Driving Sustainable Growth: SEBI Unveils Game-Changing ESG Rating Norms
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DRIVING SUSTAINABLE GROWTH: SEBI UNVEILS GAMECHANGING ESG RATING NORMS 2
Driving Sustainable Growth: SEBI Unveils Game-Changing ESG Rating Norms
DRIVING SUSTAINABLE GROWTH: SEBI UNVEILS GAMECHANGING ESG RATING NORMS 3
DRIVING SUSTAINABLE GROWTH: SEBI UNVEILS GAMECHANGING ESG RATING NORMS 4 CONTENTS 1. Meaning of ESG Rating Provider? 6 2. To whom ESG Rating Provider norms apply? 6 3. What is the eligibility criteria to be registered as ESG rating provider? 6 4. Mandatory registration requirement for acting as ESG rating providers 7 5. How to obtain registration certificate to act as an ESG rating provider? 8 6. Power of SEBI to call for additional information from applicant who want to be registered as ‘ESG Rating Provider’ 8 7. Mandatory conditions to be fulfilled for obtaining certificate to act as ESG Rating Providers 9 8. Code of Conduct for ESG Rating Providers 10 9. ESG Rating Providers shall maintain Transparency, governance and prevention of conflict of interest 10 10. ESG Rating Providers must follow the Rating process as prescribed 12 11. Disclosure to be made by ESG rating providers 13 12. ESG Rating Providers shall appoint a Compliance Officer 13 13. ESG Rating Provider shall maintain Books of Accounts & records 14 14. ESG rating providers shall rectify the deficiencies made out in auditor’s report 15 15. ESG Rating Providers shall maintain confidentiality 15 16. Provisions relating to shareholding w.r.t. ESG rating providers 15 17. ESG Rating Providers cannot rate the Entities connected with its promoters 17
Introduction:
The SEBI (Credit Rating Agencies) Regulations, 1999 was introduced by the SEBI to provide the procedure for credit rating agencies. The SEBI (Credit Rating Agencies) Regulations, 1999 provide for a disclosure-based regulatory regime, where the agencies are required to disclose their rating criteria, methodology, default recognition policy etc. Now, SEBI vide. Notification no. SEBI/LADNRO/GN/2023/136, dated 03.07.2023 has notified the SEBI (Credit Rating Agencies) (Amendment) Regulations, 2023 whereby a new chapter called “ESG Rating Providers” has been introduced which prescribes provisions relating to:
Applicability of ESG Rating Provider norms
Registration requirement for acting as ESG rating providers
Eligibility criteria to be registered as ESG rating provider
Power of SEBI to call for information from the ESG rating provider applicant
Transparency and governance requirement maintained by ESG rating provider
Appointment of Compliance Officer by ESG Rating Providers
Books of Accounts & records maintained by ESG Rating Providers
Provisions relating to shareholding
1. Meaning of ESG Rating Provider?
ESG rating provider” means a person which is engaged in, or proposes to engage in, the business of issuing ESG ratings
2. To whom ESG Rating Provider norms apply?
The “ESG Rating Providers” norms shall be applicable on the following class of ESG Rating providers:
3. What is the eligibility criteria to be registered as ESG rating provider?
SEBI has prescribed various eligibility criteria for entities to obtain certificate of registration to act as an ESG rating provider:
DRIVING SUSTAINABLE GROWTH: SEBI UNVEILS GAMECHANGING ESG RATING NORMS 6
Location of ESG Rating Provider Asset class in securities market Location of ESG Rating User Applicability of regulations India Indian India Yes India Indian Outside India No India Global India Yes Outside India Indian India Yes Outside India Indian Outside India No Outside India Global India No
Applicant shall have and shall maintain the net worth
Applicant shall have necessary infrastructure including adequate office space, technology, equipment & manpower
Applicant is not a credit rating agency or any other intermediary
Applicant shall be incorporated as a company under the Companies Act, 2013
Applicant shall be incorporated as a company under the Companies Act, 2013
Applicant shall submitted its business plan to the Board
Applicant shall have appointed a compliance officer
Applicant shall required to employ individuals who possess sufficient professional and other relevant experience
Applicant shall required to employ individuals who possess sufficient professional and other relevant experience
Applicant must not have been refused a certificate, deemed unfit by the Board, or faced enforcement action for Act violations in the past 3 years.
