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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

Kaveri Power Ltd wants to use an ESG rating in its investor presentation. Its CFO suggests hiring a firm to issue the rating, and that firm would also advise Kaveri on improving the same rating for a consultancy fee. Which concern is most relevant under the SEBI framework for ESG Rating Providers (ERPs)?

The key concern is conflict of interest. Under SEBI's regime for ESG Rating Providers, a provider must identify, disclose and manage conflicts and keep rating work separate from advisory work for the same entity, to protect the independence and credibility of its ratings.

  1. AConflict of interest, so ERPs must manage and disclose such conflicts and keep advisory activity separateCorrect
  2. BNo concern, since ERPs may freely advise the entities they rate
  3. CThe concern is only that the rating will be too high
  4. DThe concern is that ERPs cannot be paid by rated entities at all

Explanation

SEBI's ERP regime requires rating providers to avoid and manage conflicts of interest, including through segregation of rating and other activities and disclosure. It does not ban the issuer-pays model entirely, and the concern is independence, not the score level.

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