As Environmental, Social and Governance (ESG) issues become relevant to the sustainability of a business, Indian corporates are gradually recognizing the importance of ESG disclosures. ESG reports enable organizations to communicate their environmental and social impacts and their governance practices to stakeholders – customers, employees, shareholders, lenders, regulators, and suppliers – among others. Over the last decade, sustainability reporting has become a critical medium for businesses to showcase their commitment to sustainable development and transparency.
With the release of S1 and S2 standards, the International Financial Reporting Standards (IFRS) Foundation has taken the initiative to better connect the sustainability standards to accounting standards. Globally, investors and lenders are increasingly focused on ESG risks while making investment decisions. With better connectivity between financial and sustainability information, investors will get a comprehensive view.
In recent years, India has also seen a surge in ESG-focused mutual funds that invest in public capital markets. Special Impact Investment Funds are also set up to drive more investments to sustainable start-ups. A 2023 study by Morgan Stanley Capital International (MSCI) says that about 56% of institutional investors in India consider ESG performance as a key factor in their investment decisions, up from 42% in 2019. Lenders also offer a preferential rate of interest for projects and businesses that have a positive sustainability impact.
India is actively transforming its corporate governance frameworks with global sustainability standards. The Securities and Exchange Board of India (SEBI) has been largely successful in promoting sustainability disclosures through the Business Responsibility and Sustainability Reporting (BRSR) framework.
Sustainability disclosure is not new to Indian corporates and it has been ongoing for a decade. The Ministry of Corporate Affairs (MCA) introduced the National Voluntary Guidelines (NVG) in 2011 to introduce voluntary sustainability-related disclosures. In 2012, SEBI made it mandatory for the top 100 listed companies to file the Business Responsibility Report (BRR), based on the NVG 2011 framework – it covered areas such as environmental responsibility, governance, and community engagement.
In 2017, SEBI issued a circular suggesting the top 500 listed companies to voluntarily adopt Integrated Reporting (IR) in addition to the BRR. IR highlights the connection between financial and non-financial performance. SEBI expanded the BRR mandate to the top 500 listed entities in 2016 and to the top 1000 listed entities in 2019. Later, in May 2021, SEBI introduced the BRSR framework – a significant upgrade to the incumbent BRR framework – and more aligned to global reporting standards such as the Global Reporting Initiative (GRI) and Task Force on Climate-related Disclosures (TCFD). BRSR became mandatory for the top 1000 listed companies from FY 2022-23 onwards.
In July 2023, the BRSR framework was revised to include new KPIs for the BRSR Core. These KPIs are quantifiable to the greatest extent possible, aiming to facilitate comparability of disclosures. With BRSR Core, the framework now also connects financial and non-financial parameters, making BRSR more comprehensive for decision-making.
The BRSR framework, introduced by SEBI, is a standardized approach to sustainability reporting for Indian companies. It is divided into three main sections – (1) General Disclosures (2) Management and Process Disclosures and (3) Principle-wise Performance.
BRSR framework makes sustainability disclosures more data-driven, result-oriented, and comparable – enabling investors to make informed decisions. It encourages businesses to include ESG principles as a part of their executive decisions.
The new revised framework, published by SEBI in July 2023, has embedded several financial indicators drawn from books of accounts. Information such as gender pay ratio, openness of business, intensity, and dollar equivalent values has successfully made BRSR a more connected framework.
To enhance the reliability of BRSR disclosures, SEBI has mandated that the top listed entities follow a prescribed glide path for reasonable assurance of BRSR Core, starting with the top 150 entities from FY 2023-24 onwards.
Financial services, information technology, and FMCG sectors are early adopters of ESG disclosures and have been most proactive in adopting global reporting standards. In contrast, heavy industries like manufacturing, chemicals, and mining have lagged in the adoption of ESG reporting standards and disclosures. Also, mid-sized firms are slow in their approach to adopting ESG and sustainability disclosures, compared to large and multi-national conglomerates.
Data quality and consistency have been a major challenge in the reports provided by companies. Only 45% of companies are known to have disclosed quantified Greenhouse Gas (GHG) emissions and water consumption data in their 2023 reports. Many companies provide vague or incomplete information, making it difficult for rating agencies and institutional investors to assess and compare performance. Some companies sign up for a technology tool to enable data collection and end up with inconsistent and incomplete data without the handholding of ESG and GHG emissions experts.
With the introduction of value chain reporting and the CBAM framework, Small and Medium Enterprises (SMEs) are also required to report on their ESG performance in various forms. The lack of ESG awareness, along with evolving compliance requirements, presents significant challenges for companies, especially for Small and Medium Enterprises (SMEs). Around 60% of SMEs in India lack access to resources, tools, and knowledge to report their ESG parameters. Often, our clients start working on BRSR reports with in-house expertise, but quickly realize that the expertise required for BRSR adoption is very different.
Also, there is a growing risk of ‘Greenwashing’ – as companies exaggerate their ESG performance or even falsely claim their credentials on sustainability initiatives. Often, these risks are partly covered by independent assurance, but a large portion of ESG reports continue to be unaudited. Ensuring the accuracy and authenticity of sustainability reports remains a critical challenge for both – regulators and rating agencies.
ESG and sustainability reporting in India is poised to grow, with a focus on key stakeholders such as investors, regulators, and customers. Over the coming years, ESG reporting will become more standardised and widespread across sectors. SEBI’s BRSR framework is likely to expand in terms of coverage and parameters. Looking at the new global trend set by IFRS S1 and S2, the BRSR framework, with further upgrades, is expected to come close to accounting standards
Assurance will play a crucial role in this transition, as companies seek independent verification of their ESG disclosures. In parallel, ESG ratings will become increasingly significant, as investors rely on these ratings to make informed decisions. Rating agencies will continue to evaluate companies based on ESG performance, with a growing emphasis on both the quality and consistency of disclosures.
Given India’s commitment to decarbonization, the government is expected to introduce stringent environmental regulations, especially for energy efficiency and carbon emissions. This will eventually lead to the development of green finance opportunities and trading platforms for carbon credits.
Sustainability reporting in India has come a long way and has also adapted to reporting based on non-financial risks in the Indian context. With regulatory frameworks like BRSR, investor pressure, and international commitments, India’s corporate sector is gradually aligning itself with global sustainability standards. Today, more companies understand the importance of transparency.
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