This blog is written by Hema gariya, a Fourth-year law student of BML Munjal University, Haryana

"India's Carbon Challenge: Understanding Our one of the top Positions in Global Emissions"

What impact has the required ESG reporting that SEBI implemented in 2021 had on Indian companies' environmental performance, especially in highly resource-intensive or highly polluting industries?

Introduction:

It is alarming to state that India is among the top 5 nations in terms of carbon emissions and like many other developing countries, India continues to struggle to achieve a balance between environmental sustainability and economic growth. There is an increasing need for strong environmental governance as urbanization is picking up the speed.

The Securities and Exchange Board of India (SEBI) in India addressed this by mandating Environmental, Social, and Governance (ESG) reporting from listed companies beginning in 2021. This choice symbolizes an enormous change in India's business sustainability, accountability, and transparency.

ESG reporting evaluates a company's performance in key areas associated with environmental, social responsibility, and governance. It provides investors, regulators, and the public helpful insights into a company's sustainability strategies and how they impact society and the environment.

SEBI's Decision to Mandate ESG Reporting provides a growing understanding of the significance of non-financial factors in establishing a company's long-term worth and resilience.

In this blog, I will examine how SEBI's mandated ESG reporting has affected the environmental performance of Indian companies, emphasizing those in resource-intensive or polluting industries.

I will also look at how these regulations have impacted business behavior, environmental management tactics, and sustainability efforts across various Indian industries.

BACKGROUND:

As established in 1988, the Securities and Exchange Board of India (SEBI) is a statutory regulatory body responsible for overseeing and supervising the country's securities markets. Its main responsibilities involve safeguarding the interests of shareholders and encouraging the growth and effective operation of the securities markets by ensuring open and transparent business. With its introduction of regulations to improve market efficiency, transparency, and corporate governance standards about securities trading, takeovers, mergers, insider trading, and disclosure requirements, SEBI has had an important effect on India's capital markets.

The mandatory Environmental, Social, and Governance (ESG) reporting requirements that SEBI enforced on listed businesses in 2021 was an important step towards fostering sustainability and ethical business practices. This project represented an important turning point in SEBI's efforts to apply ESG (environmental, social, and governance) considerations to investor decision-making procedures and company disclosures.

Considerations that resulted in the decision to implement ESG reporting requirements:

First was a growing worldwide acceptance of the importance of environmental, social, and governance (ESG) considerations when considering a company's sustainability and long-term value.

Second, to better serve the interests of stakeholders, such as investors, regulators, and the public, there was a need to increase transparency and accountability in corporate reporting.

Initially, SEBI aimed to boost India's competitiveness in the global market by putting the country's regulatory structure in line with worldwide norms and best practices in ESG reporting. By mandating ESG disclosures, SEBI hopes to improve transparency, inform investors about a company's sustainability policies, and motivate companies to act in the best interests of every stakeholder.[1].

ESG:

The foundation of ESG practices for Indian companies can be found in the Companies Act, 2013, even though it does not have a specific section devoted to ESG. The Act's specific provisions have significant effects on how ESG reporting and decision-making are done. For example, companies are required under Section 134(3)(m) to submit a report on business responsibility reporting (BRSR), which includes the environmental, social, and governance aspects of their operations, from their Board of Directors in their annual report. The directors' duties in Section 166(2) highlight the need for them to "act in the best interests of the community and the environment," which underlines the importance of considering ESG concerns into account.

Additionally, some companies are required by Section 135 and the Companies (Corporate Social Responsibility Policy) Rules, 2014 to allocate 2% of their average net income to Corporate Social Responsibility (CSR) initiatives, which helps with the social responsibility reporting process. Furthermore, the SEBI's Business Responsibility Reporting (BRSR) framework not being a direct part of the Companies Act 2013, specifies the nature and amount of information that companies must submit in their BRSR reports.[2].

In India, the private sector has mainly been involved in other ESG initiatives. The first ESG fund in India was set up by Avendus Capital, which refrained from investment in the thermal coal, oil, or gas industries. To establish a ranking system that included ESG principles, it collaborated with Institutional Investor Advisory Services (IIAS). In addition n, Quantum Advisors and the three Tata Group executives formed ECube, a billion-dollar fund, in 2018 to invest $30–50 million for an 8–9% interest in small- to medium-sized enterprises. India performed quite well by placing itself to third in the Asia-Pacific area concerning sustainability reporting rate.

India had an enormous rise in integrated reporting, ranging from 5% in 2017 to 28% in 2020. Only 19% of the areas met the PM10 WHO air quality guideline values, indicating significant room for improvement in the quality of the air in India. As a first step towards achieving India's commitment to the SDGs expressed at the 2015 UN Sustainable Development Summit, the green hydrogen mission was included in the union budget of India in 2021 for decarbonizing heavy industries to establish 450 GW[3] (renewable energy).

Significant Turning Points in India's ESG Development

2009: Introduction of CSR voluntary guidelines by the Ministry of Corporate Affairs (MCA).

2011: Development of National Voluntary Guidelines (NVGs) by MCA. A framework for incorporating sustainability and responsible business practices into company operations.

2012: The Securities and Exchange Board of India mandated a Business Responsibility Report (BRR) by for the top 100 listed companies. To promote transparency, accountability, and sustainable business practices.

2015: The Companies Act mandated CSR spending for eligible companies and companies with specified criteria were required to spend at least 2% of average net profits on CSR activities.

2015: SEBI extended BRR reporting mandate to top 500 listed companies.

2017: SEBI recommended integrated reporting for the top 500 listed companies voluntarily.

2018: The Bombay Stock Exchange (BSE) published a Guidance Document on Environmental, Social, and Governance (ESG) Disclosures. Which provides guidance on ESG-related information disclosure for listed companies.

