India: Introduction To Environmental, Social, And Governance (ESG) Disclosures In India With An Overview Of The Global Standards On ESG

Introduction

ESG (Environmental, social, and corporate governance) is a term that has been coined to refer to specific data designed to be used by investors for evaluating the material risk that the organization is taking on based on the externalities it is generating.

The data produced can also be used within an organization as metrics for strategic and managerial purposes. Additionally, the investors may use ESG data beyond assessing material risks to the organization in their evaluation of enterprise value, specifically by designing models based on assumptions that the identification, assessment and management of sustainability-related risks and opportunities in respect to all organizational stakeholders leads to higher long-term risk-adjusted return. Organizational stakeholders include but not limited to customers, suppliers, employees, leadership, and the environment. Broadly the ESG can be categorised as follows:

• Environmental aspect: Data is reported on climate change, greenhouse gas emissions, biodiversity loss, deforestation, pollution, energy efficiency and water management.

• Social aspect: Data is reported on employee safety and health, working conditions, diversity, equity, and inclusion, conflicts and humanitarian crisesand is relevant in risk and return assessments directly through results in enhancing (or destroying) customer satisfaction and employee engagement.

• Governance aspect: Data is reported on corporate governance such as preventing bribery, corruption, diversity of Board of Directors, executive compensation, cybersecurity and privacy practices, management structure, executive pay, diversity in leadership, manner in which the leadership responds to and interacts with shareholders, audits, internal controls, and shareholder rights.

Since 2020, there has been accelerating interest in overlaying ESG data with the Sustainable Development Goals (SDGs), developed based on work by United Nations beginning in the 1980's.

Evolution of ESG in India

ESG reporting in India commenced in 2009 with the Ministry of Corporate Affairs (MCA) issuing the Voluntary Guidelines on Corporate Social Responsibility. Ever since the reporting framework has come a long way with the introduction of Business Responsibility Reporting ("BRR"), Corporate Social Responsibility (CSR), National Guidelines on Responsible Business Conduct (NGRBC) and the newly introduced Business Responsibility and Sustainability Report (BRSR) (introduced through a SEBI circular dated 10 May 2021, discussed below).

The Indian Companies Act introduced one of the first ESG disclosure` requirements for companies. The Indian companies are required to include in report by their Board of Directors details regarding conservation of energy, along with annual financial statement. Further, it is the statutory duty of a director of an Indian company to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.

In recent times, adapting to and mitigating climate change impact, inclusive growth and transitioning to a sustainable economy have emerged as major issues globally. There is an increased focus of investors and other stakeholders seeking businesses to be responsible and sustainable towards the environment and society. Thus, reporting of company's performance on sustainability related factors has become as vital as reporting on financial and operational performance. The Securities and Exchange Board of India ("SEBI") introduced the requirement of ESG reporting back in 2012 and mandated that the top 100 listed companies by market capitalisation file a BRR. This was later extended to the top 500 listed companies by market capitalisation in 2015.

Pursuant thereto, on 10 May 2021, SEBI introduces new reporting requirements on ESG parameters called the Business Responsibility and Sustainability Report ("BRSR") by amending regulation 34 (2) (f) of SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 ("LODR Regulations"). The BRSR is accompanied with a guidance note to enable the companies to interpret the scope of disclosures. The BRSR seeks disclosures from listed entities on their performance against the nine principles of the 'National Guidelines on Responsible Business Conduct' (NGBRCs) and reporting under each principle is divided into essential and leadership indicators. The essential indicators are required to be reported on a mandatory basis while the reporting of leadership indicators is on a voluntary basis. Listed entities should endeavor to report the leadership indictors also.

The BRSR is intended towards having quantitative and standardized disclosures on ESG parameters to enable comparability across companies, sectors and time. Such disclosures will be helpful for investors to make better investment decisions. The BRSR shall also enable companies to engage more meaningfully with their stakeholders, by encouraging them to look beyond financials and towards social and environmental impacts. The listed entities already preparing and disclosing sustainability reports based on internationally accepted reporting frameworks (such a GRI, SASB, TCFD or Integrated Reporting (IR)) may cross-reference the disclosures made under such framework to the disclosures sought under the BRSR.

Applicability of BRSR: With effect from the financial year 2022-2023, filing of BRSR has been made mandatory for the top 1000 listed companies (by market capitalization) and has replaced the existing BRR.

With ESG investing becoming more mainstream, SEBI's above disclosure requirements through BRSR have been introduced to keep pace with such investment strategies, and growing concerns about responsible corporate governance and climate change.

