Abstract
India’s regulatory environment now calls for the comprehensive ESG disclosures from the top 1000 listed companies in India, as part of SEBI’s Business Responsibility and Sustainability reporting (BRSR) initiative. BRSR aims to include responsible business conduct, support sustainability, and improve transparency by mandating companies to report as part of their annual reporting standardized principle wise ESG disclosures. BRSR is aligned with global best practices and serves the dual purpose of enabling Indian companies to report meaningful non-financial performance to stakeholders and to better manage sustainability-related risk while also facing legal and operational challenges related to the implementation.
Introduction
India’s corporate governance context has undergone dramatic change as mandatory ESG disclosures have been formally applied to larger listed management entities, responding to global regulatory changes and stakeholder imperatives. The Securities and Exchange Board of India (SEBI) established the Business Responsibility and Sustainability Reporting (BRSR) framework in May 2021, that has been applicable from the financial year 2022-23 for the top 1,000 listed entities based on market capitalization, which have to submit standardized ESG information as part of the management entities’ annual reports.
The BRSR framework is an effort to address concerns for global investors, increasing the risk of environmental and social challenges, increased demand for accountability and transparency for businesses in society. The requirement for disclosures under the BRSR framework is legally based on the Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, and the framework establishes precedent for the responsibility of business conduct in India.
Evolution of ESG Disclosure Norms in India
The initial steps of India’s journey towards ESG disclosure took shape in 2011 when the Ministry of Corporate Affairs developed and released the National Voluntary Guidelines (NVGs), which laid out principles for responsible business conduct. These NVGs were then revised, clarified, and expanded upon in 2019, and conceptualized into the National Guidelines on Responsible Business Conduct (NGRBC), as expectations around transparency and truly responsible business practices underwent stricter thinking and consideration.
In 2012, the Securities and Exchange Board of India (SEBI) required Business Responsibility Reports (BRR) to be provided from India’s 100 largest listed entities and extended this BRR requirement to India’s 500 largest entities by 2016 and subsequently to 1,000 entities in 2019.
SEBI released the Business Responsibility and Sustainability Reporting (BRSR) framework for formal disclosure of ESG principles in 2021, which became effective for the largest 1,000 listed entities beginning in 2022-23, thereby instituting ESG principles within a formal statutory element of corporate governance.
Structure, Scope, and Applicability of the BRSR Framework
Structure of the BRSR Framework: The BRSR framework is structured into three parts – General Disclosures (company info, workforce, Corporate Social Responsibility (CSR), pursuit of compliance), Management and Process Disclosures (policies, governance, NGRBC principles), and Principle-wise Performance Disclosures (data metrics on ethics, environment, social & stakeholder engagement). Together, they work to standardize and provide the companies with a common ESG reporting language.
Scope of the BRSR Framework: The main scope of the BRSR framework ranges from a broad range of ESG considerations to nine core principles, such as ethical business practices, employees, environment, human rights and consumer protection. It includes both narrative reports and quantitative indicators that are deemed to communicate relative progress towards leadership targets in non-financial areas, with those for leadership being aspirational.
Applicability of the BRSR Framework: Starting from FY 2022-23, BRSR reporting will become mandatory for the top 1,000 companies listed in India by market capitalization. The BRSR framework is open to voluntary adoption by other organisations. BRSR Core which was introduced in 2023 will require certain mandatory disclosures of key performance indicators (KPIs) and independent assurance of the reporting framework, to enhance transparency and uphold investor confidence.
Regulatory and Compliance Requirements
- SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015 require the top 1,000 listed entities to adopt Business Responsibility and Sustainability Reporting (BRSR) from FY 2022-23. The LODR Regulations have the prescribed format of reporting, timelines for making disclosures and penalties for non-disclosures and thereby ease the transparency and disclosure in regard to ESG.
- Companies will be required to have comprehensive internal ESG frameworks which detail not only how data is collected but also verified, the governance process around this and the actual reporting protocol to ensure that when businesses do report on their performance they are doing so with accurate, standardised and comparable information.
- Examples of common company compliance problems include: data in mixed units, incomplete or inaccurate data and/or a lack of independent third-party verification. Any one of these activity areas could create reputational damage, legal liability and financial risk. SEBI has also formulated Industry Standards for standardisation and confidence that is needed more in larger companies and their value chains.
Comparative Analysis: Indian BRSR Versus Global ESG Disclosure Practices
BRSR is aimed at enhancing the alignment of India’s ESG reporting with leading global frameworks including GRI (Global Reporting Initiative), SASB (Sustainability Accounting Standards Board) and TCFD (Task Force on Climate-Related Financial Disclosures).
The alignment will improve the comparability of both the quality and quantity of ESG disclosures across borders and support understanding and benchmarking for global investors.
As opposed to many jurisdictions like the US and EU that have immediate strict mandates in ESG regulatory regimes, India is a more phased and flexible approach. This carries some advantages for ongoing capacity building and institutionalization of processes, even while maintaining some challenges in terms of standardization and mandatory third-party verification.
International investors are increasingly focused on the credibility and assurance of ESG data around the globe and Indian firms that robustly conform to the BRSR, will likely have a competitive edge in accessing global investment markets with improved transparency, accountability, and demonstrable commitment to sustainability.
Challenges and Recommendations
- Challenges include potential greenwashing where companies did not portray their sustainability efforts honestly, difficulties developing standardized metrics given the unique nature of company’s businesses, high compliance costs and the potential conflict companies may confront between profitability and sustainability performance.
- Recommendations for Governance improvements with ESG reporting included: a) providing more financial compliance incentives, b) providing capacity-building support like training and technical assistance, c) enhancing board oversight to ensure companies consider ESG factors in strategic decision-making and d) increasing independent third-party assurance of leadership metrics in BRSR Core.
- An ongoing collaboration between regulators, companies, auditors and other stakeholders is needed to follow proper reporting standards, adapt to emerging challenges, and spur the broader implementation of best ESG disclosure practices among Indian companies.
Conclusion
SEBI’s BRSR framework is a game changer in Indian company law as it entails ESG disclosures becoming part of the statutory reporting obligations. Its phased introduction has set a new benchmark for transparency, comparability and sustainability of corporate governance from which investors, regulators and civil society are direct beneficiaries. Continual issues with data integrity, assurance, and harmonization to international standards converge as pressing areas requiring further development. The BRSR regime also carries potential to expedite India’s shift towards sustainable and responsible business behaviour.
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WRITTEN BY Stuti Vineet
