Environmental, Social and Governance (ESG) refers to certain data that has been gathered to evaluate the material risk that a company might take based on the externalities it generates. The data produced may be used within a company as metrics for strategic and administrative reasons.
In addition, investors may use the ESG data for purposes other than calculating the material risks to the organization while estimating the value of their enterprise. This is done specifically by preparing frameworks based on the understanding that recognizing, gauging and managing risks and opportunities related to sustainability in respect to all organizational stakeholders leads to higher long-term risk-adjusted return.
Note: Organizational stakeholders include customers, suppliers, employees, leadership, etc.
ESG Reporting in India
ESG reporting began in India in 2009, after the Ministry of Corporate Affairs (MCA) issued the Voluntary Regulations on ‘Corporate Social Responsibility’.
After that, the reporting process has been continuously improved and evolved with the introduction of:
- Corporate Social Responsibility (CSR),
- Business Responsibility Reporting (BRR),
- National Guidelines on Responsible Business Conduct (NGRBC), and
- Business Responsibility and Sustainability Report (BRSR).
Business Responsibility and Sustainability Report (BRSR)
In May 2021, the Securities and Exchange Board of India (SEBI) introduced the Business Responsibility and Sustainability Report (BRSE). SEBI amended Regulation 34 (2)(f) of SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 (also known as ‘LODR Regulations’) to introduce this reporting requirement.
The BRSR has a guidance note accompanying it to enable companies interpret the scope of disclosures. The BRSR asked listed entities to disclose their performance against the nine principles of the ‘National Guidelines on Responsible Business Conduct’ (NGBRCs). Reporting under each of the nine principles is divided into essential and leadership indicators.
- Reporting the essential indicators is mandatory while reporting the leadership indicators is on a voluntary basis. Besides, listed entities should strive to report the leadership indictors as well.
BRSR has replaced the current BRR and from the financial year 2022-23, it shall be declared mandatory for the top 1000 listed companies (as per market capitalization) to file the BRSR.
As ESG investing becomes more mainstream, the above-mentioned disclosure demands of the SEBI were introduced to keep up with investment strategies and the rising concerns related to responsible corporate governance and climate change.
Furthermore, under Regulation 34(3) of the LODR Regulations, companies have been asked to mandatorily disclose details of opportunities, threats, risks, and concerns in their annual reports.
- However, companies do not need to mention the metrics and methods used by them to identify these opportunities or threats.
- Besides, companies are not expected to present a complete progress chart.
The BRSR aims to secure transparent and standardized disclosures by listed companies. This method shall also allow companies to present their sustainability objectives, position and performance to the market and create more value in the long-term and help investors make more informed decisions related to ESG.
SEBI provides the BRSR format, which is divided into three parts:
- Section A: General Disclosures
- Section B: Management and Process Disclosures
- Section C: Principle-wise Performance Disclosures
ESG Categories
As part of the ‘governance aspect’, the following corporate governance data needs to be reported:
| Bribery |
Corruption |
Internal Controls |
Shareholder Rights |
| Audit |
Executive Pay |
Management Structure |
Executive Compensation |
| Diversity in Leadership |
The way leadership responds to & engages with shareholders |
Diversity of Board of Directors |
Cybersecurity & Privacy Practices |
All data related to the following must be reported:
| Greenhouse Gas Emissions |
Energy Efficiency |
Deforestation |
| Pollution |
Biodiversity Loss |
Climate Change |
| Water Management |
All data related to the following must be reported:
| Employee Health & Safety |
Equity |
Inclusion |
| Working Environment |
Conflicts |
Humanitarian Crises |
| Diversity |
Why is ESG Reporting Important?
- Enhanced Communication with Stakeholders
By broadening the scope of ESG reporting to include non-financial disclosure of environmental and social interaction and impact, companies offer a structure to measure non-financial performance. It provides guidance on opportunities and complications faced in handling non-financial risks.
As per the goals of one of the Corporate Governance Code principles, it allows stakeholders to conduct a balanced and reasonable performance assessment of the company to facilitate corporate accountability.
- Boosts Engagement of Stakeholders
Identification of and engagement with stakeholders are the key to maintaining sustainability in reporting and are mentioned as vital steps by numerous international sustainability systems.
For sustainability reporting, listed companies bring their attention to review areas of potential risks and to spot opportunities that these risks present but are often overlooked during other analytical and system-driven methods.
Conclusion
ESG frameworks are vital tools for companies as they can help people or other corporate entities ascertain if your company is in alignment with their values and the overall value of a company. This, in turn, shall help enable sustainable investments from such individuals and entities, as they are now aware of the company’s activities, values as well as its total worth in the market. Therefore, it is imperative to ensure you timely conduct your ESG reporting, so that you attract the best entities for investments and enable unhindered growth for the organization.
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