Market Regulator Proposes Stricter Rules for ESG Rating Providers
The Securities and Exchange Board of India (SEBI) has proposed new measures for [[Environmental]], [[Social]], and [[Governance]] (ESG) rating providers. These measures aim to improve transparency and accountability in the ESG rating process. The latest news updates from the market regulator focus on rating withdrawals, disclosures, and audits.
New Rules for Rating Withdrawals
SEBI has suggested different rules for rating withdrawals depending on the payment model used by the ESG rating provider. In the subscriber-pays model, ratings can be withdrawn only if there are no active subscribers. However, for the issuer-pays model, there’s a mandatory minimum rating period of three years. Additionally, issuer-pays model providers need approval from 75% of bondholders before withdrawing ratings. This ensures greater stability and reliability in ESG ratings.
Disclosure Requirements and Public Availability of ESG Ratings
Under the new proposals, ESG rating providers using the subscriber-pays model can restrict detailed reports to their subscribers. However, they must publish ESG ratings publicly on their websites in a standard format. Stock exchanges will also have to prominently display ESG ratings for listed companies and securities, making it easier for investors to access this crucial information. This increased transparency aims to enhance market integrity and investor confidence.
Internal Audit Requirements for ESG Rating Providers
SEBI has proposed internal audit requirements for rating providers, categorized into two groups. Category-I providers must comply immediately, while Category-II providers have a two-year grace period. This difference is due to the challenges faced by newer, smaller Category-II providers. Category I providers can certify green debt securities, must maintain a net worth of Rs. 5 crores, and have four employees. Category II providers, on the other hand, cannot certify green debt securities, require only two employees, can operate remotely, and need a net worth of Rs. 10 lakh. The two-year grace period allows Category-II providers time to adjust to the new audit requirements.
Formation of ESG Rating Sub-Committees and NRCs
The requirement for forming ESG Rating Sub-Committees and Nomination and Remuneration Committees (NRCs) is also deferred for two years for Category II ESG rating providers. Their board of directors will handle these responsibilities during this period. These measures ensure a smooth transition for Category II providers while maintaining oversight and governance.
SEBI’s Focus on Global Alignment
SEBI is committed to aligning its ESG disclosure norms with global standards, promoting consistency and comparability in ESG ratings worldwide. These proposed measures aim to strengthen the ESG rating framework in India, contributing to a more sustainable and transparent financial market. The market analysis today suggests that these regulations will have a significant impact on the business landscape.
These latest updates are a step towards increasing transparency and accountability in the ESG rating process, ultimately benefiting investors and promoting sustainable business practices.
