India regulator opts for principles-backed approach on ESG ratings -sources

FILE PHOTO: The logo of the Securities and Exchange Board of India (SEBI) is pictured on the premises of its headquarters in Mumbai

By Jayshree P Upadhyay

MUMBAI (Reuters) - India's market regulator will adopt a principles-based, rather than prescriptive, approach in its first set of rules, expected over the next few months, for rating a company on environment, social and governance (ESG) issues, two sources said.

The move by the Securities and Exchange Board of India (SEBI) would allow such scores to be assigned to more companies, making it increasingly possible for investors to assess businesses with a yardstick seen to be growing in importance.

The regulator will canvass public opinion on draft rules set to be unveiled in the next two to three months, which it aims to finalise this year.

That follows steps by global regulators such as the European Securities and Market Authority (ESMA), the Securities Exchange Commission in the United States and the China Securities Regulatory Commission (CSRC).

Details of the Indian rules have not been reported previously.

"The regulator wants to steer clear of prescribing too many rules but follow a principle-based approach," said one of the sources, who both sought anonymity as the discussions are confidential. "There will be a lot more focus on disclosures."

The rules would focus on three aspects, such as who pays for the rating, what information is taken into account in deciding the score, and the relative weights assigned to environmental, social and governance policies, the sources added.

A SEBI spokesperson did not immediately respond to an email request for comment on Thursday.

In a shift from the most commonly used model, in which a company issuing securities paying for the ratings, the regulator plans to allow payment by either a company or a group of investors instead, the sources said.

Global rating agencies such as S&P Global Ratings and Moody’s Investors Services have a model in which the company pays to get an ESG score.

"If the investor pays, then the risk of conflict is minimised," said the second source, adding that each model had its advantages and SEBI planned to allow both in the regulatory framework.

"If the company pays then the rating is more accurate and can be accessed by all investors not just the deep-pocketed ones (institutional investors)," added the source.

The rules would permit two categories of ratings providers, the source said.

The first would group those that have a dialogue with the issuer and can get data from the company, while the second would consist of firms assigning ESG ratings solely on the basis of publicly available information, the source added.

Ratings providers will be able to use information from the Business Responsibility and Sustainability Report (BRSR), a mandatory requirement for the top 1,000 listed companies by market capitalisation.

While ratings providers will have flexibility to assign different weights to environmental, social and governance policies they will have to make adequate disclosures of the factors governing ratings, the second source said.

SEBI's approach is largely in line with global practice and the 2021 recommendations of the International Organisation of Securities Commissions.

The global body urged providers of ESG ratings to disclose and use transparent, defined methodologies to assign ratings. (This story has been refiled to correct the word order in paragraph 1)

(Reporting by Jayshree P Upadhyay; Editing by Clarence Fernandez)