SEBI has introduced a new regulation, 28KA, requiring ESG rating providers, or ERPs, to share ESG rating reports with both subscribers and the rated issuer, requiring public disclosure.
SEBI defines the subscriber-pays business model as a model where ESG rating providers earn revenue from subscribers like banks, insurance companies, pension funds, or the rated entity itself.
The business model must guarantee publicly available ratings and the lowest fee paid by the subscriber if the rated entity or issuer is a subscriber.
As per the new framework, ERPs must disclose ESG rating policy, share reports with rated entities and subscribers, and offer clarification on methodology and assumptions for the same.
They must also disclose on their website the financial sector regulator or authority under which they conduct ESG ratings for each product.
ERPs must incorporate comments or clarifications received from the rated entity in an addendum to the ESG rating report.
ERPs will be required to adhere to the laws set by the financial sector regulator or authority. The revised rules are aimed at improving transparency and clarity.
“An ESG rating provider following a subscriber-pays business model shall share the ESG rating report with its subscribers and the rated entity or the issuer whose securities have been rated at the same time and provide two working days to such rated entity or the issuer to provide its comments,” SEBI said in a recent notification.
“Only group companies or associates of an entity whose core business requires ESG ratings of such an entity or the securities issued by such entity and are regulated by the financial sector regulator(s) can subscribe to the ESG rating,” the market regulator said.
However, there should not be any conflict of interest or any potential or actual abuse or misuse, it added.
