SEBI Certification Mandatory for ESG rating Providers

Currently, the Securities and Exchange Board of India (SEBI) only permits certified entities to provide ESG rating services. Even foreign agencies providing ESG rating services must obtain SEBI certification to operate in India.

According to a gazette notification by SEBI, "No person shall act as an ESG rating provider unless they have obtained a certificate from the Board." However, as per the board's instructions, current ESG rating providers may continue to operate for another six months or until the conclusion of their certification application.

To qualify as an ESG rating service provider, a company must be incorporated under the Companies Act, 2013, with ESG rating activities as their primary objective in the Memorandum of Association. If the ESG rating provider is affiliated with a credit rating agency, it must clearly state that ESG ratings are distinct from credit ratings on its website and in its reports.

The certified rating agency is required to disclose its rating methodology, including environmental, social, and governance (ESG) factor weightages, as well as the weightage of key issues within each of these three factors. While maintaining a balance, the agency must disclose methodology details on its website while safeguarding proprietary or confidential aspects.

The promoter of the ESG rating agency must maintain a minimum shareholding of 26% in the ESG rating provider for at least five years from the date of registration.

The Financial Action Task Force (FATF) has recognised jurisdictions for foreign ESG rating providers, and they must have at least five years of experience in providing ESG ratings for securities or businesses.

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Source: Business Line