Social and Impact
Interpreting the Evolving ESG Landscape in India
07 Oct 2022
The COVID-19 pandemic brought Environmental, Social, and Governance (ESG) issues to the surface and highlighted the need for businesses to keep these issues at their core. While India still might be at a nascent stage when it comes to ESG investments, businesses are now finding it crucial to develop progressive strategies keeping ESG principles into account.
This trend can also be observed in investors who are now leaning towards avenues that generate positive social and environmental impact in addition to monetary gains. ESG is now being looked at as more than an obligation. It is now regarded as an opportunity to develop a more sustainable business, improve relevancy, and enhance trust.
According to a report issued by International Institute of Sustainable Development, globally, sustainable investments have reached $30.71 trillion to account for over 34% of the total asset management. The same interest and potential are also being witnessed in India, and a number of sustainable investment efforts have been introduced in the country over the past two years.
The BRSR Framework
From the financial year 2022-23, the top 1,000 listed firms by market capitalization will have to put together a Business Responsibility and Sustainability Report highlighting their ESG disclosures.
The BRSR must be included in the annual report, which is sent to stock exchanges, published on official business websites, and distributed individually to shareholders. The BRSR framework abides by MCA ESG guidelines and is inspired by international reporting frameworks, providing quantitative and qualitative ESG data in complete detail.
Other Disclosure Requirements
The BRSR reporting guidelines are not mandatory for smaller companies and unlisted private or public businesses. However, such enterprises can choose to take up the BRSR framework voluntarily.
Aside from BRSR, there are a few other mandatory ESG requirements. For example, companies need to include disclosures on energy conservation in their annual reports and produce statements in board reports regarding laws preventing sexual harassment.
As of now, ESG reports are mandatory only for the top 1000 listed firms. However, smaller businesses, especially those looking for VC or PE funding or eying for IPO listing to increase their attractiveness in equity markets, should start thinking about their ESG efforts and reporting.
We also believe that ESG efforts will soon become a key consideration for credit assessment by financial institutions and NBFCs. Moreover, the RBI, India's financial regulator, is allegedly considering establishing lending rules keeping ESG into consideration.
Smaller businesses can improve their ESG scores by adopting certain KPIs from the BRSR (rather than the entire BRSR), considering KPIs from other specialized reporting frameworks - such as the Future-Fit Business Benchmark & B Impact Assessment and adopting the ISO 26000 standard, which offers guidance on social responsibility.
In addition to this, at the grassroots level, smaller enterprises should start strengthening their protocols and ensure they comply with applicable laws involving ESG practices. For this, businesses can refer to the MCA ESG framework that illustrates 37 relevant laws for business sustainability.
Key Considerations
ESG Ratings
The consistency of ESG scores is being questioned, mainly due to the apparent irregularity in rating methods. This has raised the question whether ESG rating should be controlled. Certain reports have suggested that regulators should pay attention to ESG ratings that fall under their jurisdiction and look for ways to enhance rating methodologies and avoid conflicts of interest.
In a recent development, SEBI has issued a paper asking for views on a proposal to develop accreditation guidelines for ESG rating agencies in India. It can be hoped that as these disclosures get standardized and enhanced in terms of quality, apprehensions regarding the reliability of ESG ratings will also be put to rest.
That said, rating agencies can be faced with further pressure from the investors or regulatory bodies to be transparent about their rating methodologies.
Reporting Quality
Even though the BRSR structure complies with the international reporting standards, it shouldn’t be taken for granted that submitting the BRSR report would be enough to meet investor expectations.
Foreign investors have only just begun to believe in the emerging economies opportunity and can demand more comprehensive disclosures that are supported by concrete engagement practices and follow-up action-points. The idea of double materiality - which requires businesses to assess and report not only how ESG practices impact them but also how they cause or impact ESG issues - is also expected to become more common.
Another critical factor to consider is the involvement of third-party assurance. While the BRSR guidelines require enterprises to reveal if any external assessment has been conducted, assurance statements are still not as common in India. However, external assurance enhances the quality of the disclosure and addresses any ‘greenwashing’ concerns that the investors might have.
Finally, investors are now looking forward to meaningful follow-up actions. This would require enterprises to go above and beyond what is mandatory and do something to drive real impact.
Disclosure Standards
A key point for debate for ESG regulators worldwide is whether public enterprises across industries should follow a single standard for reporting ESG issues. One of the most significant advantages of a common standard is a lower diligence cost.
In addition, following a single standard of reporting also helps eliminate the risk of companies self-reporting and drafting their disclosure in a way that makes them look good.
On the other hand, since ESG reporting involves both qualitative and quantitative factors and the data used is incredibly nuanced, it can be challenging to have a standard reporting structure, especially when comparisons are drawn across industries or jurisdictions.
Globally, there’s a bend towards a standard reporting structure. However, the ideal approach for India should be somewhere in the middle. India could adopt the global standard while also providing sector-wise guidance and allowing certain exceptions.
Regulatory Measures
India’s commitment to meeting its international environmental goals has resulted in the development of a number of policies, which can result in several ESG opportunities (and risks).
For instance, India’s commitment to reach net-zero carbon emissions by 2070 has given momentum to several initiatives like incentives for the electric-vehicle industry.
India vs Other Asian Countries
The transition from voluntary ESG disclosures (or disclosures on a 'comply or explain' basis) to mandatory disclosures is gathering steam. Just how India has made the BRSR mandatory for its largest listed enterprises, Malaysia, China, and Indonesia, also require their biggest listed businesses to provide mandatory ESG disclosures.
Singapore and Japan are also considering this transition and can make the shift in the next financial year. Hong Kong, on the other hand, has a mixed strategy, requiring mandatory disclosures on specific ESG concerns but permitting a 'comply or explain' approach to climate change issues.
The Way Forward
With the evolution of ESG reporting standards and the integration of frameworks, it is clear that there’s going to be a major shift in the way ESG disclosures are made. There’s an obvious need to develop a forward-looking reporting framework that indicates a proactive rather than a reactive approach to ESG.? The BRSR reporting framework is an admirable achievement that could help give more meaningful and trustworthy ESG data to Indian public market investors. This approach can then be gradually expanded to include additional listed and unlisted enterprises operating in regulated or resource-intensive industries, as long as their compliance costs are not excessively high.
Smaller enterprises, particularly SMEs, should be encouraged to utilize their own KPIs (or those recommended by their investors or lenders), whether by adopting an international standard like ISO 26000 or by selective BRSR disclosures and specialized reporting standards like the B Impact Assessment.

Author: Shishir Mankad, Managing Partner, Praxis Global Alliance
Co-author: Lokesh Bohra, Senior Vice President, Praxis Global Alliance

Ready to talk?

I want to talk to your experts in:

We work with ambitious leaders and transformative clients who are defining the future. Together, we achieve extraordinary outcomes.

I have read the privacy policy and I agree to its terms.