The International Financial Services Centres Authority (IFSCA) introduced a comprehensive framework for entities aspiring to operate as Environmental, Social, and Governance (ESG) Ratings and Data Products Providers within the International Financial Services Centre (IFSC). This regulatory development comes as global demand for ESG transparency grows due to net-zero goals, investor interest in sustainable finance, and the increasing need for robust corporate governance. The framework provides a roadmap for entities aiming to enter the ESG rating and data provision space in the IFSC, aligning with both international standards and unique regulatory requirements.
Global Context and Regulatory Backdrop
As the world moves towards sustainable development, ESG ratings and data products have gained critical importance. These ratings and data products provide essential insights into companies’ performance across environmental, social, and governance criteria, helping investors make informed decisions. Global organizations, like the International Organization of Securities Commissions (IOSCO), have emphasized the need for transparency, governance, and effective conflict management within the ESG ratings sector. IOSCO’s recommendations, issued in 2021, have influenced various national frameworks that aim to standardize ESG rating practices worldwide.
Following these global moves, India’s Securities and Exchange Board (SEBI) and IFSCA have also been active in promoting ESG rating activities. In July 2024, SEBI enabled SEBI-registered ESG Rating Providers to conduct rating activities in the IFSC, fostering greater collaboration and aligning regulatory efforts between Indian markets and IFSC authorities.
Key Highlights of the IFSCA’s ESG Framework
Registration and Compliance: Under this framework, entities seeking to act as ESG Ratings and Data Products Providers (ERDPP) in the IFSC must register with the IFSCA. A key highlight is that existing credit rating agencies already registered with the IFSCA are permitted to offer ESG ratings without undergoing a separate registration process. For other entities, compliance with both the new circular and existing Capital Market Intermediaries (CMI) Regulations is mandatory.
Legal Structure and Financial Requirements: Entities looking to register must have a presence in the IFSC, either through a branch, a company, or a limited liability partnership. A minimum net worth of USD 25,000 is required to ensure financial stability. Notably, if a foreign entity operates an IFSC branch, it must separate its IFSC activities from other operations, safeguarding financial soundness and avoiding regulatory conflicts.
Management and Personnel Requirements: A Principal Officer with relevant qualifications and experience in finance, law, or ESG-related areas must be appointed. The framework also mandates the appointment of a Compliance Officer to oversee regulatory adherence. Additionally, the ERDPP must maintain an adequate, trained workforce to manage its ESG-related activities effectively.
Operational Standards: Registered ERDPPs are expected to establish sufficient infrastructure, including physical office space, communication facilities, and an appropriate support system to carry out their functions. The framework underlines the importance of a “fit and proper” assessment for the entity’s key stakeholders, ensuring adherence to ethical and governance standards.
Application Process and Conditional Registration: Interested entities must submit a detailed application, including necessary documents and a non-refundable fee. IFSCA will evaluate each application based on criteria like infrastructure, financial stability, and management quality. If an application fails to meet requirements, IFSCA may reject it but offers a grace period to address any shortcomings.
Implications
The IFSCA’s framework for ESG Ratings and Data Products Providers in the IFSC is a promising step toward fostering a transparent and regulated ecosystem for ESG services in India. By aligning with global standards and integrating local requirements, the IFSC aims to attract credible ESG data providers, further reinforcing India’s position as a sustainable finance hub.
As ESG regulations mature, the demand for reliable, unbiased ESG data and ratings will only increase. This framework not only ensures that entities in the IFSC operate with transparency but also positions India to cater to international investors looking for credible ESG assessments. With robust standards, the IFSC could become a regional leader in sustainable finance, supporting companies and investors as they transition toward a more sustainable future.
