Financial Accountability Network, along with over 30 orgs responded to SEBI consultation paper on ERP ratings

Response to SEBI Consultation Paper on Regulating Environmental, Social and Governance (ESG) Rating

Providers for Securities Markets

In the last few years and particularly in the last couple of years Financial Institutions, companies and regulators alike are interested in the ESG framework. It is surely a welcome step for the regulators and companies to take serious cognisance of the impact of environmental, social and governance. The movement for responsible investments and environment and social safeguards have been led and furthered by social movements, civil society organisations and progressive forces for decades. It was such movements and their steadfast fights that forced the likes of the World Bank Group to include environment and social safeguard measures and consultations for the same. Over the years these have evolved into standard procedures for multilateral financial institutions, with due mechanisms to raise questions on any violations of the standards. But when it comes to companies and private investments, the businesses have always stayed away from any regulations.

Hence it is important to understand this new found interest in the ESG framework and why this particular framework is being pushed over all other existing frameworks and standards.

What is the ESG framework?

Environment, Social and Governance framework is popularly known as the ESG framework, the concept itself can be traced back to the Socially Responsible Investment (SRI) of the 70s, this new framework has its origin in the last two decades. In 2004 the then UN General Secretary Mr Kofi Annan invited financial institutions to deliberate and bring out a report on how to better integrate environmental, social and corporate governance issues within the market framework. Twenty Financial institutions1from 9 countries with total assets under management of over 6 trillion

1 ABN Amro, Aviva, AXA Group, Banco do Brasil, Bank Sarasin, BNP Paribas, Calvert Group, CNP Assurances, Credit Suisse Group, Deutsche Bank, Goldman Sachs, Henderson Global Investors, HSBC, IFC, Innovest, ISIS Asset Management, KLP Insurance, Mitsui Sumitomo Insurance, Morgan Stanley, RCM (a member of Allianz Dresdner Asset Management), UBS, Westpac and World Bank Group

USD had participated in developing the report and the process was facilitated by the UN Global Compact and funded by the Swiss government. The Report “Who Cares Wins: Connecting Financial Markets to a Changing World” was brought out in 2005 forming the foundation of the multiple frameworks we see today. This report along

with the “The Legal Framework for the integration of the environment, social and governance issues into institutional investment” produced by the Asset Management Working Group of the UNEP Finance Initiative forms the basis of Principles of Responsible Investment (PRI). Increasingly, multiple institutions and principles of disclosure emerged over the years – Global Reporting Initiative (1997), CDP (2000), Climate Disclosure Standards Board (2007), International Integrated Reporting Council (2010), Sustainability Accounting Standards Board (2011) have emerged over the years.

But what started as a UN initiative to expand the scope of Corporate Social Responsibility two decades ago, became a phenomenon in the last few years. One of the reasons for this shift can be attributed to the increased number of studies and reports published since 2013 that supported that businesses including ESG had better financial returns. The most accurate reason would be the raise of the number of assets under management (AUM) which increased from $6.5 trillion in 2005 to $80 trillion in 2018. Many institutions and research analysts came into the market rating business on their ESG standards. But it was the pandemic and its impacts that changed the ESG framework into the mainstream.

In late 2020 the big four accounting firms – PricewaterhouseCoopers, Deloitte, Ernst and Young, and KPMG jumped on the ESG bandwagon launching their programmes and institutes for training employees and clients on ESG standards. The big four along with the World Economic Forum and International Business Council (IBC) have built on the existing metrics to create 21 core and 34 extended metrics under the classifications – Principles of Governance, People, Planet and Prosperity. These metrics were released in the Davos World Economic Forum, a week after GRI, SASB, CDP and CDSB which set the frameworks and standards for sustainability disclosure, including climate-related reporting, along with the TCFD recommendations and IIRC brought out a framework for the comprehensive corporate reporting system.

