"Getting everyone involved to create a more sustainable and environmentally friendly imprint is the only way forward if we want to improve the quality of the environment and societal norms."
Introduction
The term ESG (Environmental, Social, and Corporate Governance) has been created to refer to specific data intended to be utilized by investors for assessing the material risk that the company is taking on based on the externalities it is generating.
Additionally, the data generated can be utilized within an organization as measurements for managerial and strategic goals. Additionally, the investors may use ESG data in their evaluation of enterprise value beyond identifying and managing material risks to the organization. Specifically, they may design models based on the supposition that better long-term risk-adjusted returns result from the identification, assessment, and management of sustainability-related risks and opportunities with respect to all organizational stakeholders. Customers, vendors, employees, the leadership, and the environment are just a few examples of the stakeholders in an organization. The ESG can be broadly categorized as follows:
Environmental aspect: Climate change, greenhouse gas emissions, biodiversity loss, deforestation, pollution, energy efficiency, and water management are just a few of the environmental issues included in the data.
Social aspect: Information on employee safety and health, working conditions, diversity, equity, and inclusion, conflicts, and humanitarian crises is reported. This information is relevant in risk and return assessments because it has an impact on how satisfied customers and engaged employees are affected (positively or negatively).
Aspects of corporate governance are covered in the data, including the prevention of bribery and corruption, diversity on the board of directors, executive compensation, cybersecurity procedures, diversity in leadership, management structure, executive pay, how the leadership responds to and engages with shareholders, audits, internal controls, and shareholder rights.
Since 2020, interest in overlaying ESG data with the Sustainable Development Goals (SDGs), which were created based on work by the United Nations starting in the 1980s, has increased.
Evolution of ESG in India
ESG reporting in India commenced in 2009 with the Ministry of Corporate Affairs (MCA) issuing the Voluntary Guidelines on Corporate Social Responsibility. Ever since the reporting framework has come a long way with the introduction of Business Responsibility Reporting ("BRR"), Corporate Social Responsibility (CSR), National Guidelines on Responsible Business Conduct (NGRBC) and the newly introduced Business Responsibility and Sustainability Report (BRSR) (introduced through a SEBI circular dated 10 May 2021, discussed below).
The Indian Companies Act introduced one of the first ESG disclosure` requirements for companies. The Indian companies are required to include in report by their Board of Directors details regarding conservation of energy, along with annual financial statement. Further, it is the statutory duty of a director of an Indian company to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.
In recent times, adapting to and mitigating climate change impact, inclusive growth and transitioning to a sustainable economy have emerged as major issues globally. There is an increased focus of investors and other stakeholders seeking businesses to be responsible and sustainable towards the environment and society. Thus, reporting of company's performance on sustainability related factors has become as vital as reporting on financial and operational performance. The Securities and Exchange Board of India ("SEBI") introduced the requirement of ESG reporting back in 2012 and mandated that the top 100 listed companies by market capitalization file a BRR. This was later extended to the top 500 listed companies by market capitalization in 2015.
As a result, SEBI amended regulation 34 (2) (f) of the SEBI (Listing Obligation and Disclosure Obligations) Regulation, 2015, introducing additional reporting requirements on ESG criteria kno
wn as the Business Responsibility and Sustainability Report ("BRSR"), effective May 10, 2021. ("LODR Regulations"). A guidance note is included with the BRSR to help the firms understand the disclosure's scope. The National Guidelines on Responsible Business Conduct (NGBRCs) contain nine principles, and the BRSR requests disclosures from listed entities about their performance against each of these principles. Each principle's reporting is broken down into essential and leadership indicators. The reporting of leadership indicators is voluntary, whereas the reporting of the essential indicators is mandated. Listed companies ought to try to report the leadership indicators as well.
The goal of the BRSR is to provide quantifiable and standardised disclosures on ESG parameters to enable comparison across businesses, industries, and periods of time. Investors will benefit from these disclosures by making wiser investing choices. The BRSR will also help businesses interact more deeply with their stakeholders by enticing them to consider factors other than just profits, such as social and environmental implications. The listed entities may make a cross-reference between the disclosures provided under their existing sustainability reporting processes (such as GRI, SASB, TCFD, or Integrated Reporting (IR)) and the disclosures requested under the BRSR.
