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SEBI proposes framework for Environmental, Social and Governance 
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First Notes
The Securities and Exchange Board of India (SEBI) issued a consultation paper 
‘Environmental, Social and Governance (ESG) Rating Providers for Securities Markets’ to 
propose framework to regulate ESG rating providers. The consultation paper aims to 
streamline and standardise the ESG ratings for companies and also proposes to allow 
credit rating agencies and research analysts to provide such services.
3 March 2022
Background
Recently, climate change and sustainable development concerns have become a priority  
at global and national level. There has been an increase in the interest of international 
bodies and financial regulators in examining ESG-related issues. SEBI is one of the 
regulator on the forefront of ESG and hence, it has mandated the top 1,000 listed 
companies by market capitalisation to report Business Responsibility and Sustainability 
Report (BRSR) from the financial year 2022-23. 
Investors factor financial implications of sustainability related risks and opportunities and 
these are impacting their investment decisions. This has led to an increase in the investor 
interest and demand for ESG reporting. However, the activities of ESG Ratings Providers 
(ERPs) are not subject to regulatory oversight at present. Reliance on such unregulated 
ERPs in securities markets has raised concerns about the potential risks to investor 
protection, the transparency and efficiency of markets, risk pricing, and capital allocation, 
etc. Additionally, lack of transparency in this area gives rise to the risk of greenwashing 
and misallocation of assets which could lead to infirmity in such ESG rating and a 
consequent lack of trust thereof. Therefore, SEBI has issued a consultation paper which 
describes the proposed regulatory framework to regulate ERPs and oversight thereon, 
periodicity of such disclosure, etc. 
This issue of First Notes aims to provide an overview of the proposed framework issued 
by SEBI.
The consultation paper is open for comments upto 11 March 2022.

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First Notes – 3 March 2022
Overview of the proposed framework
Following are some of the key proposals:
1.
Proposed scope of regulation/accreditation: SEBI proposes to accredit ERPs for the purpose of assigning ESG 
ratings to listed entities and listed securities. The consultation paper highlights following conditions for listed 
entities to avail ESG rating:

Accredited ERP: A listed entity that intends to avail an ESG rating, would obtain the same from only a SEBI 
accredited ERP.

Mandatory BRSR reporting to avail services of accredited ERPs: If entities other than the top 1,000 listed by 
market capitalisation wish to avail services of SEBI accredited ERPs, then such entities would be required to 
make public disclosures in line with those prescribed in BRSR on a mandatory basis prior to engaging with 
SEBI accredited ERPs. Also, ERPs would provide ESG rating, basis the publicly available disclosures as per 
BRSR reporting. Additionally, the consultation paper provides that to avoid information asymmetry, listed 
entities seeking rating would continue to provide BRSR disclosures.
•
Mutual funds/alternative investment funds investment decisions: SEBI-registered entities engaged in fund-
based investment activities such as mutual funds or alternative investment funds, desirous of using third-
party ESG ratings as part of their decision-making process for investing in Indian securities, would be 
required to avail services of SEBI accredited ERPs.
•
Index providers: Index providers using ESG ratings for formulation of index/indices on Indian securities, 
would use services of only SEBI accredited ERPs for formulation of such an index.
2.
Entity eligible to be accredited as ERP: The consultation paper specifies that only following regulated entities 
may be considered as eligible entities for being accredited as ERPs subject to fulfilment of accreditation criteria:  
•
Credit Rating Agencies (CRAs)
•
Research Analysts (RAs).
3.
Conditions for accreditation: The proposed accreditation conditions for ERPs to include following criteria:
•
Minimum net worth of INR10 crore
•
Adequate infrastructure to undertake necessary due diligence for assigning ESG ratings
•
Manpower consisting of specialist in specified areas
•
The accreditation should be granted subject to review by SEBI every two years.
4.
ESG rating products under purview of proposed SEBI’s accreditation framework: The consultation paper 
proposes that ERPs intending to get accredited with SEBI would offer at least one of the following ratings 
products:
•
ESG Impact Ratings
•
ESG Corporate Risk Ratings or ESG Financial Risk Ratings
•
Any other ESG related rating products, which may be appropriately labelled.
Additionally, it provides that in order to avoid any confusion among stakeholders that ERPs should always use 
proper terminologies for the products offered by them.
Response sought by SEBI on:

Whether there is a need to regulate/accredit ERPs in securities market.

Whether the proposed regulatory framework are adequate, if not, suggestions to modify the 
requirements?
Response sought by SEBI on:

Entities that should be considered to accredit as ERPs along with the rationale.
Response sought by SEBI on:

Appropriateness of proposed accreditation criteria and if any additional criteria should be included.
Response sought by SEBI on:

Appropriateness of proposed classification of ESG ratings and other related products.