Grant of certificate to the applicant would be in the interest of investors
Any other criteria, as may be specified by the Board
Mandatory registration requirement for acting as ESG rating providers
Newly inserted provisions require mandatory registration ESG Rating providers. As per the amended norms ESG service providers shall get themselves registered with the SEBI as ESG service provider.
However, an individual who is currently functioning as an ESG Rating Provider can continue to do so for 6 months from the date this regulation is implemented. Further, if the individual has already applied for a registration certificate within the specified period, they can continue their activities until a decision is made on their application.
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5. How to obtain registration certificate to act as an ESG rating provider?
Anyone intending to engage in this business must apply to the Board for a certificate. An application for the grant of a certificate to act as an ESG rating provider shall be made to the Board, in Form A of the Fifth Schedule.
Additionally, applicants are required to pay a non-refundable application fee as follows:
6. Power of SEBI to call for additional information from applicant who want to be registered as ‘ESG Rating Provider’
The Board has the authority to ask for additional information or clarification from an applicant who wishes to obtain a certificate as an ESG rating provider. This information could be related to the provider’s activities or any relevant matters.
Additionally, the Board has the option to request the applicant or their authorized representative to appear in person before the Board for further discussion and representation regarding the certificate’s approval.
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Sr. No. Particulars Fees payable 1 Application fee for grant of registration 50,000 2 Registration Fees (a) Category I (b) Category II 10,00,000 1,00,000 3 Recurring registration fee (For every three years) (a) Category I (b) Category II 5,00,000 50,000
7. Mandatory conditions to be fulfilled for obtaining certificate to act as ESG Rating Providers
The certificate granted to act as ESG Rating Provider shall be subject to the following conditions:
a) the ESG rating provider shall comply with the provisions of the Act, the regulations, guidelines, directives, circulars and instructions as may be issued by the Board.
b) the ESG rating provider shall forthwith inform the Board, in writing, if any information or particulars earlier furnished to the Board is found to be false or misleading .
c) in case any change in control of the ESG rating provider is proposed, the ESG rating provider shall obtain the prior approval of the Board for continuing to act.
d) the ESG rating provider shall at all times maintain the minimum liquid net worth1
e) the ESG rating provider shall pay the requisite registration fees
f) the ESG rating provider shall meet the targets, declared at the time of its application to the Board, within the specified time:
a. If the ESG rating provider fails to achieve their set targets, they will be obligated to contribute additional capital or implement other corrective measures as determined and specified by the Board. This action must be taken within six months from the corresponding target date or within any other period specified by the Board.
g) the ESG rating provider does not undertake any activity or offer any product or service, except services related to ESG ratings
1 liquid net worth” means net worth deployed in liquid assets which are unencumbered; Explanation. – For the purposes of this chapter,
(i) “liquid asset” is a low risk asset that can easily be converted into cash in a short period of time, such as cash, fixed deposits, government securities, treasury bills and repo on government securities.
(ii) “Net Worth” means the aggregate value of the paid up equity capital and free reserves (excluding reserves created out of revaluation), reduced by the aggregate value of accumulated losses and deferred expenditure not written off, including miscellaneous expenses not written off
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8. Code of Conduct for ESG Rating Providers
The ESG rating provider shall abide by the Code of Conduct as set out in the Seventh Schedule. The Code of Conduct as specified in schedule seven includes:
a) An ESG rating provider shall make all efforts to protect the interests of the investors.
b) An ESG rating provider shall fulfil its obligations in a prompt, ethical and professional manner.
c) An ESG rating provider shall maintain records to support its decisions.
d) An ESG rating provider shall adopt and implement ESG rating processes that reflect consistent rating standards.
e) An ESG rating provider shall provide adequately empower its compliance officer to enable him or her to effectively discharge his duties.
