The Securities and Exchange Board of India (SEBI) has revised its regulatory framework for Environmental, Social, and Governance (ESG) Rating Providers (ERPs), particularly those operating under a subscriber-pays business model. These amendments aim to enhance transparency, accountability, and consistency in the ESG rating process.
Key Policy Updates
According to SEBI’s latest notification, ERPs that follow a subscriber-pays model must now share the ESG rating report simultaneously with both subscribers and the rated entity or issuer. The rated entity will be given two working days to provide comments or clarifications on the report.
All responses received within this window must be reflected in an addendum to the ESG rating report. If the rated entity presents a different perspective on the data included in the report, the ERP must consider the feedback and may either revise the original report or issue an additional addendum with its own remarks. This updated report must then be circulated to all subscribers.
Disclosure and Communication Requirements
ERPs are also mandated to publicly disclose their policy on sharing ESG rating reports with rated entities and subscribers via their official websites. Additionally, they must provide a dedicated facility for rated entities or issuers to seek clarifications regarding the ESG rating, methodology, or underlying assumptions.
Defining the Subscriber-Pays Model
SEBI has defined the subscriber-pays model as one where the ERP earns revenue from subscribers such as banks, insurance firms, pension funds, or even the rated entity itself. To ensure fairness, SEBI stipulates that:
- Ratings must be based solely on publicly available information.
- If the rated entity is also a subscriber, it must pay the lowest fee among all subscribers.
Conflict of Interest Safeguards
Only group companies or associates of the rated entity whose core business requires ESG ratings—and who are regulated by a financial sector authority—may subscribe to such ratings. SEBI emphasizes that there must be no actual or potential conflicts of interest or any misuse of information.
ERPs must also declare on their websites the financial sector regulator or authority under which they operate for each ESG product and ensure full compliance with the respective laws.
These amendments, part of SEBI’s broader initiative to standardize and strengthen the ESG rating ecosystem, are expected to foster greater trust and reliability among investors and other market participants.
