Securities and Exchange Board of India (SEBI), has taken a giant leap in ESG compliance
Shakti Deb and Trisha Shreyashi
Environmental, social, and governance (ESG) agendas are progressively gaining prominence among regulators, investors across the globe, corporate boards and G20 summits. There is an increased commitment of their portfolio to ESG considerations as evident from ESG Mutual Funds. At the same time, indictments of greenwashing have also amplified.
Greenwashing entails a marketing strategy to exploit environmentally or socially conscious stakeholders by disclosing untrue or deceptive information about ESG practices. Greenwashing is due to a lack of standardised ESG norms, where some companies find leeway to disclose favourable ESG practices and hide negative practices through word puzzles. Thus, regulatory efforts to streamline ESG practices are gaining momentum across the globe.
ESG Compliance Gets Going
The capital market regulator- Securities and Exchange Board of India (SEBI), has taken a giant leap in ESG compliance. Initially, it came out with the Business Responsibility and Sustainability Report (BRSR). Recently, SEBI introduced a Consultation Paper on ESG Disclosures to update BRSR in terms of incorporating Key Performance Indicators on ESG (as BRSR Core). The introduction of the BRSR Core includes a constrained set of Key Performance Indicators (KPIs) under each E, S, and G attributes, for which listed organisations shall be required to have reasonable assurance that improves the credibility of ESG disclosures. It shall apply to the top 150 listed companies from FY 2023-24 and gradually extend to the top 1,000 companies by FY 2026-27.
It is an epic journey of ESG reporting in India, starting from humble beginnings and evolving into a force for good. This decision marks a pivotal moment in the pursuit of sustainable finance. It will have a ripple effect in bringing smaller suppliers and service providers within the ESG fold, thereby resulting in deeper penetration of sustainability practices across all tiers of the business ecosystem. The prospect of it becoming mandatory for all listed companies is something to look forward to. It is, however, contested that this might make companies grumble over the tedium of compliance.
SEBI’s measures reiterate the evolution in the corporate disclosure era, where companies must guarantee responsible disclosure by providing third-party assurance. The concept of assurance is not a new phenomenon in corporate governance understanding. It is an obvious expectation from any reporting entity. Assurance of ESG disclosures aims at cracking down on attempts of greenwashing.
Although assurance plays a vital role in guaranteeing the quality of ESG disclosure, it does not supplement the monitoring role of investors. Investors need to comprehend any admonitions attached to an ESG assurance report and be equipped to assess to what extent a reporting company is committed to ESG considerations.
Companies are also divided in ESG reporting practices leading to issues such as consistency and comparability of reports. In the context of comparability issues of ESG reports across companies, investors or stakeholders will continue to brawl, gratifying the best performer in ESG agendas. Moreover, companies across the globe are also haunted by the dilemma of opting for an assurance approach (process-oriented assurance or content-oriented assurance).
Quality Of ESG Disclosures
Process-oriented assurance indicates whether ESG disclosures conform to a particular ESG reporting standard. In contrast, content-oriented assurance connotes whether the reporting is credible enough to be relied upon regarding the quality and completeness of the information disclosed.
Content-oriented assurance is costlier than process-oriented assurance as it demands that the assurance provider appointed is independent and credible in terms of possessing functional expertise on every strategised parameter of the ESG factors. Therefore, some firms may comfortably switch to process-oriented assurance due to their familiarity with the said approach in financial auditing practices.
The SEBI proposed KPIs on ESG and the detailed assurance approach. Yet the one-size fits all applicability of such KPIs may render a challenge for companies to pursue corporate purpose-driven ESG considerations. Ideally, corporate purposes must irradiate ESG considerations. Also, the demand of stakeholders is ever-changing; hence companies must leverage to approach ESG driven by corporate purposes.
To survive and scale up in the tectonic shift in the demand for disclosure from mere corporate disclosure to ESG disclosure, companies must reflect and disclose the rudimentary premises of ESG implementation. It entails how ESG considerations are internalised within their governance framework, materiality assessment of ESG parameters, resource investment for harmonising ESG with business purposes, challenges in ESG integration, impact of ESG mandates on organisational performance and projected impact. These disclosures may serve as robust gestures of ESG commitments and an add-on to the assurance process.
Dr. Shakti Deb is a Professor of Business Laws at IIM Trichy. Trisha Shreyashi is an Advocate & Columnist. Views are personal and do not represent the stand of this publication.
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