The Securities and Exchange Board of India (SEBI) recently announced the formation of a working group to review the regulatory framework governing Environmental, Social, and Governance (ESG) Rating Providers. This review is a significant step in refining the existing regulatory landscape for ESG ratings in India.

Background of the Review

The review process comes on the heels of SEBI’s 2021 release of the “Master Circular for ESG Rating Providers,” which integrated ESG rating agencies into SEBI’s regulatory framework for credit rating agencies. The move aims to enhance the quality and credibility of ESG ratings and data in India. SEBI has decided to undertake this new review following feedback from various market participants and stakeholders, which suggested the need for updates and improvements to the current framework.

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Global Context and IOSCO Recommendations

This initiative is part of a broader global trend, with regulators in Europe, the UK, and other regions over the past year similarly working to improve their ESG ratings frameworks. In 2021, the International Organization of Securities Commissions (IOSCO) emphasized the importance of improving transparency in the ESG ratings and data space. IOSCO recommended that regulators take action to enhance oversight in this area, including requiring providers to disclose potential conflicts of interest and thoroughly consider the data and methodologies they use.

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Composition and Mandate of the Working Group

SEBI’s working group includes a diverse set of stakeholders, such as issuers, investors, users of ESG ratings, domestic and global ESG ratings providers, ESG analysts, legal experts, and academics. The group has been tasked with conducting a comprehensive review of the current regulatory framework, examining suggestions from market participants, and recommending measures to increase transparency, reliability, and confidence in ESG ratings. Additionally, the group will assess international regulatory developments in the ESG ratings field and identify areas where India can align with global best practices.

Conclusion

This review by SEBI marks an important step in strengthening the ESG ratings ecosystem, ensuring that it continues to evolve in line with global standards and market needs.

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