In this context, Indian Regulators have also followed suit with the RBI joining the Network for Greening the Financial System (NGFS) and SEBI bringing in the

Business Responsibility and Sustainability Report (BRSR) in 2021 (updating the previous Business Responsibility Report). The BRSR disclosures are made mandatory for the top 1000 listed companies from 2022-23, other companies can do so voluntarily. The consultation paper is the next step in regulating the ERPs that provide ESG ratings for companies.

What are the problems?

ESG framework:

The demand for responsible investment and holding companies that violate environmental and social responsibilities has been a struggle for decades. To a great extent, these struggles led by activists and people have greatly strengthened the movement against the climate crisis and human rights violations to the extent that it has become impossible for businesses to ignore them any longer.

Businesses have operated with Milton Fredman’s theory (1970) that social responsibility is to increase profits. This was considered as a doctrine that governed corporate businesses and their response to the environment and social responsibility. Critics believe that the influence of Friedman’s theory on business has furthered inequality and impoverished people. Big businesses have violated environmental laws and have caused scores of human rights violations across the world. This new engagement with ESG even from its very beginning with the “Who Cares Wins” report has been on the premise that including ESG will be profitable to businesses in the long run. This is not founded on a change, of course, accepting the violations or from a concern for these principles for the actual protection of the environment and human rights concerns, but the corporate world readjusting to the new trend of climate justice.

World over, the gaining momentum in movements against the climate crisis has forced governments and corporations to change laws, accept violations and pay settlements in millions of dollars. The cases against violations have only increased. “World-wide the cumulative number of climate change-related cases has more than doubled since 2015. Just over 800 cases were filed between 1986 and 2014, while over 1,000 cases have been brought in the last six years, with 37 ‘systemic mitigation’ cases against governments”, points out a 2021 report from the Climate Neutrality Forum. The Global Climate Litigation Report (2020) states that in 2017 alone the Litigation

The report identified 884 cases brought in 24 countries and by July 2020 1,550 climate change cases were filed in 38 countries (1,200 in the US alone).

A 2015 case forced the Dutch government to close down a power plant four years earlier than it was planned. In another landmark ruling in 2021, the oil giant Dutch Royal Shell was ordered to cut its emissions by 45 per cent. A case filed by the fishing community of Mudra against IFC in 2011 led to the landmark judgement (2019) that questioned the immunity rights enjoyed by IFC. Many such victories have only set the trend for more people to hold the companies, governments and institutions accountable for their actions.

In 2017 UK based companies Northumbrian Water (£375,000), Filippo Berio UK (£253,906), Anglian Water Services (two payments of £100,000 each), Heineken UK (£160,000), Kerry Ingredients UK (£127,975) and Sandoz (£120,932) made settlements to avoid prosecution. Such settlements have only increased in the past few years.

Hence, the corporate interest in the ESG framework emanates from avoiding financial risks. Unlike SRI, which is based on ethical and moral criteria and uses mostly negative screens, such as not investing in alcohol, tobacco or firearms, ESG investing is based on the assumption that ESG factors have financial relevance, points out Georg Kell. He further states that even now, companies are reluctant to embrace the concept, arguing that their fiduciary duty was limited to the maximisation of shareholder values irrespective of environmental or social impacts, or broader governance issues such as corruption. Much of the Big Four accounting company’s investments are not in climate change but in new technology and international markets.

The renewed focus on ESG has created a market for ESG rating providers, Research analysts who help the company to have better ESG ratings. But with no common or proper definitions for words like ‘sustainable’, ‘green’, ‘eco friendly’ there is justifiable

fear that these are to greenwash companies. A recent article in Financial Times pointed out that 421 out of 593 ESG equity fundshad portfolios that were not Paris-aligned and Climate-themed funds were found to hold positions in large oil and gas stocks. InfluenceMap (London based NGO) said more than half of climate-themed funds are failing to live up to the goals of the Paris Agreement. It also found that 55% of funds marketed as low carbon, fossil-fuel-free and green energy exaggerated their environmental claims, and more than 70% of funds promising ESG

goals fell short of their targets. The NGO’s results are from a study of 723 equity funds—with over $330 billion in total net assets—marketed using environmental, social and governance (ESG) claims and climate-related keywords. The study points out shortcomings in ESG funds of the largest asset managers like BlackRock and UBS Group AG. A report published by the Economist in May 2021 found that some of the world’s biggest ESG funds are “stuffed full of polluters and sin stocks.” Further, the US and German authorities have launched an investigation into Deutsche Bank AG’s asset-management arm DWS Group, after a former executive alleged that the firm overstated the environmental credentials of some of its products.

