The Securities and Exchange Board of India (SEBI) unveiled a series of proposals aimed at enhancing the business landscape for Environmental, Social, and Governance (ESG) rating providers (ERPs). This initiative responds to industry feedback and seeks to improve operational efficiency and transparency within the ratings process.

One of the key changes proposed is the expansion of rating capabilities, allowing ERPs to assess not only listed securities but also unlisted ones. This marks a significant shift, as it broadens the scope of entities that can receive ESG ratings, making it easier for investors to evaluate a wider range of options.

In addition to this, SEBI is looking to create an activity-based regulatory framework that would incorporate ERPs into the existing regulations governing Credit Rating Agencies (CRAs). This approach aims to streamline operations and reduce the regulatory burden on these providers.

Another notable proposal is the exemption for entities not engaged in SEBI-regulated activities from the need to register with the regulator. This move is designed to simplify compliance for those ERPs focused solely on unlisted securities.

Transparency is a central theme in SEBI’s proposals. Registered ERPs that rate non-SEBI products will need to clarify their regulatory status, ensuring that all stakeholders are aware of the governing authority overseeing these ratings. Furthermore, SEBI suggests that rating reports should be shared simultaneously with both subscribers and the rated entities, allowing for equal access to information and fostering an open dialogue.

The proposals also emphasise the importance of including any clarifications from rated entities in the rating reports as an addendum, promoting greater transparency. Additionally, SEBI intends to lift the requirement for ERPs operating on a subscriber-pays model to disclose ESG ratings to the stock exchange, thereby easing the compliance burden on these organisations.

As these changes unfold, SEBI acknowledges the unique business models of ERPs, particularly those that depend on subscriber fees. However, concerns have been raised by ERPs regarding the potential impact of sharing reports with rated entities, which could affect their business models. SEBI, while addressing these concerns, highlights the necessity of allowing rated entities to respond to their ratings.

Finally, the proposals emphasise the need for ERPs to maintain the integrity of their relationships with subscribers. It’s crucial that rated entities or their affiliates do not subscribe to the rating service to avoid any conflicts of interest.

SEBI’s proposals represent a pivotal step toward expanding the capabilities of ESG rating providers and enhancing the overall efficiency of the ESG rating process in India.