Applicability of BRSR: The filing of BRSR, which has taken the role of the previous BRR, is now required for the top 1000 listed businesses (by market capitalization) as of the fiscal year 2022–2023.
SEBI's aforementioned disclosure rules through BRSR have been implemented to keep up with such investment methods and growing concerns about ethical corporate governance and climate change as ESG investing becomes more widely used.
Additionally, corporations are required by Regulation 34(3) of the LODR Regulations to disclose opportunities, threats, risks, and concerns in their annual reports. However, these disclosure requirements do not force corporations to monitor their progress over time or to provide information about the measurements and procedures they use to identify such opportunities or hazards.
In connection therewith, the Indian Banks' Association (IBA) also published the National Voluntary Guidelines for Responsible Financing in 2016, which established broad and general guidelines for "integrating ESG risk management into Financial Institutions' (FIs) business strategy, decision-making process, and operations." In accordance with Principle 2, for instance, FIs "should integrate the examination of environmental, social, and governance factors in their investment, lending, and risk-management procedures across business lines to limit unfavorable impact on their own operations and on society."
BRSR framework introduction
In order to improve ESG compliant business operations in India, BRSR inter alia also contains the following elements in addition to the rather complete disclosure framework:
A company's implementation of suitable procedures and policies to maintain its ESG compliance must be disclosed. In order to ensure comparison across industries, businesses, and historical periods, BRSR places a lot of focus on quantitative metrics;
enhanced disclosures on climate and socially relevant topics; BRSR enables collaboration for organizations that already submit sustainability reports under various globally acknowledged standards.
Global regulations and best practices in relation to ESG
The Non-Financial Reporting Directive 2014/95/EU ("NFRD"), one of the major laws of the European Union, mandates that public-interest organisations with more than 500 employees prepare and disclose a "non-financial statement" (relating to diversity and non-financial information) in their annual management report. Additionally, the regulation has a "comply or explain" clause that forces businesses to give good cause for any non-compliance.
The European Commission adopted a set of policies on April 21, 2021, among them a proposal for a Corporate Sustainability Reporting Directive ("CSRD"). By introducing mandatory EU sustainability reporting standards for environmental, social, and governance elements, the CSRD broadens the application of the NFRD to all listed firms, including SMEs. These standards will be further developed by the European Financial Reporting Advisory Group (EFRAG). The proposed CSRD also clarifies the requirement to report in accordance with the double materiality perspective, which states that businesses must disclose both the information necessary to understand how sustainability issues affect them and the information required to comprehend the effects they have on people and the environment.
While NFRD went into effect in 2018, CSRD has not yet done so. Companies that are already subject to NFRD will be subject to CSRD for financial years beginning on or after 1 January 2024, with the first report anticipated in 2025. Large businesses who are not already subject to NFRD will have to apply CSRD beginning with their fiscal years beginning on or after 1 January 2025 and report on 2025 data in 2026.
In Asia, the Singapore Exchange has also mandated climate reporting for specific industries, and all issuers must include climate reporting in their sustainability reports on a "comply or explain" basis.
The US Securities and Exchange Commission (SEC) proposed rule changes on March 21, 2022, requiring registrants to include specific climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, as well as certain climate-related financial statement metrics in a note to their audi The disclosure of a registrant's greenhouse gas emissions, which have evolved into a widely used measure to gauge a registrant's exposure to such hazards, would also be included in the required information about climate-related risks.
The New York Stock Exchange (NYSE) requires listed companies to adopt and disclose a code of corporate conduct and ethics for directors, officials, and employees as part of another sustainability reporting instrument.
Regulations that serve as instruments of required disclosure on sustainability issues are in existence in China. Corporations are required to disclose environmental information under the Environmental Information Disclosure Act of 2008. To increase your chances of receiving grants and public support, you can voluntarily share information on your annual resource usage, pollution levels, waste generation, disposal strategy, and other factors. Large enterprises listed on the Shanghai Stock Exchange are also required to submit a supplementary report that includes an environmental disclosure.
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