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Business News/ News / India/  MSCI, LSE Group among 11 cos seeking ESG rating provider registration
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MSCI, LSE Group among 11 cos seeking ESG rating provider registration

The move to regulate ESG rating firms came after concerns were raised around the lack of transparency in rating methodologies, leading to inconsistent ESG ratings for the same company across different rating providers.

As climate change accelerates, investors are increasingly looking at how a business is impacting the planet (environment), the people (social), and whether it's being governed in a transparent fashion, before investing.Premium
As climate change accelerates, investors are increasingly looking at how a business is impacting the planet (environment), the people (social), and whether it's being governed in a transparent fashion, before investing.

Mumbai: New York-based index provider MSCI and financial services giant London Stock Exchange Group are among 11 companies that have applied to the Securities and Exchange Board of India (Sebi) to become ESG (environmental, social, governance) rating providers in the world's fastest-growing major economy.

Others include proxy advisory firms IIAS and SES, as well as credit rating agencies Crisil and Care that are looking to register as ESG rating providers amid a surge in demand for ratings of businesses based on these non-financial parameters, according to information available on Sebi's website.

As climate change accelerates, investors are increasingly looking at how a business is impacting the planet (environment), the people (social), and whether it's being governed in a transparent fashion, before investing.

These applications come after Sebi amended its credit rating agency regulations in July last year to add provisions for regulating ESG Rating Providers, or ERPs, in a bid to facilitate greater transparency in the ESG rating process.

“We have been looking to expand from G to E and S to give more holistic ratings. As we experience the effects of climate change, it is important to have wider access to ESG ratings to ensure that companies recognize the importance of their environmental and social impact too in addition to having good governance," said Amit Tandon, the managing director of proxy advisory firm IIAS. IIAS has applied for registration as an ERP through its arm lIAS Sustainability Solutions Private Ltd.

The applications were made between September last year and January this year. Companies are expected to start receiving the required registration in the coming few months, said people in the know.

The move to regulate ESG rating firms came after concerns were raised around the lack of transparency in rating methodologies, leading to inconsistent ESG ratings for the same company across different rating providers.

To bring more transparency, Sebi has ruled that ESG rating reports must have some minimum disclosures around the ESG rating or score, history of previous ratings, summary of key qualitative and quantitative factors considered for arriving at the rating, as well as pillar-wise E, S and G scores. Weights of E, S and G scores in the assigned ESG rating and a brief explanation of the methodology used are also required.

This is in line with regulations for credit rating agencies.

Tackling the concern of conflict of interest that particularly arises in the 'issuer-pays' model, Sebi has mandated that the rating agency and the rated company get into an agreement which has some standard clauses around rights, liabilities and fees.

Issuer-pays is a model where the company being rated pays the rating agency for its services. This is the general business model adopted by credit rating agencies today. In contrast, in the investor-pays model, large investors like credit funds and mutual funds pay for the rating services for assessment of the companies they have invested in. This model is popular among proxy governance firms that advise funds on how to vote for proposals put forth by the companies they have invested in.

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Published: 11 Apr 2024, 06:18 PM IST
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