9. ESG Rating Providers shall maintain Transparency, governance and prevention of conflict of interest
The ESG rating provider shall:
a) maintain a website and disclose the ESG ratings
b) prioritize adequate levels of public disclosure and transparency for its ESG ratings products
c) disclose its rating methodology for all ESG ratings on its website
d) disclose the category under which the ESG rating provider is registered in all its disclosures related to ESG ratings on its website
e) use terminologies which are relevant and reflective of the characteristics of the ESG ratings product offered
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f) disclose the changes in the ESG rating methodology and consequential changes in ESG ratings on its website
g) disclose the extent to which a change in ESG rating is on account of the change in the ESG rating methodology
h) publish its average one-year ESG rating transition rate on its respective website
i) the general nature of compensation arrangements with clients2 and whether the ESG ratings assigned were solicited or unsolicited
j) take other measures that the Board may consider material for a true and fair understanding of the ESG rating
k) identify, disclose, and to the extent possible, avoid or appropriately mitigate potential conflicts of interest
l) formulate policies and internal codes of conduct for dealing with conflicts of interest and prominently disclose the policies on its website
m) identify, disclose and, to the extent possible, mitigate potential conflict of interest that may arise between ESG rating provider and its clients or client groups
n) ensure that ESG ratings are not affected by any existing or potential business relationship between the ESG rating provider or its associates
o) structure reporting lines for its staff and their compensation arrangements to eliminate or to the extent possible, mitigate actual and potential conflicts of interest
p) not provide consulting or advisory services relating to or any areas related to environmental, social and governance aspects including ESG ratings
q) adopt and implement written policies and procedures to ensure that its decisions are independent, free from any form of undue interference or influence.
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2 “client” means any person who avails or proposes to avail the services of an ESG rating provider
10. ESG Rating Providers must follow the Rating process as prescribed
(i) An ESG rating provider shall:
a) Adequate Internal resources: ESG must have appropriate internal resources to assign an ESG rating
a) inform the general public of new ESG rating instruments or symbols introduced by it
b) ensure that the ESG rating suitably incorporates the environmental, social and governance aspects that are contextual to the Indian market
c) promptly disclose the ESG rating assigned to any issuer or security, and any changes in ESG ratings or reviews, after periodic review to the SE
d) have written policies, procedures and internal controls to ensure that the processes and methodologies are rigorous and systematic, are consistently applied, and are periodically reviewed and updated
e) adopt and implement written policies and procedures to ensure the issuance of high quality ESG ratings
f) have efficient systems to track material developments related to environmental, social and governance factors to ensure timely and accurate ESG ratings
g) attempt to continually improve information gathering processes in respect of the issuers and securities rated by it
h) respond to, and address issues flagged by issuers covered by its ESG rating products while ensuring that the same does not compromise the objectivity of the products
i) share the draft ESG rating report with the rated issuer or the issuer whose securities are being rated, before publication of the same
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(ii) The ESG rating provider shall continuously monitor the rating of a client, unless the rating is withdrawn in such manner as may be specified by the Board.
11. Disclosure to be made by ESG rating providers
The ESG rating provider is required to disclose the following while disclosing ESG ratings:
a) Clear definitions of the ESG rating, including the corresponding symbols.
b) An explicit statement clarifying that the ESG ratings should not be interpreted as recommendations to buy, hold, or sell any securities.
The ESG rating provider is further required to provide information and reports about its activities to the Board as requested, within a specified timeframe. Additionally, at the end of each accounting period, the ESG rating provider must submit its financial statements to the Board, following the specified guidelines.
12. ESG Rating Providers shall appoint a Compliance Officer
The ESG rating provider shall appoint a compliance officer who shall be responsible for monitoring the compliance of all the applicable laws.
Further the compliance officer is required to promptly and autonomously notify the Board of Directors about any instances of non-compliance that they observe.
