--- title: "SEBI Circular on ESG Rating Providers: Enhancing Transparency and Governance" date: 2025-05-23 author: "Surbhi Kapoor" url: https://ksandk.com/energy/sebi-circular-esg-rating-provider/ --- # SEBI Circular on ESG Rating Providers: Enhancing Transparency and Governance Posted On - 23 May, 2025 • By - Surbhi Kapoor ![SEBI Circular on ESG Rating Providers: Enhancing Transparency and Governance](https://ksandk.com/wp-content/uploads/Capture-18.png) ## 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]](#_ftn1) 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. ## Table of Contents ## Understanding the Circular ### Background This circular clarifies and modifies certain provisions of the SEBI Master Circular for ESG Rating Providers[[2]](#_ftn2) 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of ESG Ratings #### Reference to Existing Regulation (Regulation 28M of CRA Regulations): ESG ratings can only be withdrawn if: - The issuer is wound up or amalgamated/merged.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Additional Withdrawal Scenarios Introduced: - **Subscriber-Pays Model**: - Permissible withdrawal conditions: - Can be withdrawn due to non-availability of Business Responsibility and Sustainability Report (BRSR). - **Issuer-Pays Model**: - 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: - 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: - Protect intellectual property and confidentiality of the ERP. - ERP shall: - 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)**: - 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: - 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**: - 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 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]](#_ftnref1)[https://www.sebi.gov.in/legal/circulars/apr-2025/clarificatory-and-procedural-changes-to-aid-and-strengthen-esg-rating-providers-erps-_93704.html](https://www.sebi.gov.in/legal/circulars/apr-2025/clarificatory-and-procedural-changes-to-aid-and-strengthen-esg-rating-providers-erps-_93704.html). [[2]](#_ftnref2)[https://www.sebi.gov.in/legal/master-circulars/may-2024/master-circular-for-esg-rating-providers-erps-_83421.html](https://www.sebi.gov.in/legal/master-circulars/may-2024/master-circular-for-esg-rating-providers-erps-_83421.html). **[King Stubb & Kasiva](https://ksandk.com/), Advocates & Attorneys** [Click Here to Get in Touch](https://ksandk.com/ksk/contact-us/) **[New Delhi](https://g.page/king-stubb-and-kasiva) | [Mumbai](https://g.page/king-stubb-kasiva-mumbai) | [Bangalore](https://g.page/king-stubb-kasiva-bangalore) | [Chennai](https://g.page/king-stubb-kasiva-chennai) | [Hyderabad](https://g.page/king-stubb-kasiva-hyderabad) | [Mangalore](https://goo.gl/maps/hUS3gL7bmBgwRnRg8) | [Pune](https://goo.gl/maps/FdXh54RE2Jh5AFLc7) | [Kochi](https://goo.gl/maps/nVtT1vZdbcy7NTiE6) Tel: [+91 11 41032969](tel:+911141032969) | Email: [info@ksandk.com](mailto:info@ksandk.com)** --- ## Office Locations - [New Delhi](https://ksandk.com/locations/top-corporate-law-firm-in-delhi/) (HQ): +91-11-41318190 | info@ksandk.com - [Mumbai](https://ksandk.com/locations/top-corporate-law-firm-in-mumbai/): 3 offices (Nariman Point, Lower Parel, Andheri) | mumbai@ksandk.com - [Bangalore](https://ksandk.com/locations/top-corporate-law-firm-in-bangalore/): bangalore@ksandk.com - [Chennai](https://ksandk.com/locations/chennai/): chennai@ksandk.com - [Hyderabad](https://ksandk.com/locations/hyderabad/): hyderabad@ksandk.com - [Pune](https://ksandk.com/locations/pune/): pune@ksandk.com - [Kochi](https://ksandk.com/locations/kochi/): kochi@ksandk.com ## Contact - [Contact Page](https://ksandk.com/contact-us/) - General: info@ksandk.com | +91-11-41318190 - WhatsApp: +91-7428567444 - [Privacy Statement](https://ksandk.com/privacy-statement/) - [Terms of Use](https://ksandk.com/terms-of-use/)