Co-authored by Kanisha Vora (Partner) | Sunil Neelakantan (Associate) | Janhavi Rajkumar (Associate)
1. Legal background
As we enter the financial year 2023, the year from which SEBI’s Business Responsibility and Sustainability Reporting framework(“BRSR”) becomes mandatory for the top 1000 listed companies based on market capitalization, corporate commitment to environmental, social and governance (“ESG”) norms continues to be in focus.
The BRSR Framework
Expanding on the foundation laid by SEBI’s erstwhile Business Responsibility Reporting framework (“BRR”), the BRSR reflects the principles enshrined in the National Guidelines on Responsible Business Conduct (“NGRBC”), which is in turn based on the United Nations’ Sustainable Development Goals, and it intends to provide a single framework for companies to disclose all relevant information.
The BRSR has a three-part structure. In addition to general information about the company, disclosures are required in relation to policies and processes relating to the NGRBC principles, the purpose of which is to understand whether the company has the building blocks in place that will enable and ensure responsible business conduct. The last and most detailed section requires responses to indicate how a company is performing in respect of each of the NGRBC principles. This section is divided into two parts, an ‘essential’ section comprising of mandatory disclosures, and a ‘leadership’ section, responses to which are voluntary. The ‘essential’ components include data on training programmes conducted, environmental data on energy, emissions, water and waste, social impact generated by the company, etc. As regards ‘leadership’ indicators, companies can disclose information on key performance indicators including life cycle assessments, details on conflict management policy, additional data on biodiversity, breakup of energy consumption, Scope-3 emissions and supply chain disclosures.
BRSR has evolved from the BRR regime as a more specific and quantifiable metric. One of the key themes of the BRSR is its emphasis on the various stakeholders of a company, particularly a company’s supply chain, and the expectation that reporting companies extend their policies to their value chain partners, thereby indirectly broadening the impact of its ESG and sustainability focus.
While many of these disclosures find their place in the voluntary section of the form, it is expected that in the next cycle of review by the Ministry of Corporate Affairs, the information to be disclosed under the leadership section may be moved to the essential section, and companies have been advised to view these questions as a pathway to transitioning to a more comprehensive disclosure regime.
Despite being a more robust disclosure mechanism than the BRR, the BRSR is not without its challenges. For instance, while BRSR’s focus on quantifiable metrics facilitates a comparison of companies across industries, such a sector agnostic comparison may not present an accurate picture of companies’ performance, since it does not account for the specific circumstances of companies. The criteria for and impact of a consulting company for example, would be inherently different from a company engaged in manufacturing. Further, the BRSR framework does not require any external audit which may raise questions on the reliability of disclosures made by companies and make greenwashing a credible risk. Additionally, the BRSR does not always seek an explanation for practices by a company which are not compliant with ESG goals.
To overcome the above-mentioned shortcomings of the BRSR framework, different approaches adopted globally could be looked at for best practices in ESG reporting.
European Union and global best practices
One of the major EU laws is the Non-Financial Reporting Directive 2014/95/EU (“NFRD”) which requires public-interest entities with more than 500 employees to prepare and disclose a ‘non-financial statement’ (relating to diversity and non-financial information) in their yearly management report. Further, the directive applies on a “comply or explain” basis which requires companies to provide clear and reasoned explanations for any non-compliance.
The NFRD is proposed to be replaced by the Corporate Sustainability Reporting Directive (“CSRD”), which further aims to increase the efficacy of the guidelines by requiring a mandatory audit of the non-financial statement, and placing minimum sanctions for non-compliance with reporting requirements. Once adopted by the European Council, Member States will be required to implement the provisions of the CSRD into national law by 1st December 2022. The European Commission also aims to adopt sector specific standards by 31st October 2023.
In Asia, the Singapore Exchange has also made climate reporting mandatory for certain sectors, and all issuers are required to provide climate reporting on a “comply or explain” basis in their sustainability reports.
In addition to the above-mentioned EU regulations, global reporting standards such as the Global Reporting Initiative, and the Sustainability Accounting Standards Board Standards provide detailed industry-specific disclosure checklists and ESG-metrics which go beyond the general nature of BRSR.
Market incentives guiding ESG-compliance and disclosures
While an extension of the BRSR ESG disclosure requirement, perhaps in a more diluted form, is anticipated to cover all other companies, including unlisted ones, companies are not guided by a regulatory push alone to adopt ESG best practices and make ESG disclosures. Companies may either have an inherent sustainable agenda or may be looking to address the demands of increasingly conscious investors, customers, and employees.
The intention of global investors to invest in ESG-compliant companies is perceivable in the Glasgow Financial Alliance for Net Zero, where over 450 financial institutions, responsible for over $130 trillion of private financial assets, committed to net zero targets. Closer home, the total number of Indian ESG assets under management increased 4.7 times in the past two years. In line with the growing consciousness of ESG across various classes of investors, two major ESG-oriented indices have emerged in India, namely, the S&P BSE 100 ESG index, and the NSE NIFTY 100 ESG index, which aid investors to measure securities that meet a sustainable investing criteria. Further, banks and financial institutions have also begun favouring ESG-compliant companies by offering lower rates of interest on loans earmarked for green projects.
