Regulation is on the horizon for the ESG ratings market. By the end of this year, the EU will join India in establishing one of the first regulated sustainability ratings markets globally. India has taken a pioneering step by implementing a comprehensive regulatory framework for ESG rating agencies. The Securities and Exchange Board of India (SEBI) now oversees the operations of these agencies, ensuring greater accountability and transparency. [1]
Similar to credit rating agencies, ESG rating agencies in India require authorisation to operate. This process involves rigorous scrutiny of various aspects, including conflict of interest management, analyst qualifications, corporate structure, and fee transparency. While obtaining authorisation can be time-consuming and competitive, it is essential for ensuring market integrity.[2]
However, there remains a notable gap in the current Indian regulatory landscape. SEBI's regulations do not seem to differentiate adequately between credit rating agencies that incorporate ESG factors into their assessments and those that focus solely on ESG. [3]
Surely, excessive red tape can stifle innovation, create a regulatory oligopoly, and potentially drive business elsewhere. And while investors may cheer for stricter rules, there's a risk of focusing too much on short-term compliance at the expense of long-term sustainability. We find evidence for this in the forthcoming discussion on the evolution of CRAs businesses in India. Recent news speculate on Morningstar Sustainalytics and S&P leaving the Indian ESG ratings industry. While Sustainalytics has apparently withdrawn in full [4], S&P has registered its Indian subsidiary Crisil [5].
The key is balance. Europe must find a sweet spot between safeguarding investors and nurturing a dynamic ESG ratings market. By learning from India's playbook and forging international cooperation, the EU can shape a regulatory landscape that drives positive change.
The imperative for regulation in the ESG Ratings market cannot be overstated. While such regulation may come at a cost, it is a necessary step towards establishing a well-functioning ecosystem. The pursuit of clarity and rationalisation in the ESG ratings market is paramount. Those who perceive ESG solely as a matter of recycling or accounting GhG emissions are likely to be disappointed in the coming years. The global institutional effort to develop effective ESG regulations is a testament to the growing recognition of the critical role that ESG plays in sustainable investing and economic development.
To conclude, an ounce of prevention is worth a pound of cure.
Sources
[1] Security and Exchange Board of India: Master Circular for ESG Rating Providers (ERPs), May 16,2024.
[2] The Economic Times. Everyone wants to board India's growing ESG compliance gravy train.
[3] Umakanth Varottil (2023)The Legal and Regulatory Impetus towards ESG in India: Developments and Challenges. NUS Law Working Paper No 2023/003
[4] Responsible Investor. Sustainalytics to exit India after regulatory overhaul, November 23, 2023.
[5] Security and Exchange Board of India: Registered ESG Rating Providers as of September 2,2024
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