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13. ESG Rating Provider shall maintain Books of Accounts & records
Every ESG rating provider shall keep and maintain, for a minimum period of five years, the following books of accounts, records and documents, namely-
copy of its financial statements as on the end of each accounting period
a copy of the auditor’s report on its accounts for each accounting period
a copy of the agreement entered into with each client, if applicable
ESG ratings assigned to various issuers or securities including upgradation and down gradation (if any) of the ratings so assigned
ESG rating notes and other documents which state the rationale or form the basis for assigning an ESG rating
letter or reports or press releases or disclosures assigning ESG ratings
particulars of fees charged for ESG ratings
information supplied by each of the clients, if applicable;
correspondence with each client
such other records as the Board may specify from time to time
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ESG rating providers shall rectify the deficiencies made out in auditor’s report
Every ESG rating provider shall, within 2 months from the date of the report of the auditor, take steps to rectify the deficiencies, if any, made out in such report, in so far as they relate to the activity of ESG rating
15. ESG Rating Providers shall maintain confidentiality
ESG rating providers must keep the information they receive confidential and not disclose it to anyone else, except when required by law or with written consent from the information provider.
The confidential information received can only be used for the purpose of conducting ESG ratings, unless the provider of the information provides written consent for other purposes.
ESG rating providers are required to have written policies and procedures in place to safeguard any non-public information they receive in relation to their ESG rating products.
The provisions of SEBI (Credit Rating Agencies) (Amendment) Regulations, 2023 are effective from 03.07.2023.
16. Provisions relating to shareholding w.r.t. ESG rating providers
(i) 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 other ESG rating providers, but it requires approval from the Board. This is allowed to safeguard the interests of investors, maintain market integrity, and ensure stability.
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Additionally, an ESG rating provider can acquire shares or voting rights exceeding ten percent in another ESG rating provider, but only if this acquisition leads to a change in control of the company being acquired.
(ii) A shareholder holding 10% or more shares or voting rights in an ESG rating provider shall not hold 10% or more shares or voting rights, directly or indirectly, in any other ESG rating provider.
Provided that the said restriction shall not apply to holdings by pension funds, insurance schemes and mutual fund schemes.
Illustration 1: AB Ltd. is an ESG Rating Provider who holds 6 % of shareholding in XYZ Ltd. which is also an ESG Rating Provider. Now, AB Ltd. wants to acquire additional 6 % shareholding right in XYZ Ltd.
In this case, AB Ltd cannot hold 10 % or more shareholding in any other ESG Rating Provider. Therefore, AB Ltd. can only acquire upto 3 % additional shares in XYZ Ltd.
Illustration 2: Mr. A holds 12 % of shareholding in AB Ltd. and 6 % in XYZ Ltd. AB Ltd. and XYZ Ltd. both are ESG Rating Provides. Now, Mr. A want to acquire 6% additional shareholding right in XYZ Ltd.
In this case, since Mr. A already holding more than 10 % of shareholding in AB Ltd. Therefore, he cannot hold 10 % or more shareholding in any other ESG Rating Provider. Hence, Mr. A can only acquire upto 3 % additional shares in XYX Ltd.
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17. ESG Rating Providers cannot rate the Entities connected with its promoters
No ESG rating provider shall, rate an issuer or securities of any issuer, which is a borrower of its promoter or a subsidiary of its promoter or an associate of its promoter.
No ESG rating provider shall, rate an issuer or securities of any issuer, which is its promoter.
Conclusion:
An ESG rating provider shall neither assign any ESG rating to an issuer promoted by it or its associates, nor rate securities of such issuers.
No ESG rating provider shall rate an issuer or securities of such issuer, if the ESG rating provider has a Chairperson, director or employee who is also a Chairperson, director or employee of the issuer.
In the current scenario, ESG (Environmental, Social, and Governance) plays a vital role for investors while their decision making as focus on sustainable practices and responsible governance. It can contribute to improved operational efficiency, cost reduction, innovation, and enhanced reputation, leading to potential competitive advantages and financial returns.
Previously, India did not have any specific regulations for the ESG Rating Providers. However, establishing a clear framework for ESG Rating Providers will address issues of biased rating and ensure that methodologies used are transparent, practical, accurate, and aligned with the Indian ecosystem. The implementation of these regulations is expected to provide a significant boost, especially for government enterprises.
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ESG
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