India makes the first move on ESG rating regulation

India has become the first jurisdiction to propose regulation over ESG ratings providers, as regulators from the US to Europe consider similar action.

The Securities and Exchange Board of India (Sebi), issued a consultation paper in January 2022, proposing a framework under which only accredited agencies can provide ESG ratings within the Indian market.

There is an “imperative need” to ensure that ESG ratings providers operate in a transparent and regulated environment, Sebi argued, in order to reduce the risk of greenwashing and misallocation of assets.

The framework asks ESG rating agencies to seek Sebi’s accreditation every two years, while the regulator can revoke the accreditations at any time when material non-compliances are found.

Sebi also proposed a “subscriber-pays” model for the ESG ratings industry, as that is “the predominant business model followed” by most global providers. This creates a contrast with the credit ratings market, where the “issuer-pays” model is dominant.

Public comments for the paper are invited until March 10.

The regulator’s move means that Indian companies and investors of all sizes can have increased clarity on how their work should evolve. The Indian regulator’s move comes two months after global regulators called for more oversight over ESG ratings and data providers.