Traditionally, investment decisions have mainly been driven by financial parameters. However, with growing concerns around climate change (and its impending global impact), adapting to and mitigating its consequences by transitioning to sustainable models of development (and therefore, investment) have emerged as major concerns on an international scale.
There is an increasing investor focus on sustainability investing, shifting from finance-centric investment models to more socially and environmentally responsible long-term investing trends. As a result, the demand for Environmental, Social and Governance (ESG) investing has gained significant traction globally which focusses on non-financial factors as a metric for guiding investment decisions wherein increased financial returns is no longer the sole objective of investors.
An increasing demand for ESG investing means a growing need for adequate disclosure and reporting mechanisms to be put in place to keep pace with the changing investing trends leaning towards goals of long-term sustainable returns, by incorporating risk assessment and mitigating measures of environmental, social and governance challenges.
In India, the one of the initial milestones towards identifying ESG disclosure requirements for companies was the release of the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs) in 2011 by the Ministry of Corporate Affairs (MCA).
Following this, in 2012 the Securities and Exchange Board of India (SEBI) formulated the Business Responsibility Reports (BRR) emanating from the NVGs which mandated top 100 listed entities by market capitalisation to file BRR as part of their annual report.
This requirement was progressively extended to the top 500 listed entities in 2015.
Recently, in 2021, SEBI by amending the SEBI (Listing Obligations and Disclosure Requirements), 2015 (LODR Regulations) vide circular dated May 10, 2021 replaced the existing BRR reporting requirement with a more comprehensive integrated mechanism, the Business Responsibility and Sustainability Report (BRSR), and mandatorily applicable to the top 1,000 listed entities (by market capitalisation) from financial year 2022-23 onwards.
The BRSR seeks disclosures from listed entities on their performance against the nine principles of the ‘National Guidelines on Responsible Business Conduct’ (NGBRCs) and reporting under each principle is segregated into essential indicators (mandatory disclosures) and leadership indicators (voluntary disclosures).
The BRSR is a significant departure from the erstwhile BRR reporting. It is more focussed on having quantifiable metrics and is outcome oriented. Some of the key disclosures sought in the BRSR include (a) an overview of the entity’s material ESG risks and opportunities, approach to mitigate or adapt to the risks along with financial implications of the same, (b) sustainability related goals, targets and performance, (c) environmental disclosures covering aspects such as usage of resources (energy and water), air pollutant emissions, waste management practices, (d) social disclosures such as gender and social diversity, corporate social responsibility, (e) disclosures in relation to product labelling and recall, consumer complaints in respect of data privacy, cyber security, (f) Governance related disclosures such as a statement from the directors highlighting sustainability related challenges, targets and performance and so on.
Having quantitative and standardised disclosures on ESG parameters would ensure a more holistic approach, providing stakeholders with both financial and non-financial information and concise communication about how an organisation’s strategy, governance, performance and prospects will create value over time, in line with the objective of seeking greater transparency on sustainability issues.
Indian investors are showing increased interest in ESG compliant companies and investment products and companies are proactively taking steps towards inculcating ESG in their corporate governance strategies. For instance, Tata Consultancy Services revealed plans to reduce its absolute greenhouse gas emissions to achieve net zero emissions by 2030.
Similarly, Hindustan Unilever set up a centre in Mumbai to cater to issues of lack of personal hygiene, non-availability of clean drinking water and poor sanitation in slums.
In a first of a kind move, the Ghaziabad Municipal Corporation became the first ever civic body in India to issue green bonds listed on the BSE for an environmentally sustainable project for wastewater reuse, raising ₹150 crore, the proceeds of which will be utilised for a tertiary water treatment plant to benefit industries in Ghaziabad.
From an investment perspective, the demand for investing in socially and environmentally conscious businesses is increasing significantly. Implications of not taking ESG factors into consideration in business strategy/policies may result in business processes becoming redundant in future, due to legal and regulatory changes which might forbid particular ways of doing business, thereby reducing its viability in the eyes of investors.
Therefore, investors are not only oriented towards securing increased financial returns but are looking to align their portfolios with sustainable development. Thus, integrating ESG disclosures with corporate governance practices of companies is becoming extremely consequential from an investment standpoint as it plays a significant role in assessing the valuation of companies.
The way forward
ESG regulatory framework is rapidly evolving in India and there has been a marked upward trend in the incidence and quality of reporting by companies. The aim is to gradually build a more comprehensive and extensive ESG reporting regime, with the aim of encompassing all listed as well as unlisted entities and bringing them within the purview of the ESG reporting framework, moving towards the goal of a more sustainable, transparent, and long-term viable investing trend.
However, this does not come without challenges. The lack of standardisation of reporting requirements across borders may pose difficulties in harmonising ESG principles, frameworks and considerations.
Further, challenges relating to transparency, consistency, materiality and comparability of ESG standards may pose roadblocks in the seamless implementation of ESG reporting framework ahead. These concerns must be addressed in order to formulate an effective and efficient mechanism of ESG reporting in future.
Dayal is a Partner and Sawhney a Senior Associate with Lakshmikumaran & Sridhran Attorneys