SEBI certification mandatory for all Indian and foreign ESG raters; could help improve scores for Indian businesses

As more and more companies begin investing in sustainable practices, the need for a clear way to ascertain how "green" a business really is becomes paramount.

Similar to credit scores determining what type of incentives you might be able to receive, having a solid environmental, social and governance (ESG) rating can help companies unlock pathways to more attractive green funding.

But over the past decade, countless ESG raters have been sporadically popping up, all equipped with their own indices and methodologies. This meant that even if a company received a rating from one rater, it could have a vastly different conclusion from another, making it incredibly hard to discern their actual ESG performance.

In order to remove this parity and any subsequent chance of organisations weaponising this confusion to greenwash their investors and the public, the Securities and Exchange Board of India (SEBI) announced on July 5 that all ESG raters will have to receive certification from the board before they can provide services to Indian entities.

"Provided that a person acting as an ESG rating provider on the date of this regulation coming into force, may continue to do so for a period of six months from the date of this regulation coming into force or such other period as may be specified by the board, or if it has made an application for grant of a certificate for registration within the specified period, till the disposal of such application,” the notification elaborates.

In order for an institution to render their ESG rating services, they will have to be incorporated as a company under the Companies Act, 2013, with ESG marked as the main object under their Memorandum of Association.

In addition, the agency will have to disclose their methodologies for all ratings on their website (while maintaining appropriate confidentiality), and declare the weightage given to all environmental, social and governance factors in the final score.

Furthermore, even foreign entities will have to attain certification from the SEBI, the board decreed. In addition to a few other requirements, the foreign ESG rating provider will need a minimum of five years of relevant experience before they can render services to Indian businesses.

Indian companies tend to get worse ratings compared to their European counterparts without complete and proper explanation, Shailesh Tyagi of Deloitte explains.

To that end, the new provision of transparency and reasoning behind the scoring could certainly help minimise such biases. In addition, many experts are welcoming this move, noting that it would slash non-serious players by discouraging malpractice and greenwashing.

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