SEBI Circular on ESG Rating Providers: Enhancing Transparency and Governance

Posted On - 23 May, 2025 • By - Surbhi Kapoor

Introduction

The Securities and Exchange Board of India (SEBI) recently issued a clarificatory circular modifying key provisions of its Master Circular for ESG Rating Providers (ERPs).[1] Issued in response to stakeholder feedback, the circular introduces greater transparency, standardization, and procedural clarity in the ESG rating process under both subscriber-pays and issuer-pays models. It sets out new rules for rating withdrawal, disclosure norms, audit requirements, and governance standards.

Understanding the Circular

Background

This circular clarifies and modifies certain provisions of the SEBI Master Circular for ESG Rating Providers[2] based on stakeholder feedback and ERP representations.

Withdrawal of ESG Ratings

Reference to Existing Regulation (Regulation 28M of CRA Regulations):

ESG ratings can only be withdrawn if:

  • The issuer is wound up or amalgamated/merged.
  • Other specific cases as may be permitted by SEBI.
  • Must follow ERP’s documented policies published on its website.

Additional Withdrawal Scenarios Introduced:

  • Subscriber-Pays Model:
    • Permissible withdrawal conditions:
      • No active subscribers at the time of withdrawal.
      • If part of a rating package (e.g., Nifty 50) that has ongoing subscribers, withdrawal is not permitted.
      • Withdrawn ratings must not be made available to any future subscribers.
      • Can be withdrawn due to non-availability of Business Responsibility and Sustainability Report (BRSR).
  • Issuer-Pays Model:
    • For securities:
      • Minimum rating period of 3 years or 50% of the security’s tenure, whichever is longer.
      • Must obtain No-Objection Certificate (NOC) from 75% of bondholders by value.
    • For issuers/entities:
      • Minimum continuous rating period of 3 years.

Disclosure of Rating Rationale on ERP Websites

For Subscriber-Pays ERPs

  • Detailed ESG Rating Rationale/Report (as per Para 11.3 of Master Circular) to be shared only with subscribers, not publicly disclosed.
  • Mandatory Disclosure on ERP website:
    • Name of Rated Issuer/Security
    • Sector
    • ESG Rating
    • Date of Rating
    • Segregated year-wise
    • Include BRSR details the rating is based on

Comments by Rated Entities:

Rated entities may provide specific comments on the ESG Rating Report using the standardized format (Annexure A).

Standards for Clarifications by ERPs (Subscriber-Pays Model):

  • ERP must respond to rated entity’s queries using standardized formats developed by the ESG Rating Provider Association in consultation with SEBI.
  • These standards aim to:
    • Ensure minimum required clarifications.
    • Protect intellectual property and confidentiality of the ERP.
  • ERP shall:
    • Disclose these standards and formats on their website.
    • Share them with rated entities when providing the ESG Rating Report.

Disclosure of ESG Ratings on Stock Exchange Websites

  • For ESG Ratings of Issuers:Stock exchanges to create a separate tab/section on the issuer’s page for ESG rating details.
  • For ESG Ratings of Debt Securities:Similar disclosure under a dedicated section on the security’s listing page.
  • Disclosure Format (to be provided by ERP):
    • Name of Rated Issuer/Security
    • Symbol or ISIN (as applicable)
    • Sector
    • ESG Rating
    • Date of Rating
    • ERP Name
    • Business Model (Subscriber-pays / Issuer-pays)
    • Link to PDF of the ESG Rating Press Release

Internal Audit for ERPs

  • Category II ERPs:Exempted from internal audit requirement for two years from this circular’s issuance date.
  • Expanded Audit Qualifications (Modified Para 23.1.3 of Master Circular):Internal audit team must include:
    • Chartered Accountant (ACA/FCA) or Cost Accountant (ACMA/FCMA)
    • Information Systems Auditor: CISA, DISA, or DISSA (Diploma in Information System Security Audit)

Governance Norms for ERPs

  • Relaxation for Category II ERPs:Formation of Nomination and Remuneration Committee (NRC) and ESG Ratings Sub-Committee deferred for two years from the circular’s issuance.
  • In the interim, their functions may be handled by the ERP’s Board.

