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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Sustainability Audit, ESG Rating and Emerging Mandates from Government and Regulators

A SEBI-registered ESG Rating Provider is asked by a listed client, Sundaram Textiles Ltd, to raise its score because it pays the provider a large annual fee for other advisory work. Which approach is consistent with the SEBI regime's governance expectations for ERPs?

The provider must keep its rating process independent and objective and manage conflicts of interest through policies, not change the score for commercial reasons. Fee relationships cannot influence outcomes. Disclosing the conflict does not make a biased rating acceptable, and promoters cannot approve ratings.

  1. AAdjust the rating, since the client is a major fee source
  2. BDisclose the conflict to the client and then raise the rating moderately
  3. CMaintain an independent, objective rating process and manage conflicts of interest through policies, without altering the rating for commercial reasonsCorrect
  4. DShare the draft rating with the client's promoters and let them approve it

Explanation

The ERP framework requires providers to have policies to identify, avoid or manage conflicts of interest and to keep the rating process objective and independent. Changing a score because of fee relationships defeats this. Disclosure alone does not justify a biased rating, and promoter approval of a rating would undermine independence.

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