
3. Rule 28 C (Registration of ESG rating providers)– It states that no person can act as an ESG provider unless he has obtained the certificate from the board.
4. Rule 28 D (Application for grant certificate)– Anyone who wishes to conduct business as an ESG rating provider, must submit an application to the Board for the grant of certificate in Form A of Fifth Schedule. Rule 28 H mentions the prerequisites for the certificate.
5. Rule 28 E provides forth the qualifying requirements down for the purpose of the granting of certificate, together with what further information, clarification and personal representation need to be furnished by the applicant must provide, as specified in Rule 28F.
6. Rule 28 G (Grant of Certificate)- When the applicant is eligible, the Board shall grant a certificate in Form B of Fifth Schedule, and shall send an intimation to the applicant.
7. Rule 28 L highlights the rating method and monitoring of ESG rating based on internal resources, and inclusion of the environmental, social and governance elements relevant aspects that to the Indian market.
8. Rule 28 N– It specifies the internal procedure and systems that need to be framed for monitoring the trading of securities by its employees in the securities of its clients, in order to prevent contravention of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015, the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003; and other laws relevant to trading in securities.
9. Rule 28 P– It stipulates that the ESG rating provider must provide the board with all information requested, including any reports relating to its activities, within such period as may be specified by the Board and at the close of each accounting period, furnish to the Board copies of its financial statements.
10. Rule 28 Q– It states that the ESG rating provider must select a compliance officer who will be responsible for monitoring the compliance of all the applicable laws and who will quickly and independently report to the Board of any non-compliance discovered to the Board.
11. Rule 28 R requires every ESG rating service to retain and maintain, for a minimum period of five years, the following books of accounts, records and documents.
12. Rule 28 S stipulates that every ESG rating provider must take efforts to correct the flaws identified in the report.
13. Rule 28 T – It states that every ESG rating provider must treat the information supplied to it by any person as confidential and shall not disclose the same to any other person unless such disclosure is required or permitted by or under any law currently in force or the ESG rating provider has obtained the consent, in writing, of the provider of information.
14. Rule 28 U (Restriction on shareholding in an ESG rating provider)- It says that an ESG rating provider shall not: (a) directly or indirectly, hold 10%. or more shareholding or voting rights in any other ESG rating provider, or (b) have representation on the board of directors of any other ESG rating provider. But it is provided that an ESG rating provider may, with the prior approval of the Board, in the interest of investors, market integrity and stability, acquire shares or voting rights exceeding 10%. in any other ESG rating provider if such acquisition results in a change in control in the ESG rating provider whose shares are being acquired.
15. Rule 28 V– It states that companies associated with a promoter or a rating agency are not to be rated.

Conclusion

ESG ratings are crucial for advancing the field of sustainable investment. This is advantageous for the ESG raters as well as the rated firms and investors that subscribe to the ratings.

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