Sustainalytics to exit India following regulatory overhaul

A spokesperson for the firm tells RI the decision was 'a difficult one'.

Morningstar Sustainalytics will no longer operate in India in response to regulations introduced by the Securities and Exchange Board of India (SEBI) earlier this year, Responsible Investor has learnt.

“Following a careful assessment of the recently adopted new eligibility requirements [from] SEBI, Morningstar Sustainalytics will no longer distribute ESG data and ratings to clients and users in India by 1 December,” said a spokesperson.

The ESG data shop will also cease providing second party opinions for the Indian market.

Coverage of Indian companies will be maintained for global users.

India is one of the first jurisdictions to begin regulating ESG ratings products, together with Japan, following a call to action to do so by global regulatory forum IOSCO in 2021.

But there has been lingering concerns over elements within the rules which stray beyond the scope of IOSCO’s recommendations, such as a requirement for providers to “incorporate the ESG aspects that are contextual to the Indian market, in such a manner as may be specified by SEBI from time to time”.

An “indicative” list of metrics provided by SEBI that meets this objective include the number of jobs created in smaller towns, amount of CSR spending and percentage of dissenting votes received at AGMs.

In contrast, Japan and other jurisdictions that are in the process of introducing equivalent policy measures, have largely focused on disclosures and conflict of interest considerations in line with IOSCO advice to “focus is on transparency and internal consistency… there is no call for standardised methodologies, consistent across the industry”.

ESG ratings providers have been required to demonstrate compliance with SEBI’s rules in order to receive authorisation to operate in India since the rules entered into force in July.

RI understands that Morningstar’s interpretation of the rules is that compliance is mandatory for all ESG ratings and data providers serving India, regardless of where the rated securities are based. The firm did not specify which rule proved unworkable and had triggered the move.

“Our decision not to pursue registration in light of the elevated regulatory requirements was a difficult one that balances these requirements with the market opportunity,” the company spokesperson said.

“This does not affect other Morningstar offerings; we will continue to provide independent data, research, conventional investment ratings, and software platforms such as Direct and Advisor Workstation in India that have earned Morningstar’s strong reputation for investor advocacy.”

The firm confirmed that clients in India had been informed and are being supported in “their transition”.

There are suggestions that other global ESG ratings providers could follow suit although RI was unable to get a response from MSCI and S&P in time for publication. A spokesperson for Refinitiv and FTSE Russell – both of which are owned by the London Stock Exchange – said that the firm was still weighing up its options.

SEBI did not respond to a request for comment.

Morningstar Sustainalytics is often considered a market leader among its peers, with EU regulator ESMA previously citing a survey of sustainability experts which found that MSCI and Sustainalytics were the most frequently cited ESG ratings providers.

The firm was also recognised for issuing the most sustainable finance SPOs in the first six months of 2023.