In the words of BlackRock’s former CIO of sustainable investing, Tariq Fancy “In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community”.

Relevance to the Consultation Paper:

India signing the COP 26 mandate signals a new mainstreaming of sustainable finance. SEBI notes that increasing reliance on such unregulated ESG rating providers in securities markets raises concerns about the potential risks it poses to investor protection, transparency and efficiency of markets, risk pricing, and capital allocation. The paper also points out that the lack of transparency in this area gives rise to the risk of greenwashing and misallocation of assets which could lead to infirmity in such ESG rating and a consequent lack of trust thereof. In this context, SEBI has taken the step to regulate the growing market of ERPs which is yet to come under any regulations.

The objectives of the paper are as stated:

  1. To enable the ESG Rating Provider to respond to new developments in this space including new products without being too prescriptive
  2. To give a level playing field to domestic unregulated entities offering ESG Rating as well as allowing well established players

A paper proposes:

  • Any listed entity that requires ESG rating will be required to get it only from SEBI accredited rating provider
  • Credit agencies and Research Analysts have been considered for accreditation as ESG rating providers.
  • There has to be a clear distinction between ESG Impact Ratings—which measure a company’s impact on the environment and society—from ESG Financial Risk Rating—that measures impact of ESG factors on a company’s business and financials. Currently, there are more in the second category
  • Rating providers need to be transparent on their usage of terms, methodology, products being provided, indicators used for ratings, sectoral classification. It also requires the rating providers to disclose their annual reports and any potential conflict


The movement for the environment, climate and human rights have their roots in decade long struggles that have put justice at its core. As mentioned at the outset of the response, decades of struggle has resulted in some of the major shifts in perceptions, acceptance and even changes in laws and regulation regarding business and environment, social issues. Any further changes to these regulations need to uphold principles of justice and should be in the line of expanding the scope and depth of existing standards achieved.

The paper states that the need for a regulatory framework has increased because India is a signatory to the COP or Paris agreement. The need for regulation arises because companies have violated the environment and have committed human rights violations. The paper reflects more a rush to bandwagon than a commitment to the environment and social justice.

Areas, where the paper falls short of other than the overall perspective, is given below:

The need for ESGs or ERPs as they are gaining currency is to tap into the sustainable development market that is capped up north of $35 trillion globally, and has actually decelerated due to pandemic, and is all set to reverse course once economies start hitting mainline. In a scenario such as this, segregating ratings as provided by the agencies based on the information disclosed by the companies from those that merely are policy-oriented becomes crucial. This has been the Achilles’ heel for regulators as

much as regulator-accredited rating agencies. In other words, there is quite a spacious room for discrimination. This colludes with the subscription-based model to make things murkier, and with such a gigantic market to be tapped, both these possibilities are likely to get murkier.

Existing Impact Assessments:

So far, Environment Impact Assessment was introduced in 1978 as a result of struggles against detrimental environmental impact caused by many river valley projects. EIA was included under the Environment Protection Rules (1986) which allows restrictions on construction and expansion of specific projects that have adverse environmental impacts. The EIA notification of 2006 gives a four-stage process for obtaining environment clearance – screening, scoping, public consultation and appraisal. While there have been problems with the implementation of this process, it had a framework that gave scope of consultation with all stakeholders. In 2020 i.e. since the ESG framework became ‘mainstream’, the EIA was amended. EIA (Amendment) 2020 allows ‘ex post facto clearance’ route under which certain projects can go ahead with the construction without obtaining the necessary clearance, subject to the payment of fines in cases of violations, subsequently, which is in violation of the EIA. Currently, there is a strong movement against the new amendment.