In addition to this, companies are mandated to include disclosures on opportunities, threats, risks and concerns as part of their annual reports under Regulation 34(3) of the LODR Regulations. However, such disclosure requirements do not seek details about the metrics and processes adopted by companies to identify such opportunities or risks nor mandates the companies to chart its progress over the course of time.

On a related note, the Indian Banks' Association (IBA) had also released the National Voluntary Guidelines for Responsible Financing in 2016, laying down broad and general principles towards 'integrating ESG risk management into Financial Institution's (FIs) business strategy, decision-making process and operations.' For instance, Principle 2 provides that FIs 'should integrate the analysis of environmental, social and governance factors in their investment, lending and risk-management processes across business lines to minimize adverse impact on their own operations and on society.

Introduction of the BRSR framework

Apart from introducing a relatively comprehensive disclosure framework, BRSR inter-alia also includes the following aspects, with an aim to enhance ESG complaint business practices in India:

• Disclosure of adequate policies and mechanism that a company implements to remain ESG-compliant. BRSR lays considerable emphasis on quantifiable metrics for ensuring comparison across sectors, companies, and time periods;

• Enhanced disclosures on climate and social related issues;

• BRSR allows interplay for organisations that are already publishing sustainability reports under other internationally recognized frameworks.

Global regulations and best practices in relation to ESG

One of the major European Union laws is the Non-Financial Reporting Directive 2014/95/EU ("NFRD") which requires public-interest entities with more than 500 employees to prepare and disclose a 'non-financial statement' (relating to diversity and non-financial information) in their yearly management report. Further, the directive applies on a "comply or explain" basis which requires companies to provide clear and reasoned explanations for any non-compliance.

On 21 April 2021, the European Commission adopted a package of measures, which includes a proposal for a Corporate Sustainability Reporting Directive ("CSRD"). The CSRD expands the scope of NFRD to all listed companies, including SMEs and introduces mandatory EU sustainability reporting standards for environmental, social and governance aspects to be further worked out by the European Financial Reporting Advisory Group (EFRAG). The proposed CSRD also further clarifies the obligation to report according to the double materiality perspective: that is companies should report (i) information necessary to understand how sustainability matters affect them, as well as (ii) information necessary to understand the impact they have on people and the environment.

While NFRD has been in effect since 2018, CSRD is yet to come into effect. For financial years starting on or after 1 January 2024, CSRD will apply to companies that are already subject to NFRD, with the first report expected to be produced in 2025. Large companies that are not presently subject to NFRD will have to apply CSRD from financial years starting on or after 1 January 2025 and therefore report in the year 2026 on 2025 data.

In Asia, the Singapore Exchange has also made climate reporting mandatory for certain sectors, and all issuers are required to provide climate reporting on a "comply or explain" basis in their sustainability reports.

In USA, on 21 March 2022, the US Securities and Exchange Commission (SEC) proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant's greenhouse gas emissions, which have become a commonly used metric to assess a registrant's exposure to such risks.

Another sustainability reporting instrument by the New York Stock Exchange (NYSE) mandates that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees.

China has regulations in place that act as instruments of mandatory disclosure on sustainability matters. The Environmental Information Disclosure Act, 2008 mandates corporations to disclose environmental information. Annual resource utilization, pollution levels, waste generation, disposal method, and some other aspects can be disclosed voluntarily to gain more rights to grants and public support. A separate report with an environmental disclosure is also requested from large companies listed on the Shanghai Stock Exchange.

In April 2022, the Canadian federal government released its 2022 budget, where it was proposed to bring mandatory climate-related reporting requirements to federally regulated banks and insurance companies. The financial institutions in scope will be required to publish their climate disclosures in alignment with the Task Force on Climate-related Financial Disclosures (TCFD) framework, beginning in 2024. Although the regulation focuses on federally regulated financial institutions, the government expects it to have an impact on Canada's entire economy.

In addition to the above-mentioned regulations, global reporting standards such as the Global Reporting Initiative, and the Sustainability Accounting Standards Board Standards provide detailed industry-specific disclosure checklists and ESG-metrics which go beyond the general nature of BRSR.

Conclusion

India is steadily moving towards developing regulations around environment, social and corporate governance. With the implementation of the BRSR framework, India has joined the group of countries to have issued comprehensive sustainability reporting frameworks in the recent past. Even though the ESG reporting requirement is currently limited to the top 1,000 listed companies by market capitalization, the experience with BRR only indicates that a wider range of companies would soon be covered by the BRSR framework.

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