IndiaCorpLaw

Analysing MCA’s Proposed Framework on Business Responsibility Reporting

[Yash More and Hitoishi Sarkar are III year students at Gujarat National Law University]

On August 18, 2020, the Securities and Exchange Board of India (“SEBI”) released the Consultation Paper on the format for Business Responsibility and Sustainability Reporting in India.   Interestingly, on August 11, 2020, the Ministry of Corporate Affairs (“MCA”) had also released the Report of the Committee on Business Responsibility Reporting (“MCA Report”) chaired by Mr. Gyaneshwar Kumar Singh (Joint Secretary) at the MCA. The Committee analysed the reports filed by the Top 500 companies in the SEBI-Business Responsibility Reports, studied the prevalent non-financial/sustainability frameworks already being used by companies for making disclosures, and examined the need for a comprehensive non-financial/sustainability reporting requirement by companies.

In this post, the authors delineate the concept of sustainable business reporting in the modern business framework and highlight the benefits of such reporting for companies, their customers, investors, etc. The post also draws a comparative analysis with reporting trends across the globe. It conclusively lays down the various principles that businesses must adhere to while publishing business reports.

Sustainable Business Reporting

Environmental and Social Reporting, referred to as Sustainability Reporting, started in the 1960s in the western world, which then shifted to environmental issues in the 1980s. A 2017 study by the World Business Council for Sustainable Development (“WBCSD”) indicated that the number of “ sustainability reporting provisions” globally had increased tenfold in the 25 years since the 1992 Rio Earth Summit to about a thousand, indicating the complexity and need for such reporting.

The increase in sustainability reporting has been driven by three factors – pressure from stakeholder groups on companies to disclose information, especially on the negative impact of their operations; heightened governmental regulation on these issues to protect rights of citizens and the environment; and most importantly, market demand which has required companies to demonstrate their sustainability performance through the use of voluntary sustainability standards, certifications, etc.

The MCA Report recognises the form in which such information must be disclosed – the financial reporting structures, policies, and practices. The framework has gradually evolved, attained maturity, acceptability, and uniformity across the globe. The Committee noted the growing awareness and activism amongst stakeholders, businesses in particular, and society in general, demanding business accountability for their social and environmental impacts.

Benefits of Sustainable Reporting

Several companies have begun to recognise that investment in social and environmental issues and sustainability reporting can benefit their business. There are several global studies that show that companies that embed Environmental, Social and Governance (“ESG”) into core business practices outperform their peers. A better ESG performance accompanied with better disclosure results in increased value creation to shareholders.

The communities have become aware and empowered, and most companies recognise that it is communities and not governments that provide them with the “license to operate.” There have also been instances of investor activism that are driving business responsibility. For example, there have been demands for disclosures on carbon emissions from energy companies, which are also facing litigation for causing and perpetuating global warming; hedge funds have been holding directors responsible for improving pollution disclosures, etc.

Sustainability reporting enables companies to disclose their plans and activities and thus obtain this license. Employees are also increasingly preferring companies that demonstrate responsible behaviour and a purpose. For example, in a recent survey of about 1,800 employees at large U.S. companies, more than 70% employees echoed that they were more likely to choose to work at a company with a strong sustainable agenda.

Principle Wise Performance Disclosure

The MCA Report aims to help businesses demonstrate their performance in integrating the principles and core elements with key processes and decisions. Indian policymakers often face a dilemma when it comes to labour laws. Principle 3 in such regard aims to foster respect and promote the well-being of all employees, including those in their value chains. It requires details of employees and workmen covered by employee welfare measures under the Maternity Benefit Act, Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, Occupational Safety, Health and Working Conditions Code Bill and Child Labour (Prohibition & Regulation) Act. Although a significant thrust of the MCA Report seems to be on labour laws and welfare. However, the recent pandemic has demonstrated the lackadaisical attitude of Indian policymakers towards labour laws. For instance, multiple states such as Uttar Pradesh, Gujarat, Rajasthan suspended labour laws.

Principle 5 demands that businesses must respect and promote human rights. It requires disclosures on the percentage of employees provided training on human rights policies and issues and details about their remuneration/salary/wages. This principle is in line with the goal of investors who want the best for the employees of a business. For example, in the aftermath of the Rana Plaza Disaster, when about 1,100 people were killed after a garment factory complex collapsed in Bangladesh, a group of socially responsible investors urged 160 major retailers who source clothes from Bangladesh to back the extension of an agreement which promotes the safety of millions of workers in garment factories in Bangladesh.

Global Trends

There has been a considerable global consensus concerning corporate reporting that evaluates corporate entities on several non-financial metrics such as environmental, social, and human rights issues. This is an interesting development considering that many investors in these times would like to examine the risks and opportunities potential of their investment from the standpoint of these non-financial metrics.

Globally, a significant number of voluntary frameworks have been developed by independent third-party agencies to incentivize corporates to deepen their commitment to social and environmental responsibilities. For instance, the United Nations Global Impact enables to report on several principles derived from instruments such as the Universal Declaration of Human Rights, the International Labour Organization’s Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the United Nations Convention Against Corruption.

Several Asian jurisdictions have introduced frameworks on non-financial corporate reporting. For instance, from 2008 onwards, the Shanghai Stock  Exchange (SHSE) mandated sustainability reporting for firms included in the SHSE Corporate Governance Index, firms with overseas-listed shares, and firms in the financial industry. Likewise, the Stock Exchange Bursa Malaysia has mandated sustainability disclosure as a listing requirement for all listed firms. 

Several countries have reporting requirements on specific issues. For instance, climate change-related reporting is prevalent in Australia, Mexico, USA, and France. The Modern Slavery Act, first enacted by the United Kingdom in 2015 and more recently by Australia, asks each company to report on modern slavery not just in its operations but also in its global supply chains, thereby including many Small and Medium Enterprises (“SMEs”) in emerging markets.

Conclusion

The MCA Report strikes a vital  note of consensus regarding the importance of non-financial/sustainability disclosures in the Indian economy. A major thrust of the Committee’s focus has been on the value chain, labour welfare, and women’s participation in economic activity which will further the cause of inclusive development in the Indian scenario.

The Committee has in its report expressed hope that the data captured through its proposed ‘Business Responsibility and Sustainability Report (BRSR)’ would be used to develop a Business Responsibility-Sustainability Index through which corporate entities can be evaluated on the basis of responsible business conduct by investors and the regulatory authorities alike. With concerted policy efforts, such metrics of responsible business conduct can be used banks, credit rating agencies, and other financial institutions, to incentivize responsible business conduct. 

It may be argued that the recommendations of the Committee would be applicable only to companies and therefore would leave a huge chunk of Indian businesses out of its ambit as the mandate of the MCA is limited to regulation of companies. However, it is pertinent to note here that despite the limited applicability of the BRSR formats the impact of such a regulatory measure would be implicitly applicable to most businesses by virtue of their presence in the value chain of these companies. 

– Yash More & Hitoishi Sarkar