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6.
Standardisation of Symbols and Scales for ESG Ratings: SEBI proposes to not standardise rating scales (i.e., 
rating/scoring symbols and their definitions). However, ERPs should prominently disclose on their website and in 
the ESG rating reports, the rating scale (symbols and their definitions) used by them. Additionally, an ERP should 
also ensure consistency in the application of its ESG rating scale. 
6.
Transparency: ERPs are expected to maintain transparency and ensure the following:
•
Type of ESG product and rating methodology on website and reports: Prominently display on their website 
and in ESG rating reports the type of ESG rating product (whether impact-based, or risk-based, or otherwise) 
and rating methodology for all its products. Also maintain archives of earlier rating methodologies on the 
website.
•
Sectoral classification: Disclose sectoral classification standard being followed, and other relevant 
disclosures up to at least two levels of sector classification
•
Publish evaluation: Publish, on an annual basis, an evaluation of their ESG-rating methodologies against the 
outputs which have been used to produce
•
Resources used to be disclosed: Disclose the data and information sources, such as BRSR, including the use 
of industry averages, estimations or other methodologies when actual data is not available or not publicly 
disclosed. 
•
Rating to be sector-agnostic: An ESG rating may be provided at a sector-agnostic level, to facilitate 
comparison of ESG ratings of one company from other companies within the same industry as well as 
companies operating in other industries.
•
Cross-reference: Where an index-provider is using ESG ratings in formulation of its index/indices, it should 
be cross referenced to the ESG rating methodology
•
Caution statement: Prominently display on their website and rating reports that ESG rating is not a 
recommendation to buy, sell or hold any security or financial instrument.
7.
ESG Rating Process to be consistent: An ERP should follow a proper rating process and ensure consistency in 
application of its methodology for the same product (as publicly disclosed) across ESG ratings assigned by it.
8.
Governance and prevention of conflict of interest: The consultation paper emphasises that ERPs ensure 
prevention of conflict of interest. The following are the proposals:
•
Policy on conflict of interest: Formulate detailed policy on managing conflict of interest and provide 
prominent disclosure on its website.
•
Related entities: ESG providers should not provide ratings to its related entities or securities
•
Adequate corporate governance structures: The corporate governance organisational and operational 
structures should be sufficient to identify, manage and mitigate any potential conflicts of interest.
•
Independence: Ensure that the personnel in the activity of ESG ratings are separate from those involved in 
other activities of the ERP. Take steps to help ensure that the ESG ratings would not be affected by the 
existence of or potential for a business relationship between the ERP (or their affiliates) and any entity or any 
other party for which it provides ESG ratings. Structure reporting lines for their staff and their compensation 
arrangements to eliminate or appropriately manage actual and potential conflicts of interest related to their 
ESG ratings.
•
Manage conflict of interest: Identify, disclose and, to the extent possible, mitigate potential conflict of interest 
that may arise between ESG Rating offering and other relationship with the covered entities such as ESG 
consulting, etc.
First Notes – 3 March 2022
Overview of the proposed framework (cont..)
Response sought by SEBI on:

Whether the proposal to not to standardised ESG rating scales is appropriate.
Response sought by SEBI on:

Appropriateness of proposed norms relating to transparency.

Whether ERPs should be free to assign ESG ratings on a sector specific or sector-agnostic basis, 
subject to adequate disclosures?.

