ESG Ratings Get a Makeover: SEBI’s Fresh Norms Bring Flexibility and Foresight

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India's market regulator, the Securities and Exchange Board of India (SEBI), has released new guidelines simplifying withdrawal of ESG (Environmental, Social, and Governance) ratings. The development is aligned with industry suggestions and is intended to align norms associated with ESG rating withdrawal with those for credit ratings, bringing flexibility and transparency to ESG Rating Providers (ERPs).

Key Points of the New Norms:

No Subscribers, Rating Can Be Withdrawn: ERPs with a subscriber-pays business model are now allowed to withdraw an ESG rating when there are no subscribers to that rating at the time of withdrawal. But if the rated entity or instrument is part of a package (e.g., a broad index) with active subscribers, the rating cannot be withdrawn for one subscriber alone-it must be withdrawn for all.
Failure to Publish Sustainability Report: Ratings providers can also suspend an ESG rating if the company fails to publish its Business Responsibility and Sustainability Report (BRSR), a core disclosure report for ESG ratings.
Three-Year/50% Tenure Rule: In the case of issuer-pays ERPs, a rating could be withdrawn if the provider has rated the company or the security for three years or 50% of the bond's tenure, whichever is greater. For bonds, withdrawal also needs to be approved by 75% bondholders by value.
Procedural Clarity: The guidelines also make it more explicit that ERPs must comply with documented withdrawal policies, which must be published on their websites. The changes seek to bring more transparency and consistency into the ESG rating process. SEBI's move comes on the back of growing examination of ESG reporting and disclosure mandates in India, in line with global trends as regulators in Europe and the US too reexamine the extent and rigor of sustainability reporting.