SEBI Amends Credit Rating Agency Norms to Include Provisions Relating to ‘ESG Rating Providers’

Notification No. SEBI/LAD-NRO/GN/2023/136, dated 03.07.2023

The SEBI (Credit Rating Agencies) Regulations, 1999 were introduced by the SEBI to 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 has notified the SEBI (Credit Rating Agencies) (Amendment) Regulations, 2023. Whereby a new chapter called “ESG Rating Providers” has been introduced. Accordingly, no person shall act as an ESG rating provider unless he has obtained a certificate from the Board.

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 can contribute to improved operational efficiency, cost reduction, innovation, and enhanced reputation, leading to potential competitive advantages and financial returns.

The amended regulation has provided the following provisions:

1. Applicability of the amended norms

The new chapter named “ESG Rating Providers” shall be applicable on the following class of ESG Rating providers:

(a) where Location of ESG rating provider is in India having asset class in Indian securities market and location of ESG rating user is in India

(b) where Location of ESG rating provider is in India having asset class in Global securities market and location of ESG rating user is in India

(c) where Location of ESG rating provider is outside India having asset class in Indian securities market and location of ESG rating user is in India

2. Registration of ESG rating providers

Newly inserted provisions require mandatory registration ESG Rating providers.

“ESG rating provider” means a person which is engaged in, or proposes to engage in, the business of issuing ESG ratings.

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.

3. 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 like the applicant shall be incorporated as a company under the Companies Act, 2013, the applicant shall have specified ESG rating activity, as the main object in its Memorandum of Association;there are other net worth based criteria also.

4. 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.

5. Appointment of 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.

6. Maintenance of Books of Accounts records

Every ESG rating providers shall keep and store certain financial records, documents, and books for at least Five (5) years.

7. Steps taken by ESG rating providers on 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

8. 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.

Click Here To Read The Full Notification