Now, with the new model of voluntary adaptation of ESG policies and private rating agencies giving ratings to companies, this model will destroy the battles fought for decades by movements and civil society organisations.

Definitions and Standardisation:

The paper, despite warning about the threat of greenwashing with unregulated ERPs, seems to be making the same mistake by not standardising. Quoting the earlier regulation on credit agencies which came out in 1999 but the standardisation of definitions was done only in 2011, the paper says that a similar approach is sensible. But given the confusion over different terms and definitions, there is an urgent need for standardisation. Given that the scope for greenwashing is more due to the confusion and we have seen reports of many companies using these confusions to their advantage, a delay in the process will only lead to more greenwashing.

There needs to be a clear definition of the terms used and their meaning so that words like ‘sustainable’ ‘green’ ‘social responsibility are not misused and should have implications for false claims. There has to be a standard use of such terms across the country, and rating agencies and companies should be made to abide by those terms to avoid appropriation of a progressive language for profit maximisation. Even the definition of what each of the components in Environmental, Social and Governance will entail. This will only increase more confusion. At least the rating agencies should follow similar components within each of these categories.

Conflict of Interest:

According to the paper, Credit Rating Agencies are identified as ERPs as they are already in the process of giving ratings to companies. Firstly, Credit ratings and ESG ratings follow very different skills and methodologies. Secondly, if Credit Rating Agencies are also providing ESG impact assessment for those companies that they are also giving credit ratings it will clearly be a conflict of interest. The subscription-based model proposed, as mentioned earlier, is only going to compound the problem. Credit Rating Agencies should not be allowed for ESG impact assessments.

Tracking violations of companies:

SEBI should consider and anticipate based on the global trends to avoid cases of greenwashing. It starts by understanding that the need is to have stricter norms to force companies to comply with environmental and social safeguards, and not let the responsibility only rely on ratings from agencies. India has seen a number of cases where companies have openly flouted guidelines and laws for their profit maximisation. Globally too there are an increasing number of cases where ESG ratings have been used to greenwash dirty investments. The paper, in its rush to emulate global standards, has not incorporated mechanisms that would prevent such violations.

Access to Remedy:

There is an increasing shift towards self accreditation and ratings from private companies than by regulators and institutions which also have legal measures or actions taken for violation of any ESG policy. The onus of environment and social policies cannot be only limited to accreditation from private firms. In such a model

there is no scope for access to remedy. The paper does not indicate what will be the course of action taken by the regulator in case of violations. It also does not indicate what course of redressal can an individual or an entity take to report any violation.


Given the seriousness and devastating impacts that can be caused through violations of environmental and social safeguards, there needs to be monitoring of the said policies. The current model equips the rating agencies to give out ratings based on their policies. Without mechanisms to ensure that these policies are implemented and monitoring of the companies these policies will only remain in paper.

There has to be an independent monitoring mechanism that would consider opinions from all stakeholders including the people who are affected through the investments. This is more important in the case of an impact assessment.

Mandatory disclosures:

The ESG framework has been made mandatory for the top 1000 listed companies. But the policies which include gender parity in the board, rights of workers, not indulging in human rights violations etc should be mandatory for all companies.


The fundamental problem with the paper is the perspective. The regulator, as is the case with all regulators, seem to miss that they are here to protect the interest of the people. In the context of ESG rating agencies, the paper admits that among the ESG rating agencies there are many who concentrate on giving ESG financial ratings which assess the financial implications for the company due to ESG factors, in simple terms how to protect the company and its profits by incorporating some of these policies. By its own admission, the ESG impact assessment actually looks at the impact of the company on the environment and social policies as it is ‘not mainstream’ and ‘difficult to calculate’. It is unfortunate that the paper that contextualises the need for regulation within the climate crisis and environmental risks, says that ESG impact ratings may be something government organisations, institutional investors and non-governmental organisations may find useful from the perspective of sustainable development.

