India’s proposal includes accreditation requirements for ESG ratings providers and mandatory disclosure of providers’ data and information sources.

By Paul A. Davies, Michael D. Green, and James Bee

On 25 January 2022, the Securities and Exchange Board of India (SEBI) released a consultation paper stating that it planned to regulate what it described as “ESG risk ratings” and “ESG impact ratings”, alongside similar products such as carbon risk ratings, environmental, social, and governance (ESG) disclosure ratings, corporate transaction risk scores, and others.

The paper, which appears to position India as a pioneer in regulating the ESG ratings provider market, comes three months after the International Organization of Securities Commissions (IOSCO) published a report and a set of recommendations in relation to ESG ratings providers (as discussed in our previous blog post), which urged regulators to focus more attention on these entities. As ESG issues have become an increasingly prominent aspect of investment decisions, the role of providers of ESG ratings and scoring services has become ever more important. The wide variety of ESG ratings or scores that have sometimes been given to the same company by different ESG ratings providers has led some to question whether ESG ratings providers should be subject to regulatory oversight. Notably, the IOSCO took this view in its November 2021 report.

SEBI’s proposal would require ESG ratings providers to receive accreditation from SEBI, which would last two years before requiring renewal. Whilst SEBI stopped short of proposing standardised rating scales, the proposal would require an ESG ratings provider to “prominently disclose on its website and in the ESG rating reports the rating scale” that it applied. The data and information sources that the ESG ratings provider used would also have to be publicly disclosed, along with steps taken to demonstrate that the ESG ratings provider has avoided any conflict of interest.

A further notable aspect of the proposal, requires providers of funds registered with SEBI to use an ESG ratings provider accredited by SEBI should they wish to use a third-party ESG ratings service, and SEBI envisions that the industry (in keeping with current practice) will be funded by subscribers and users of ESG ratings, as opposed to issuers — a contrast with traditional credit ratings.

India is not the only country to consider the regulation of these products. The UK began considering whether to bring such entities under the remit of the Financial Conduct Authority in late 2021 and the European Securities and Markets Authority (ESMA) issued a call for evidence of ESG rating providers on 3 February 2022.  While ESMA did not directly propose regulation of ESG rating providers, ESMA did note its concern that without regulatory safeguards for ESG ratings, the benefits of these products may be outweighed by the risks. However, the SEBI proposals stand out as the most fulsome response to date in respect of the recommendations of IOSCO in late 2021. Whether the SEBI proposals are passed and their full impact on other jurisdictions will be interesting to monitor over the remainder of 2022, given the increased prominence of ESG ratings providers.

Latham & Watkins will continue to monitor developments in this area.