Framework for ESG Ratings and Data Products Providers in the IFSC

1 | P a g e Circular F. No. IFSCA-PLNP/12/2024-Capital Markets October 30, 2024 To All entities desirous of acting as ‘ESG Ratings and Data Products Providers’ in the International Financial Services Centre (IFSC) Madam/Sir, Sub: Framework for ESG Ratings and Data Products Providers in the IFSC 1) Globally, the role of Environmental, Social and Governance Ratings and Data Products Providers has seen a significant rise due to factors such as net zero targets in several jurisdictions and companies having their own targets to reduce carbon footprints, demand from investors for businesses to have a positive social impact and pervasiveness of transparency and governance. Further, various regulatory frameworks internationally require disclosures of ESG reports including sustainability reports by entities, thereby increasing the role of ESG Ratings and Data Products Providers. 2) IOSCO published a report in November 2021 on “Environmental, Social and Governance (ESG) Ratings and Data Products Providers” (ERDPPs) providing 10 recommendations for securities market regulators to consider while regulating ERDPPs with a focus on promoting transparency, good governance, management of conflicts of interest, and robust internal systems and controls. 3) Subsequently, securities market regulators in few global jurisdictions have issued frameworks, including codes of conduct, for regulating ERDPPs. An industry-led working group, with the support of the International Capital Market Association and the International Regulatory Strategy Group, created a voluntary Code of Conduct in December 2023, for ERDPPs. 4) SEBI, vide circular titled “Enabling ESG Rating Providers (ERPs) to undertake ESG rating activities under IFSCA” dated July 19, 2024, has also enabled SEBI registered ESG Rating Providers to undertake ESG rating activities in the IFSC in accordance with the framework specified in this regard by the International Financial Services Centres Authority (“Authority”). 2 | P a g e 5) The Authority, vide circular titled “Enabling Credit Rating Agencies to undertake additional activities relating to ESG Ratings and Data Products Providers” dated July 31, 2024 and Master Circular titled “Master Circular for Credit Rating Agencies” dated October 01, 2024, has permitted Credit Rating Agencies, registered with the Authority to undertake activities relating to ESG Ratings and ESG Data Products also in accordance with the said circulars. 6) In this background, with an objective to further develop the ecosystem for ESG Ratings and ESG Data Products in the IFSC, the Authority hereby specifies ESG Ratings and Data Products Providers as intermediaries under clause (d) of sub-regulation (2) of regulation 3 of the IFSCA (Capital Market Intermediaries) Regulations, 2021(‘CMI Regulations’) and further specifies the following framework for ERDPP registered with Authority under CMI Regulations for undertaking activities relating to ESG Ratings and Data Products : Applicability 7) This circular shall apply to the entities desirous of undertaking activities relating to ESG Ratings and ESG Data Products from the IFSC. Definitions 8) For the purpose of this circular, unless the context otherwise requires, the terms defined herein shall bear the meanings assigned to them, and their cognate expressions and variations shall be construed accordingly: (i) “ESG Data Products” shall include products and services relating to ESG-related information; (ii) “ESG Ratings” shall include the broad spectrum of rating products relating to sustainable finance and include ESG scorings, ESG rankings, Sector ESG Ratings, and Thematic scores; (iii) “ESG Ratings and Data Products Provider (ERDPP)” shall mean an entity engaged in the activity (ies) of providing services relating to ESG Rating or ESG Data Product; Explanation - The services relating to independent external review for ESG labelled bonds listed on the recognised stock exchanges in the IFSC are included as permitted services by ERDPPs; (iv) “Registered ERDPP” refers to an ERDPP which has been granted certificate of registration under the CMI Regulations. 3 | P a g e Obligation to seek Registration 9) An entity desirous of acting as Registered ERDPP for undertaking activities relating to ESG Ratings and ESG Data Products in the IFSC, shall be required to seek registration under CMI Regulations and also comply with the requirements specified in this circular besides complying with all applicable norms under the Regulations, and any other circular or guidelines issued by the Authority in this regard, from time to time: Provided that a Credit Rating Agency, registered with the Authority under CMI Regulations, shall not be required to obtain separate registration for acting as ERDPP under this Framework. 10) Securities and Exchange Board of India, vide circular dated July 19, 2024 on “Enabling ESG Rating Providers (ERPs) to undertake ESG rating activities under IFSCA” permitted the ESG Rating Providers registered with SEBI to undertake ESG rating activities in the IFSC in accordance with regulation 28E (d) of SEBI (Credit Rating Agencies) Regulations, 1999 read with para 7.1 of the master circular of SEBI for ESG Rating providers dated May 16, 2024. Para 7.1 of the master circular provides that “CRA Regulations allow ERPs to undertake or offer ESG rating of any product or issuer, as may be required by another financial sector regulator or authority, as may be specified by SEBI, under the guidelines of such regulator or authority.” 11) An ESG Rating Provider (ERPs), registered with SEBI, desirous of undertaking activities relating to ESG Ratings and ESG Data Products in the IFSC, shall apply to the Authority for registration under the CMI Regulations. Application for registration 12) Any entity desirous to seek registration with the Authority for acting as Registered ERDPP, shall submit an application to the Authority in the format specified in Annexure I (Common Application Form) and Annexure II (Additional information specific to ERDPPs). 13) The application shall be accompanied by a non-refundable application fee, as specified in Annexure III. Legal Form of applicant 14) An entity seeking registration with the Authority for acting as Registered ERDPP shall be required to be present in the IFSC by establishing a branch or forming a company or limited liability partnership or body corporate or any other form as may be permitted by the Authority: Provided that the branch structure is permitted only for an entity which is already undertaking activities relating to ESG Ratings or ESG Data Products in India or in a Foreign Jurisdiction: 4 | P a g e Provided further that such entity shall ring-fence its activities in the IFSC from its other activities. Net Worth Requirements 15) An entity seeking registration for acting as Registered ERDPP shall maintain net worth of at least USD 25,000 at all times. Fit and proper requirements 16) An entity seeking registration for acting as Registered ERDPP shall ensure that the entity and its principal officer, directors/designated partners, key managerial personnel and controlling shareholders are fit and proper persons, at all times, in accordance with the requirements specified under CMI Regulations. Appointment of Principal Officer and Compliance Officer 17) The Registered ERDPP shall have at least one person designated as Principal Officer who shall have: (i) a professional qualification or post-graduate degree or post graduate diploma (minimum two years in duration) in finance, law, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognised by the Central Government or any State Government or a recognised foreign university or institution or association or a CFA Charter from the CFA Institute; and (ii) adequate experience in activities relating to credit ratings or ESG Ratings or ESG Data Products. 18) The Registered ERDPP shall designate a person as its Compliance Officer for ensuring compliance with the regulatory requirements. 19) The Registered ERDPP shall have adequate human resources commensurate with its business activities in the IFSC. 20) The Registered ERDPP shall ensure that the employees who are directly involved in activities relating to ESG Ratings and ESG Data Products are appropriately trained and have the knowledge and necessary experience for the performance of the duties and tasks assigned. Registration Requirements 21) The Authority shall take into account all matters which it deems relevant for grant of registration and in particular and shall have the following: