ESG disclosure standards that have risen dramatically in the last decade, holding firms accountable for identifying and transparently incorporating environmental, social, and governance (ESG) responsibilities in annual reports.
The concept of materiality has aided firms in identifying material items and/or services that are important to their long-term, sustainable growth in a global market. In response to these worldwide trends, Securities and Exchange Board of India (SEBI), have adopted new sustainability reporting criteria as part of its ongoing efforts to improve ESG disclosures.
This new, Business Responsibility and Sustainability Report (BRSR), reporting format intends to establish ties between a company’s financial outcomes and its ESG performance which can help regulators, investors, and other stakeholders get a more accurate picture of a company’s overall stability, growth, sustainability and transparency.
SEBI has mandated that the BRSR will be applicable to the top 1,000 listed entities (by market capitalization) for reporting on a voluntary basis for FY2021–22 and on a mandatory basis from FY2022–23.
Many companies are offering expertise to support and handhold to align with the requirements of SEBI for BRSR reporting and assurance compliances.
Read: Mumbai to host India ESG Summit 2022 on 31 May – India CSR
ESG Market in India
With aggregate ESG assets expected to exceed USD 50 trillion by 2025 (representing more than one-third of the aggregate projected global assets under management (AUM) together with the backing of prominent investors, such as BlackRock and Brookfield, ESG investing can hardly be described as merely an investing trend. In India, for example, the AUM of ESG funds in 2021 totalled to INR 123 billion, nearly five times the AUM from two years ago. There are at least 10 ESG mutual funds in India today and, for benchmarking, investors here can now choose from multiple ESG indexes.
ESG and Impact Investment
ESG investing, in simple terms, means investing based on not just traditional financial factors but also non-financial environmental, social and governance (or ESG) factors. An important part of the contemporary debate of shareholder versus stakeholder capitalism, ESG investing continues to gain momentum today, as a growing number of institutional investors (and their clients, in particular) look to align financial returns with ethical and other non-financial considerations. This momentum is further supported by increasing empirical evidence of a positive correlation between rates of return and higher ESG scores as well as policy and regulatory actions by governments and regulators aimed at combating climate change and economic and social inequalities.
Like most investors, ESG investors also seek and depend on reliable information before choosing how to allocate capital and where to invest. This explains the current emphasis on ESG disclosure and reporting, not just by investors and lenders but by governments and regulators as well.
ESG Reporting
The focus on ESG reporting in India is still being driven by European and other foreign investors and it is hoped that Indian institutional investors catch up soon. Like most developing countries, India has to contend with a number of ESG issues, which are further compounded by the scale of the country’s population, its socio-economic diversity, and its growth ambitions. Higher quality ESG reporting by Indian companies will therefore be an important tool in guiding greater volumes of capital towards sustainable purposes by rewarding companies that both promise and deliver on ESG commitments.
The BRSR framework is a laudable milestone and should hopefully help provide public markets investors in India with more meaningful and reliable ESG data. As next steps, the BRSR framework can gradually be extended to other listed companies and unlisted companies operating in regulated or resource intensive areas, so long as their compliance burden is not unduly increased. Smaller companies, in particular SMEs, should continue to be encouraged to use their own KPIs (or those advised by their investors or lenders), whether through selective disclosures from the BRSR or specialised reporting standards like the B Impact Assessment, or adopting an international standard like ISO 26000.
