The Securities and Exchange Board of India (SEBI), responding to the increase in ESG investing and the demand by investors for information on ESG risks, substantially revised the annual Business Responsibility and Sustainability Report (BRSR) required by the 1,000 largest listed companies in India.
What are E.S.G regulations?
ESG regulation is any set of requirements on an organization to publicly disclose information about their performance in environmental, social, or governance topics.
How ESG differs from CSR?
India has a robust corporate social responsibility (CSR) policy that mandates that corporations engage in initiatives that contribute to the welfare of society. This mandate was codified into law with the passage of the 2014 and 2021 amendments to the Companies Act of 2013.
The amendments require companies with a net worth of ₹500 crore or a minimum turnover of ₹1,000 crore or a net profit of ₹5 crore in any given financial year spend at least 2% of their net profit over the preceding three years on CSR activities. The list of qualifying CSR activities is intentionally broad, ranging from supporting the protection of historically important sites to promoting safe drinking water.
ESG regulations, on the other hand, differ in process and impact. The U.K. Modern Slavery Act, for example, requires companies with business in the U.K. and with annual sales of more than £36 million to publish the efforts they have taken to identify and analyse the risks of human trafficking, child labour and debt bondage in their supply chain.
ESG disclosures are highly relevant for all stakeholders involved in a business process:
- Business: ESG disclosures allow companies to identify potential transition risks, self-assess its ability to sustain in the future, and undertake necessary steps to adapt to the likely future changes. At the same time, ESG disclosures help companies in identifying certain opportunities for innovation that might yield high results in the future. They also help companies in reassuring their stakeholders about their values and respect towards responsible business.
- Investors: ESG disclosures are highly consequential for investors to include climate-related considerations in asset valuation and finance allocation processes; determine the environmental and social impact of a company’s business processes; and assess how climate change could affect a company’s financial stability in the future.
- Consumers: ESG disclosures aid consumers in identifying responsible businesses.
Evolution of ESG Disclosures in India:
- The Companies Act, 2013 introduced one of the first ESG disclosure requirements for companies. Section 134(m) mandates companies to include a report by their Board of Directors on conservation of energy, along with annual financial statement.
- This requirement is further detailed under Rule 8(3)(A) of the Companies (Accounts) Rules, 2014, which mandates the board to provide information regarding conservation of energy.
- In 2017, SEBI issued a circular on ‘Disclosure Requirements for Issuance and Listing of Green Debt Securities’, to introduce the regulatory framework for issuance of green debt securities in India and enhance investor confidence. These additional disclosure requirements have been prescribed in order to attract the finance reserved for ESG-compliant projects, such as renewable and sustainable energy, clean transportation, sustainable water management, climate change adaption, energy efficiency, sustainable waste management, sustainable land use, and biodiversity conservation.
- Indian Banks’ Association (IBA) has also released the National Voluntary Guidelines for Responsible Financing, laying down broad and general principles towards ‘integrating ESG risk management into Financial Institution’s (FIs) business strategy, decision-making process and operations.’
- In May 2021, SEBI introduced a new framework; Business Responsibility and Sustainability Report (BRSR): It is aligned with nine principles of National Guidelines for Responsible Business Conduct (“NGBRC”) and it will be mandatory for the top 1,000 listed companies to annually disclose ESG-related information from financial year 2022-23.
Way forward
In the end, it can be said that India is gradually moving towards developing regulations around ESG. With the introduction of the BRSR framework, SEBI has joined the group of countries and international organization to have released comprehensive sustainability reporting frameworks.
Though the reporting mandate is presently restricted to the top 1,000 listed companies by market capitalization, the experience with BRR only indicates that a wider range of companies would soon be covered under the BRSR framework.