Annexure A: Standard Format for Comments by Rated Entity on ESG Rating Report (Subscriber-Pays Model)

Subject

Comments on the Rating Report for [Rated Entity / Instrument Name]

Reference

  1. Date of Rating Rationale
  2. Rating Assigned: [Insert Rating]

Specific Comments on ESG Rating Rationale

  • Clearly specify points/data in the ESG Rating Rationale on which clarification is sought.
  • Provide factual corrections or differing interpretations, if any.
  • Limit comments to relevant and material aspects only.

Standards for Clarifications to be Provided by ERP (for Subscriber-Pays ERPs)

These standards, as developed by the ESG Rating Provider Association in consultation with SEBI, include the following principles:

  • Objective:Ensure transparency and fairness without compromising on intellectual property rights of the ERP.
  • Clarification Standards:
    • ERP must acknowledge receipt of comments within 3 working days.
    • Provide clarifications within 10 working days.
    • Clarifications must:
      • Refer to the specific ESG factor/score challenged.
      • Identify data sources used and explain interpretation methodology.
      • If data is unavailable or unverifiable, explain how proxies or assumptions were used.
    • Use clear and non-technical language for clarifications unless technical explanation is necessary.
  • Confidentiality Norms:Proprietary frameworks, scoring models, or algorithms need not be disclosed.Clarifications should summarize methodologies in a way that aids understanding without full disclosure.
  • Format and Record:
    • ERP to maintain written records of the comments received and the response shared.
    • ERP to publish an anonymized log of common queries and clarifications on its website to encourage transparency.

Implications of the Circular on Stakeholders

  • For ERPs, the circular demands more transparency and standardization, particularly in the subscriber-pays framework. They have to publish minimum disclosure items (e.g., issuer name, sector, rating, BRSR basis) on their websites while maintaining confidentiality of proprietary methodologies. ERPs are also required to provide replies to issuer queries within specified timeframes and standardized formats, balancing transparency and intellectual property rights. Also, the internal audit requirements have been broadened to encompass information systems proficiency, with enhanced data governance and integrity. Nonetheless, Category II ERPs are granted temporary relief in the form of a two-year exemption from audit and governance-related compliance, enabling easier operational ramp-up.
  • Rated entities gain procedural clarity within the rating procedure. The standard comment format (Annexure A) introduced strengthens issuers to effectively participate in and question ESG rating reasons. They can now request clarifications through a codified, time-bound procedure, enhancing confidence in the rating procedure.
  • Investors benefit from expanded disclosure standards, particularly via stock exchange websites, which will now include a separate section for ESG ratings. This supports informed decision-making and encourages comparability among issuers and securities.
  • Stock exchanges are now charged with implementing an easier-to-use ESG data infrastructure, further advancing market transparency.

Conclusion

This circular introduces measurable enhancements to procedural clarity, disclosure norms, and stakeholder engagement in ESG ratings. By formalizing withdrawal conditions, mandating minimum public disclosures, and codifying the feedback process, it brings greater consistency to both issuer-pays and subscriber-pays models. While balancing confidentiality with transparency, it empowers rated entities to seek redress and investors to access reliable data. The phased compliance timeline for Category II ERPs reflects a pragmatic approach, encouraging broader market participation without diluting oversight. Overall, the circular tightens operational standards while promoting accountability across the ESG rating ecosystem.

[1]https://www.sebi.gov.in/legal/circulars/apr-2025/clarificatory-and-procedural-changes-to-aid-and-strengthen-esg-rating-providers-erps-_93704.html.

[2]https://www.sebi.gov.in/legal/master-circulars/may-2024/master-circular-for-esg-rating-providers-erps-_83421.html.

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