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affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
First Notes – 3 March 2022
Our comments
The SEBI undertook discussion with various stakeholders like global and national ERPs, CRAs, mutual funds 
offering ESG schemes and research/audit firms. The discussion brought to the notice of the regulator that many of 
the ERPs are rating publicly listed companies based on public information on a subscription basis. 
The consultation paper highlights the challenges surrounding the ESG ratings and other products ecosystem. This 
is due to ambiguity of the wide range of ratings products offered along with inconsistency in disclosures and 
transparency of the methodology and rating process. In some cases, the purpose and definition of ESG rating 
products offered by different ERPs may be the same, however, the underlying methodologies utilised are likely to 
differ significantly between ERPs without sufficient disclosures.
Further, currently many ERPs offer services other than ESG ratings such as index solutions, advisory services 
related to ESG, etc. which may cause potential conflict of interests. Additionally, due to lack of transparency 
around the manner of usage of ratings by investors as well as types of ESG ratings products of different ERPs, 
there is a significant risk of misallocation and greenwashing1.
As the activities of ERPs are not subject to any regulatory oversight at present, it could give rise to potential risk to 
investor protection, the transparency and efficiency of markets, risk pricing, and capital allocation, etc. Therefore, 
with an aim to regulate the ERPs, SEBI has issued a consultation paper.
What’s happening internationally
Internationally, the International Organization of Securities Commissions (IOSCO)’s Sustainable Task Force’s 
Working Stream, published its report on ‘ESG Ratings and Data Product Providers’ in November 2021. The report 
highlighted that while the market of ERPs does not typically fall within the remit of securities regulators, 
regulators could consider focussing greater attention on the use of ESG ratings and other related products and 
activities of ERPs in their jurisdictions. SEBI has also considered the report issued by IOSCO and its 
recommendations while drafting its consultation paper.
Other regulators around the world have also considered the recommendation issued by the IOSCO. For example, 
on 3 February 2022, the European Securities and Markets Authority (ESMA), the EU’s securities markets regulator 
issued its consultation paper that seeks information on the market structure for ESG rating providers in the 
European Union (EU). The paper describes the concerns regarding lack of standards and oversight for ESG 
ratings.
The US Securities and Exchange Commission (SEC) has also highlighted the risks associated with the ESG ratings 
by the rating firms in its report Staff Report on National recognised statistical rating organizations issued in 
January 2022. The report states that by adding ESG factors, ratings firms may deviate from their methodologies, 
policies or procedures which may not be properly disclosed to investors. This would create certain potential risks 
for the ratings agencies, such as failing to follow ratings methodologies and failure to manage conflicts of interest. 
•
Require disclosure of conflict of interest: Analysts involved in ESG rating assessments should disclose 
any conflicts of interest involving a company/issuer to the ERP and should not be allowed to rate such 
companies.
9.
Business model: It is proposed that ERPs would follow a ‘subscriber-pay’ business model. While investors 
may be the primary source of revenue; a subscriber may include an issuer as well.
The consultation paper points out that the ‘issuer pay’ model is the dominant business model for credit 
rating companies. It also highlights that while the ‘issuer pay’ model ensures widespread availability of 
ratings to all investors at no monetary cost to the investors, there are inherent conflict of interest issues 
since ERP derives revenue from issuer and, may, therefore be inclined towards assigning and maintaining 
higher ESG ratings. In the subscriber pay model revenue may not necessarily come from the issuer, 
therefore this model has fewer potential issues on the conflict of interest in comparison to ‘issuer-pay’ 
model.
Overview of the proposed framework (cont..)
Response sought by SEBI on:

Appropriateness of proposed norms relating to conflict of interest.
Response sought by SEBI on:

Appropriateness of application of subscribe pay as payment model in India.
1 IOSCO report defines greenwashing as the practice by asset managers of misrepresenting their own sustainability-related practices or the sustainability-
related features of their investment products’

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© 2022 KPMG Assurance and Consulting Services LLP, an Indian Limited Liability Partnership and a member firm of the KPMG global organization of independent member firms 
affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
First Notes – 3 March 2022
Our comments (contd.)
Considerations relevant for the companies
The IOSCO report discussed that the term ‘ESG ratings’ can be referred to the broad spectrum of rating products 
in sustainable finance and include ESG scorings and ESG rankings. ESG ratings, rankings and scorings serve the 
same objective, namely the assessment to ESG risks and/or opportunities with regard to an entity, an instrument 
or an issuer. 
ESG ratings and data products providers rely on data inputs to support their analysis for ESG ratings and data 
products. The availability of reliable and high-quality data inputs is a critical component of ESG ratings and data 
products. Therefore, companies are expected to provide the information which is accurate and reliable and also
consistency of this information is an important consideration.
Considering that the activities of ESG ratings are currently not subject to regulatory oversight, the lack of 
standards in this area may present the risk of greenwashing or misallocation of assets and could lead to a lack of 
trust in ESG ratings or in the data. Therefore, the companies are expected to establish good governance practices 
in this area to ensure effective and efficient policies and procedures around the ESG structure. The companies 
should also ensure that the data provided to the agencies is in compliance with the rating criteria used by the 
ERPs.
Another consideration for the companies is the business model used by the ERPs. The consultation paper 
proposes that ERPs should follow a ‘subscriber-pay’ business model. Many credit rating companies use ‘issuer 
pay’ model. The consultation paper describes both the models and their inherent pitfalls. This is an important 
area to deliberate, and companies should evaluate these models and provide their inputs to SEBI on this topic.
The bottom line
ESG considerations have become significant aspect for investors while taking investment decisions. 
This has led to regulators across the world to focus on ERPs and ratings. 
Companies in India are dealing with both international and domestic investors as some of the 
companies have listed their securities in the overseas markets as well. 
While the SEBI framework will be relevant for India, companies should keep an eye on this topic as it 
is evolving internationally too and be prepared to respond to regulatory developments in this area. 
The new international regulations could impact changes in the methodologies and processes and 
consequent impact on the process of getting ESG ratings. 
Therefore, companies should watch out for the developments in this sphere both in India and 
internationally.

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