ESG Gets A Shot In The Arm

The Environmental, Social and Governance (ESG) regime has got a shot in the arm with the market regulator SEBI approving CRISIL ESG Ratings and Analytics Ltd (CRISIL ESG Ratings), which is a wholly owned subsidiary of CRISIL Ratings Ltd as a Category 1 provider of ESG ratings (ERP). CARE Ratings’ subsidiary CARE ESG Ratings is also a Category 1 ERP. ESG Risk Assessments and Insights, too, has got the ERP registration. ICRA’s subsidiary Pragat iDevelopment Consulting Services Ltd (PDCSL), too, has been approved as Category - 1 ESG Rating Provider. 

A framework has been laid out for ERP providers on the basis of BRSR core. They are required to apply a minimum set of ESG metrics. These BRSR core indicators have to be assured by third party auditors. The amended BRSR core require the ERPs to disclose on what basis they have given a particular rating, the qualitative and quantitative factors considered, main points of ESG and the weight assigned. 

The SEBI notification reads, “On and from the date of this regulation coming into force, no person shall act as an ESG rating provider unless it has obtained a certificate from the board.”  The foreign agencies that provide ESG rating services need to get SEBI certification and should be formed in a jurisdiction that is member of the Financial Action Task Force (FATF) and has gained recognition, according to the respective laws. SEBI has also asked ERPs to consider India specific standards/laws/guidelines for rating. 

Gurpreet Chhatwal, Managing Director, CRISIL Ratings, says, “The ESG scores, which will henceforth be called ‘ESG ratings’, have already found traction among market participants. These are based on a unique India- specific framework that factors in nuances at the sectoral level, while being guided by global best practices. The process includes analysis of more than 500 unique data points across the environmental, social and governance aspects for each company.”

India is not alone when it comes to developing the rating system in the country.  

The European Union in February 2024 came up with the regulation related to ESG ratings under which the European Securities and markets Authority (ESMA) will supervise and authorise the rating agencies. The United Kingdom, too, has been nudging their rating agencies to cater to the voluntary code of conduct from the International Capital Market Association. 

India has also been critical of the western world rating systems being developed without factoring in the Global South, which leads to their companies getting lower ratings, ultimately their impacting their investment opportunities. Similarly, the Task Force on Climate-related Financial Disclosures (TCFD), Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB) are all western models. 

Sankar Chakraborti, Chairman, ESGrisk.ai, and Group CEO and MD, Acuite, says, "Globally ESG rating business models were criticized. Some experts claimed these ratings from some established players could not accommodate nuances of developing economies, creating an inherent bias. Also, the experts opined that due to wide divergence and a non-standard approach, the ratings were not as effective in removing information asymmetry as much as it should have.”  

He adds, “The SEBI regulation addresses these issues by bringing the ESG ratings under regulatory umbrella. This will make the licensed ESG rating providers highly accountable and retaining the license and reputation would need high quality of work and highest level of governance." 

The business models of the ERPs have also been considered in the notification. Either the ERP can be a subscriber-based business model with revenue generated from the subscribers like banks, insurance companies, or the rating entity “itself”. 

Or, the ERP generates its revenue from the rated entity, which is, “in terms of a written contractual agreement between such entity and the ERP, which may contain such provisions as may be specified by SEBI”. However to prevent conflict of interest, ERPs are not allowed to follow a hybrid business model. 

Anu Chaudhary, Partner, Global Head of ESG Consulting, Uniqus Consultech, says, “The importance of ESG ratings in investment decisions is growing, reflecting their role in aligning investments with values and risk management. These steps signify a global move towards more regulated and transparent ESG ratings, which is essential for building investor confidence and promoting a sustainable future.” She says, “These ratings not only promote corporate accountability but also better corporate practices.” It is expected that such ratings will make the ESG regime more robust.