[Aanchal Kabra is a 5th year B.A. LLB (Hons.) student at the West Bengal National University of Juridical Sciences, Kolkata]
Sustainable finance has been gaining considerable prominence in corporate India. This conception of finance refers to finance which integrates environmental, social, and governance (‘ESG’) criteria into business and investment decisions, in an effort to increase benefits to the business and all other stakeholders. Recent scholarship suggests that mainstream integration of these factors into Indian businesses is essential to achieve India’s sustainable developmental goals, mentioned at COP-26, which include an increase in renewable energy procurement by 2030 and reduction of carbon emissions by 2050. Additionally, foreign and Indian investors are increasingly considering ESG as a major factor while evaluating corporate performance and risk. Globally, ESG assets are expected to rise to $50 trillion by 2025, reshaping nearly $140.5 trillion of assets under management. India’s ESG assets have multiplied nearly 4.7 times in two years and have constituted over 12,300 crore rupees in November 2019. Resultantly, this has led to rapidly changing non-financial disclosures required from companies in India. Increased awareness regarding ESG disclosures is now of paramount importance due to the mandatory disclosure requirement imposed on top 1000 listed companies by market capitalization from the financial year 2022-23.
The Journey so Far
In 2009, the Ministry of Corporate Affairs (‘MCA’) introduced the ‘Corporate Social Responsibility Voluntary Guidelines’ to guide companies to conduct their business in a responsible and ethical manner. These guidelines incorporate most ESG pillars including respect for labour rights, respect for the environment, and activities for social and inclusive development. After extensive discussion with various stakeholders, these guidelines were modified into the ‘National Voluntary Guidelines on Social, Environment and Economic Responsibilities of Business’ (‘NVGs’) in 2011. Aside from the core principles, these guidelines also included a strategy for adopting the framework, various indicators, and framework for reporting of the same. Accordingly, in 2012, the Securities and Exchange Board of India (‘SEBI’) imposed obligations on the top 100 listed companies by market capitalization to include the Business Responsibility Report (‘BRR’), as denoted by the NVGs, as part of their annual disclosures. The BRR required companies to make certain sustainability disclosures. This obligation was extended to top 500 listed companies in 2015. In 2017, SEBI advised companies to voluntarily adopt ‘integrated reporting.’ Such an integrated report sought to provide information about how an organization would create “value over time”. Subsequently, the BRR requirement was extended to the top 1000 listed companies by market capitalization for financial year 2019-20.
In March 2019, the MCA revised and updated the NVGs into the ‘National Guidelines on Responsible Business Conduct’ (‘NGRBCs’). The NGRBCs were mapped against the sustainable development goals (‘SDGs’) to promote holistic development in line with the SDGs. Subsequently, the MCA formed a committee to align the BRR framework with NGRBCs. The committee prescribed a modified format which better reflected the NGRBCs, called the ‘Business Responsibility and Sustainability Report’ (‘BRSR’). It recommended that the report be required from the top 1000 companies by market capitalization, which followed requisite consultation with all stakeholders by SEBI. Further, it also suggested that the MCA extend such obligation to unlisted companies beyond a specified threshold of turnover. It additionally endorsed a Lite version of the BRSR for smaller companies on a voluntary basis. This was especially required as until then only the top 500 companies had consistent experience of providing BRRs.
The BRSR is structured into three sections, with each section serving a particular purpose. Section A deals with a company’s general disclosures including its size, location, number of employees, products and services, markets services, and corporate social responsibility activity. It also requires additional information on contribution of exports to total turnover, types of customers, numbers regarding diversity of employees such as women and differently abled persons, and several transparency and disclosure compliances which discuss grievance redressal. Significantly, this section also requires a company to disclose the risks or opportunities presented to their business due to sustainability issues.
Section B provides an overview of the management processes of a company. It requires disclosures from the company relating to each NGRBC principle concerning leadership, governance, and stakeholder engagement. It aims to understand whether a company is in the process of aligning itself with the NGRBCs. Significantly, it allows companies to disclose principles that are not material to their business, thereby allowing investors to evaluate a company using principles relevant to it.
Section C delves further into the level of compliance by the company with the NGRBCs by detailing its performance in respect to each principle and core element of the NGRBCs. The questions in this category are divided into essential, or those questions which are mandatory, and leadership, or voluntary, questions.
Subsequently, SEBI made the publication of the BRSR voluntary for the top 1000 listed companies by market capitalization for financial year 2021-22 and mandatory from financial year 2022-23.
BRR v. BRSR
The BRR was more theoretical in nature, requiring disclosure with several crucial data points. However, its lack of exhaustiveness had earlier led to several key issues. For instance, a study carried out by the Indian Institute of Corporate Affairs on the BRRs of top 500 listed companies for financial year 2018-19 revealed that while companies were capable of providing complete information, the accuracy and clarity of the information were dubious. In a similar vein, another study pointed out that while most companies have instituted policies for the requisite NVGs, they often failed to provide links to the same. Additionally, almost every company had guidelines in place for ethical sourcing of material, yet there was an absence of disclosure of data about the percentage of products sustainably sourced. Further, only three out of five companies opted to use the BRR format suggested by SEBI. One of the biggest shortcomings of the BRR was that it failed to standardize reporting in a manner where disclosures of companies could also be cross-checked and compared by investors, thereby making ESG merely perfunctory for companies.
In contrast, the BRSR is intended to be a single unified report for non-financial disclosures regarding sustainability information. It aims to standardize and create a uniform framework, improving upon several of the failures of the BRR. In comparison to the 13 pages of BRR, it is 77 pages, with a focus on globally recognized as well as domestically developed indicators. Not only does the BRSR attempt to augment transparency by requiring both qualitative and quantitative data, but it is also more unform as it contains guidance notes for companies to follow. SEBI has also allowed inter-operability of data, which allows companies who may be preparing their reports on basis of other international frameworks to cross reference the disclosures sought under the BRSR with disclosures made under these frameworks. This will ensure greater uniformity for international investors and also reduce the burden on multi-national companies and Indian exporters.
The BRSR is an investor’s comprehensive resource for sustainability information regarding companies. Yet, it still lacks certain nuance which could prove to be a problem for regulators and other stakeholders in the future. For instance, there is an absence of requirement of an independent audit for the disclosures made in the BRSR. Considering that the BRSR contains several questions which have merely “yes/no” answers or are based on information available only to top executives of companies, investors could face being misled without third party confirmation of a company’s compliances. This may be especially true when companies have to disclose significant information such as risks posed to them by relevant ESG considerations, a factor which is material for investors to understand the company’s sustainability policies. Additionally, while the BRSR allows inter-operability of data, even under similar disclosure headings, it may ask for more or different information as compared to international standards. This would continue to disproportionately burden Indian exporters and multi-national companies who will be forced to report their sustainability practices under various standards, which may be stricter than Indian law. Europe, for instance, requires disclosures based on double materiality. Finally, the BRSR remains generic in nature and lacks sector specificity. While it allows for companies to point out which NGRBC is immaterial to them, it fails to account for that the fact that certain sectors may need to disclose additional information to ensure relevance, uniformity and transparency. The constitution of a committee by SEBI to develop sector specific disclosures and disclosures relevant to the Indian context is helpful.
Thus, while the BRSR appears to be a step in the right direction for India’s ESG journey, further modifications to the report are required to ensure that it fully integrates ESG pillars into the functioning of corporate India and provides investors with complete information to make sound and informed financial decisions.
– Aanchal Kabra