Just because companies are interested in calculating their financial risks, to only pander for their needs is a sure shot to greenwashing. Hence there have to be components for sustainable development even in the risk ratings.

Reference: history–current-status/?sh=19c69ca22cdd eporting-landscape-is-evolving-in-india :~:text=ESG%20integration%20in%20investment%20strategies,but%20also %20for%20the%20investee loads/Statement-of-Intent-to-Work-Together-Towards-Comprehensive-Corpo rate-Reporting.pdf qalbnx2pv ceo-carmine-di-sibio-as-the-big-four-corporate-accounting-firms-get-serious about-ethical-governance-and-endorse-official-esg-reporting-standards/articl eshow/78262703.cms -matter eporting-landscape-is-evolving-in-india 123.pdf of-esg-greenwashing-is-intensifying te-change INAL-For-Print_.pdf quirements-sustainability-23471.html/ 0the%20Big%20Four%20firms,multi%2Dmillion%2Ddollar%20payouts.&tex

t=All%20three%20groups%2C%20alongside%20EY,international%20standar ds%20for%20measuring%20sustainability. ceo-carmine-di-sibio-as-the-big-four-corporate-accounting-firms-get-serious about-ethical-governance-and-endorse-official-esg-reporting-standards/articl eshow/78262703.cms er-proposes-for-esg-ratings-providers =large%2Dscale%20projects.-,Applicability%20in%20India,over%2030%20cl asses%20of%20projects.


  1. Anita Kapoor, Shehri Mahila Kamgar Union
  2. Ashish Kajla, Centre for Financial Accountability
  3. Bharat Patel, Machimar Adhikar Sangharsh Sangathan
  4. Bhargavi Rao, Environment Support Group
  5. Bilal Khan, Ghar Bachao Ghar Banao Andolan
  6. Daniel Edwin, Human Rights Advocacy and Research Foundation
  7. Gautam Bandhopadhyay, Nadi Gati Morcha
  8. Himanshu Damle, Public Finance Public Accountability Collective
  9. Jameen Bachao Samanvaya Samiti, Singhbhum West, Jharkhand
  10. Jharkhand Mines Area Co-ordination Committee, Jharkhand
  11. Jhumki Dutta, Partners in Change
  12. Kaveri Choudhury, The Research Collective
  13. Krishnakant, Paryavaran Suraksha Samiti and NAPM
  14. Lokesh, Social Security Network
  15. Medha Patkar, Narmada Bachao Andolan & NAPM
  16. Meera Sanghamitra, National Alliance of Peoples’ Movement
  17. Nithyanand Jeyaraman, Vettiver Collective
  18. Omon Mahila Sanghatan, Noamuundi, Singhbhum West,
  19. Jharkhand Prafulla Samantara, Lok Shakti Abhiyan & NAPM
  20. Priya Dharshini, Financial Accountability Network India
  21. Rajendra Ravi, Institute for Democracy and Sustainability
  22. Rajkumar, Bargi Bandh Visthapeeth Sangharsh Samiti
  23. Ram Wangkheirakpam, Indigenous Perspectives
  24. Roma Malik, All India Union of Forest Working People ROSA, Tamilnadu
  25. Sanjeev Chandorkar, TISS
  26. Sanjeev Danda, Dalit Adivasi Shakti Adhikar Manch Saroja,
  27. Citizen consumer and civic Action Group
  28. Sashi Bhushan, Dalit Adivasi Shakti Adhikar Manch
  29. Soma KP, Independent Researcher
  30. Sonu Yadav, Delhi Forum
  31. Soumya Dutta, Bharat Jan Vigyan Jatha
  32. Sridhar Ramamurthy, Environics Trust
  33. Thomas Franco, People First
  34. Umesh Babu, Independent Researcher
  35. Vijayan MJ, Pakistan India Peoples’ Forum for Peace and Democracy
  36. Vimal Bhai, Matu Jan Sangathan
  37. Vinod Koshy, Dynamic Action
  38. Yash Marwah, Let India Breathe

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