RINGSIDEVIEW
The Securities and Exchange Board of India (SEBI) has proposed tighter norms in a recent consultation paper on ESG (environmental, social & governance) to check greenwashing by companies.
As the concept started gaining interest among the investor fraternity, a lot of companies tried to mis-sell them with the aim of scoring better on the ESG scale.
A lack of transparency in this area gives rise to the risk of greenwashing and misallocation of assets which could lead to weak ESG rating and a lack of trust.
“Therefore, there arises an imperative need, more than ever before, to ensure that the providers of such products operate in a transparent and regulated environment that balances the needs of all stakeholders,” SEBI paper said.
Standardised rating
In a move to ensure fair assessment of companies, SEBI has mandated that only accredited ERP (ESG Rating Providers) can issue ESG ratings. “Given the myriad products that may be offered under the umbrella of ESG rating either in form of ESG scores, rating symbols etc. it may be challenging, at this stage, to formulate a standardised rating scale for a market that is so varied, dynamic and evolving,” the consultation paper said. SEBI has proposed that only CRAs and research analysts with a minimum net worth of ₹10 crore can accredit as an ERP. Besides, a listed entity that wish to obtain ESG ratings can do only from an accredited ERP.
The capital market regulator also proposed that the ERPs should mention specifically the domain to which the product is related to. For example, carbon risk ratings cannot refer to as ESG ratings, as the products assess the environmental aspect only.
The SEBI paper suggested that ERPs should offer at least one of these rating products; ESG impact ratings, ESG corporate risk ratings or ESG financial risk ratings and other ESG related rating products that can be appropriately labelled. Every ERP should consist of professional rating committees, with members who are adequately qualified and knowledgeable to assign a rating. Additionally, each ERP should formulate a detailed policy on managing conflicts of interest and should be prominently disclosed on its website, SEBI said.
Subscription model
The regulator has also proposed that ERPs should follow a subscriber-pay business model. “While an ERP shall necessarily disclose high-level ESG rating on their websites for public access, a detailed ESG-rating report may be made available on a subscription basis, which shall have a detailed analysis of rating arrived at, specific KPIs used methodology applied for the rating and shall provide a reference/ hyperlink to the methodology placed on the website.” While it is possible for institutions and top companies to subscribe, it would be difficult for individual investors to cough up the extra money when the transaction is already high in In
dia. Instead of asking small investors to pay for a subscription, SEBI can ask BSE and the NSE, the frontline regulator, to part with some money from their investor protection fund. The needy investors can subscribe from the bourses free of cost or at a nominal rate.