An Introduction of ESG Disclosures in Indian Regulatory Space – Part 2

Introduction

In the previous part, we first discussed the relevance of ESG disclosures for stakeholders involved in business processes, and then reflected upon the existing regulatory space for such disclosures along with the Business Responsibility and Sustainability Reporting (“BRSR”) framework, recently introduced by Securities Exchange Board of India (“SEBI”). Taking forward the discussion, this part will analyse the BRSR framework and suggest ways in which it could be further improved.

BRSR Framework: An Analysis

The introduction of the BRSR framework is indeed a step in the right direction. It provides a uniform framework for ESG disclosures while emphasising the granularity and quantifiable presentation of data to enable comparison amongst companies operating in the same sector. Moreover, it classifies the disclosures into two categories – essential (mandatory) and leadership (voluntary). Such voluntary disclosures seek information on a wider set of attributes, including the conduct of the reporting entity’s value chain, which depicts the future path of ESG disclosures in India. In order to be discerning, the Indian BRSR framework needs to keep pace with the changing and evolving ESG disclosure frameworks around the globe. Without the elasticity quotient, the framework would do little to help corporates avoid multiple disclosures to satisfy their customers.

The European Union introduced its regime of non-financial disclosure requirements in 2014 mandating public companies with more than 500 employees to make ESG disclosures. It was amended in 2019 to include additional climate change related disclosures, before the proposal to replace the 2014 directive with a new and more comprehensive sustainability disclosure framework was brought in. One thing that this journey of disclosures in the EU has shown is that sustainability reporting requirements are witnessing constant modifications based on the study of market needs and demands for the future of humanity.

Therefore, after studying the Indian BRSR framework and international practices on ESG disclosures, the following enhancements could be considered:

• The current disclosure requirements under the BRSR framework are minimal, generic, and improperly structured when compared to international frameworks such as that of the EU or Task Force for Climate Related Financial Disclosures (‘TCFD’). It is recommended that the government conducts an impact study of BRSR disclosures made by the top 1,000 listed companies by market capitalisation and update the framework accordingly.
• The BRSR framework is aligned with nine principles of National Guidelines for Responsible Business Conduct, 2019 (‘NGRBC’). It is suggested that the SEBI changes its approach by making NGRBC as a part of the superstructure rather than the foundation. The SEBI should seek disclosure from the companies under broad heads such as business model, policies and procedures, risk assessment and management, outcomes, KPIs, and metrics and targets. Thereafter, these broad heads can be sub-classified under various ESG factors, which could also integrate the existing nine NGRBC principles and leave scope for further improvements based on the market needs.
• To assist and guide international companies or investors in respect of the BRSR framework, SEBI may regard providing a guidance chart mentioning each disclosure requirement under the BRSR framework against the disclosure requirement under various international framework. This could be used as a cross-referencing guide. It would relieve the Indian companies from the burden of disclosing under multiple frameworks and help investors in comparing the performance of Indian businesses of their choice.
• The current BRSR framework is generic, a boilerplate arrangement for disclosures, and is silent on specific sectoral requirements. To encourage the confidence of sector-specific investors, SEBI may consider supplementing the BRSR framework with an accompanying standardised sector-definite disclosure frameworks, post consultation with specific sectoral ministries, regulators, and business leaders. This will improve the comparability of companies operating within the same sector as every sector has its own ESG focus. For instance, for companies operating in the mining, oil & gas, and the real estate sector, environmental disclosures might play a significant role; however, for a BPO or consultancy service provider, social disclosures might be more relevant. Therefore, sector-specific disclosures in addition to the existing framework would ensure proper and adequate disclosures.
• The BRSR framework does not mandate external assurance and independent audit of the disclosures. The SEBI may examine adoption of similar auditing requirements for ESG disclosures as are presently mandated for financial disclosures of a company. This will make companies and audit firms more considerate on ESG disclosures.
• The BRSR framework seeks various responses using a yes/no format despite the absence of any legal or regulatory document to guide the conduct of businesses. For instance, using the yes/no format to ask companies whether they are following all environment-related laws, rules, and regulations may be appropriate, but the same may not be suitable to know if a company has a grievance redressal mechanism in place because neither the SEBI nor the MCA has provided any model grievance redressal mechanism. In such a scenario, a company may report in affirmative even if it has inadequate policies in place.
• While the BRSR framework asks for numerous disclosures on ESG compliances, it does not always seek explanations for non-ESG compliant practices by companies. For instance, the BRSR framework does not seek any explanation from the company if it ‘has failed to put in place relevant policies to tackle greenhouse gas emissions. It is suggested that SEBI follows the ‘comply or explain’ model, as observed in Singapore, and mandate companies to give bona-fide reasons for not adopting / complying with ESG requirements.

Conclusion

The introduction of BRSR framework indicates that India is fast moving on the  path of transparent and responsible business. Companies must, therefore, adopt best practices while disclosing relevant information to not only make themselves aware of transition and physical risks to their businesses but also to avoid potential litigation and reputational risks. With this backdrop, we would like to conclude our blog-series on ESG disclosures with two observations:

First, while the BRSR framework affixes no liability for not disclosing a particular information, or not having any policy in place with regard to any principle, the cost of non-disclosures is the potential loss of market reputation. Businesses stand to lose their market share if they approach the BRSR reporting in a lackadaisical manner. Therefore, while SEBI seems to have introduced the present framework as a mechanism to nudge companies toward giving due consideration to ESG aspects and transition to sustainable ways of doing business, it could move towards a stricter penalty-driven approach if companies are found to be delinquent.

Second, the general approach across nations on ESG disclosures is to suggest underlined principles that eligible companies need to follow while extending freedom to companies to select any internationally recognised framework for disclosure. This creates confusion and burden upon the companies as there are numerous international frameworks with different requirements under each of them. For instance, while TCFD is an internationally recognised framework, its disclosure requirements only pertain to issues relating to climate change. Similarly, while Sustainability Accounting Standards Board (SASB) provides sector-specific disclosure frameworks, its disclosure requirements only deal with the impact of ESG aspects on the financial stability of a business. It fails to capture the impact of business on the environment, which is much emphasised under the Global Reporting Initiative (GRI) framework. In this regard, BRSR framework is a forward-looking disclosure framework as it intends to provide a single framework for companies to disclose all the relevant information, which are presently sought under various frameworks. The EU is also moving in the same direction under its proposed 2021 sustainability reporting framework. The establishment of International Sustainability Standards Board to release one-stop comprehensive disclosure frameworks for companies is another such example. Therefore, if BRSR could be made more robust while retaining its comparability with the existing frameworks, it might become a model disclosure framework and an international benchmark for other countries to follow.

We understand that such changes may not be feasible in the immediate future. While many Indian companies were already accustomed to sustainability disclosures before May 2021, the introduction of the BRSR framework is a new experience for the industry in general and companies might take some time to shift to an era of responsible and transparent business with broad stakeholder concerns as the central focus. The International Financial Services Centres Authority could be of high relevance in this regard. It could introduce such singular but comprehensive disclosure framework in the GIFT city. Based on the experience in the GIFT city, SEBI could update the BRSR framework on a country wide level.