In recent years, ESG, or environmental, social and governance, investing has slowly and steadily made its way to becoming an investment strategy whereby investors put their money in companies that are looking to make the world a better place. ESG investing requires balancing the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities. ESG metrics were not commonly part of mandatory financial reporting, though of late several countries are increasingly making these disclosures mandatory for companies in their annual report or in a standalone sustainability report. Several ESG conscious companies are also voluntarily opting to make ESG disclosures available to the public.

Numerous institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures (TCFD) are working to form standards and define materiality to facilitate incorporation of these factors into the investment process. ESG reporting in India started in 2009 with the Ministry of Corporate Affairs (MCA) issuing the Voluntary Guidelines on Corporate Social Responsibility, since then the reporting landscape has come a long way with the introduction of Business Responsibility Reporting (BRR), Corporate Social Responsibility (CSR), IR, National Guidelines on Responsible Business Conduct (NGRBC) and the newly introduced Business Responsibility and Sustainability Report (BRSR) (introduced through a SEBI circular dated 10th May 2021).

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 Business Responsibility Report. This was later extended to the top 500 listed companies by market capitalisation in 2015. On 10th May 2021, the SEBI introduced a new ESG reporting structure by the name Business Responsibility and Sustainability Report (BRSR). Under BRSR, listed entities (top 1000) need to provide an overview of the entity's material ESG risks and opportunities, approach to mitigate or adapt to the risks along with financial implications of the same. BRSR was introduced with the aim of making it mandatory for the top 1000 listed companies to report their sustainability performance in order to maintain transparency with stakeholders.

BRSR is a questionnaire-based reporting that is divided into 3 sections as follows:

  • Section A: General Disclosures

This section contains details of the listed entity; products/services; operations; employees; holding, subsidiary and associate companies (including joint ventures); CSR; transparency and disclosure compliances.

  • Section B: Management and Process Disclosures

It contains questions related to policy and management processes, governance, leadership and oversight.

  • Section C: Principle-Wise Performance Disclosures

Companies are required to report upon KPIs in alignment with the nine principles of the National Guidelines on Responsible Business Conduct (NGRBC). The section classifies KPIs into two sub-categories that companies are required to report upon: Essential Indicators (Mandatory) and Leadership Indicators (Voluntary).

While SEBI introduced the requirement of BRSR vide its May 2021 circular, in order to give time to companies to adapt to the new requirements, SEBI mandated that the reporting would be on a voluntary basis for the financial year 2021-22. However, for the financial year 2022-23, BRSR is mandatory for the top 1000 listed entities. The pandemic along with the adoption of the Paris Agreement, and other initiatives to combat climate change, have been the major contributors that accelerated the relevance of ESG considerations to investors. ESG related reports provide stakeholders with comparable information of the top companies to help them make informed investment choices. ESG criteria are used by socially conscious investors to screen potential investments. Listed below is an overview of the three criteria used to evaluate companies for ESG investing:

  • Environment. What kind of impact does the company have on the environment? How does it protect/safeguard the environment? This can include a company's carbon footprint, toxic chemicals involved in its manufacturing processes, its corporate policies addressing climate change and sustainability efforts that make up its supply chain.
  • Social. How does the company improve its social impact, both within the company and in the broader community? Social factors include everything from LGBTQ+ equality, racial diversity in both the executive suite and staff overall, and inclusion programs and hiring practices. Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates.
  • Governance. How does the company's board and management drive positive change? Governance includes everything from issues surrounding a company's leadership, executive pay, diversity in leadership, how well that leadership responds to and interacts with shareholders audits, internal controls, and shareholder rights.

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.

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