Social and Impact
Interpreting the Evolving ESG Landscape in India
07 Oct 2022
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.
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.
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 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.
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.
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.
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
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.
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.
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
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.
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.
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.
said, rating agencies can be faced with further pressure from the investors or
regulatory bodies to be transparent about their rating methodologies.
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.
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
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.
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.
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
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.
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.
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
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).
instance, India’s commitment to reach net-zero carbon emissions by 2070 has
given momentum to several initiatives like incentives for the electric-vehicle
vs Other Asian Countries
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.
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 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.
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.
Mankad, Managing Partner, Praxis Global Alliance
Co-author: Lokesh Bohra, Senior Vice President, Praxis Global Alliance