In fact, the International Sustainability Standards Board (“ISSB”), formed by the IFRS Foundation, has been mandated to develop standards that result in a global baseline of sustainability disclosures. ISSB’s remit is to focus on the ESG related information requirements of investors and financial markets.
Further, companies in India not under a statutory obligation to make ESG disclosures may nevertheless be required to track and provide this data to investors who may need this information to meet their own disclosure requirements, including under foreign regulations. For example, the EU Regulation 2019/2088 on Sustainability-Related Disclosures in the Financial Services Sector (“SFDR”) integrates the disclosure requirements for financial market participants and financial advisers on the sustainability of their investment and its associated risks, and Regulation 2020/852 on the Establishment of a Framework to Facilitate Sustainable Investment and Amending Regulation (EU) 2019/2088 (“EU Taxonomy”) supplements the SFDR by laying down the criteria to determine whether an investment is ‘sustainable’. Effectively, the SFDR and EU Taxonomy could affect Indian companies vis-à-vis their relationship with European investors.
An evolving proposition
Regulations and best practices in ESG principles and reporting are in a relatively nascent stage, and will likely evolve in keeping with practical developments. While the BRSR is currently not mandatory for all companies, ESG reporting is also likely to eventually impact all companies in a bid to move towards transparency and corporate responsibility. SEBI has also recently released a consultation paper to regulate ESG rating providers (“ERPs”), which are currently unregulated, recognizing that in addition to the BRSR, there is an increasing demand from investors for evaluation and rating of ESG related parameters by ERPs, including as a result of the COP 26 mandate.
 Ministry of Corporate Affairs, Report of the Committee on Business Responsibility Reporting (2020).
 Amending Directive 2013/34/EU, Directive 2004/109/EC, Directive 2006/43/EC and Regulation (EU) No 537/2014, as regards corporate sustainability reporting  COM(2021) 189 final 2021/0104 (COD) <https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52021PC0189&from=EN>.
 Article 3 (n. 5), Corporate Sustainability Reporting Directive.
 Peter Wollmert and Andrew Hobbs, ‘How the EU’s new sustainability directive will be a game changer’ (EY, 28th July 2021). <https://www.ey.com/en_be/assurance/how-the-eu-s-new-sustainability-directive-will-be-a-game-changer>.
 Raphael Lim, ‘SGX rolls out mandatory climate reporting for financial energy issuers from 2023’ (Business Times, 4th December 2021) <https://www.businesstimes.com.sg/companies-markets/sgx-rolls-out-mandatory-climate-reporting-for-financial-energy-issuers-from-2023 >.
 Global Reporting Initiative (GRI) Standards, 2021 <https://www.globalreporting.org/how-to-use-the-gri-standards/gri-standards-english-language/>.
 Ministry of Corporate Affairs, Report of the Committee on Business Responsibility Reporting (2020).
 Jill Baker, ‘Mark Carney’s Ambitious $130 Trillion Glasgow Financial Alliance for Net-Zero’ (Forbes, 8th November 2021) <https://www.forbes.com/sites/jillbaker/2021/11/08/mark-carneys-ambitious-130-trillion-glasgow-financial-alliance-for-net-zero/?sh=4f5507bc3a31>.
 Ashley Coutinho, ‘India ESG assets up 4.7 times in two years to Rs 12,300 crore, shows data’ (Business Standard, 19th December 2021) <https://www.business-standard.com/article/markets/india-esg-assets-up-4-7-times-in-two-years-to-rs-12-300-crore-shows-data-121121900670_1.html>.
 Bombay Stock Exchange, ‘Asia Index Private Limited launches the S&P BSE 100 ESG Index’ (BSE India, 2nd November 2017) <https://www.bseindia.com/markets/marketinfo/DispMediaRels.aspx?page=67df76a1-6144-43be-9814-2bf237f2f668>.
 India Index Services and Products Limited, Nifty 100 ESG Indices – Capturing the Intangible Value of Sustainable and Responsible Business. (White Paper, March 2018) <https://archives.nseindia.com/content/indices/NIFTY_ESG_Indices_Whitepaper.pdf>.
 ‘Global banks push ESG loans in India as climate change threat worsens’ Economic Times BFSI (6th September 2021) <https://bfsi.economictimes.indiatimes.com/news/banking/global-banks-push-esg-loans-in-india-as-climate-change-threat-worsens/85971221>.
 Article 1, EU Regulation 2019/2088 Sustainability-Related Disclosures in the Financial Services Sector.
 Article 1, Regulation 2020/852 on the Establishment of a Framework to Facilitate Sustainable Investment and Amending Regulation (EU) 2019/2088.
 Andreas Rasche, ‘How the EU Taxonomy Impacts Businesses Beyond Europe’ (The Business of Society, 19th October 2021) <http://www.bos-cbscsr.dk/2021/10/19/how-the-eu-taxonomy-impacts-businesses-beyond-europe/>.