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SEBI Drafts Framework for ESG Rating Agencies

The Securities and Exchange Board of India (SEBI) published a draft proposal that will only allow accredited entities to provide ESG ratings on Indian corporations.

In a consultation paper issued for regulating ESG rating providers, SEBI said that ESG Rating Providers (ERPs) are still in their nascent stages of development and that global large institutional buyers rely on in-house research when making investment decisions.

In the draft rules, SEBI said that there is a demand for ESG Rating agencies and corporate and index providers to follow a set of ESG standards that will be established by the regulator.

The goal of SEBI’s new framework is to make Indian corporations’ ESG work tangible, measurable and transparent. The regulator also believes that it will also help asset buyers clearly understand how serious different Indian corporations are incorporating ESG standards into their business models.

In the proposal, existing major credit rating agencies and research analysts will continue to be allowed to operate in India. But every ESG rating agency will have to be accredited every two years. The regulator has the authority to revoke the accreditation for non-compliance.

SEBI-registered entities that are engaged in fund-based investment activities, including mutual funds and pension funds, that desire to use third-party ESG ratings as part of their decision-making process for investing in Indian equities and debt, must avail services of SEBI-accredited ERPs.

Market participants can make their recommendations by March 10th, 2022.