2019: Introduction of National Guidelines on Responsible Business Conduct (NGRBC) by MCA.To promote responsible business conduct and sustainable practices.

2019: SEBI extended BRR reporting mandate to top 1000 listed companies.

2020: MCA recommended a Business Responsibility and Sustainability Report (BRSR) framework for listed and unlisted companies.

2021: SEBI mandated BRSR reporting for top 1000 listed companies from FY2022-23.

March 2023: SEBI mandated BRSR core disclosures for the top 150 listed companies from FY2023-24 onwards.

Business Responsibility and Sustainability Reporting (BRSR)

Although a comprehensive set of essential ESG reporting standards has not yet been adopted by SEBI, however, significant milestones were achieved in 2021 by laying the foundations for a more comprehensive ESG framework in India. Business Responsibility and Sustainability Reporting (BRSR) was made mandatory for the top 1,000 listed companies in India based on market capitalization by the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Sixth Amendment) Regulations, 2021, that came into effect on April 1, 2022, Additionally, SEBI has mandated that listed companies shall disclose BRSR Core information about the supply chain entities they navigate with. The Supply chain of Disclosures will be made available to the top 250 publicly listed companies based on their market value starting in FY 2024–2025; and by FY 2026–2027, that number shall be increased to the top 1,000. Under this Companies are obligated to disclose material sustainability practices that address governance, social, and environmental problems as part of the BRSR structure, though the precise disclosures required might vary depending on the industry in question. There are still limitations despite the fact this is a significant advancement towards having ESG reporting mandatory, since the BRSR is not fully standardized, allowing flexibility in data presentation, which could make it more challenging to differentiate between companies. Furthermore, by focusing on the top 1,000 companies, smaller companies do not have to disclose as much, which could result in gaps in ESG transparency throughout the competitive landscape. Notwithstanding these drawbacks, BRSR is a crucial first step in encouraging better transparency, accountability, and ethical business practices among India's listed companies.

Impact Analysis of the BRSR Framework of SEBI

While India deserves to be praised for its attempts to emphasize ESG principles, enforcement constraints restrict the effects they have. It outlines areas that need attention to look at these gaps and their real-world implications in Indian industry.

One of its noteworthy impacts is the increased transparency and accountability by mandating the disclosure of significant environmental factors like greenhouse gas emissions, water and energy footprints, waste management procedures, and biodiversity conservation actions. SEBI's BRSR framework promotes companies' environmental performance[4] by introducing the Securities and Exchange Board of India (Credit Rating Agencies) (Amendment) Regulations 2023. Which helps to evaluate a company's sustainability approach and hold them accountable for their environmental actions. In addition, by highlighting environmental concerns linked to their operations, the BRSR framework encourages proactive risk management among companies. Companies are encouraged by this to recognize and reduce any potential environmental liabilities, leading to a longer-term plan that is more sustainable.

An example of Dalmia Cement (Bharat) can be taken to demonstrate its efforts to reduce emissions through the use of cleaner technology, which has led to a decrease in CO2 emissions per tonne of cement produced by the company itself.

Companies are also encouraged to implement sustainable business practices, like resource efficiency and cost reduction, by SEBI's reporting requirements. One example could be that Companies like Mahindra & Mahindra Ltd., have incorporated recycled plastic into car components and are encouraging a more circular economy, which shows the companies are shifting towards sustainability.

Companies are directing more funds to programs including energy efficiency and renewable energy, enhancing their waste management techniques, and integrating initiatives to protect biodiversity into everyday operations. A notable development is the rise in green investments, as companies put funds into energy efficiency and renewable energy initiatives. For example, in their 2023 BRSR report, Tata Motors, revealed a significant $1 billion investment in the development of electric vehicles, showing their dedication to cleaner transportation technology. In addition, Companies are also placing more and more emphasis on recycling and waste reduction programs. A remarkable 50% increase in the recycling of e-waste was recorded by Wipro Limited in their 2022 BRSR report, exhibiting a proactive attitude to responsible waste management while encouraging the circular economy.

Gaps in ESG Reporting:

Greenwashing Concerns:

The present framework for Business Responsibility and Sustainability Reporting (BRSR) that SEBI implemented has been criticized for the limited variety of mandatory disclosures. A comprehensive set of Environmental, Social, and Governance (ESG) indicators, according to critics, are not required to be reported by the framework for example, the Companies are required to emphasize more on their achievements while ignoring their shortcomings. Furthermore, evaluating companies' ESG performance objectively is challenging due to the absence of standardized criteria and verification procedures.[5].

Data Quality and Assurance:

The BRSR framework's assurance requirement raises additional issues. As it is, the mandatory assurance overlooks essential ESG data instead of financial disclosures. It is that incorporating ESG data within the scope of assurance would increase trustworthiness. Furthermore, smaller companies might not have the resources and expertise to effectively gather and evaluate challenging ESG data, which might result in incomplete or inaccurate reporting.

Enforcement and Accountability:

In the present system, Severe penalties for noncompliance with BRSR reporting requirements are absent. This drawback decreases the incentive for comprehensive and accurate ESG reporting. In addition, even though additional transparency provides investors with more power, the current framework does not provide explicit guidance on how to make use of BRSR data to impact voting or engagement on ESG performance.

Industry-Specific Considerations:

Since the existing framework applies a uniform standard set of requirements across all companies, its one-size-fits-all approach might not be the most effective one. So, it is essential to establish sector-specific rules that might provide a more balanced approach, considering the various ESG challenges that each sector encounters.

Global norms and guidelines for ESG reporting are constantly evolving, and to be contemporary and functional, SEBI's framework might require modifications to consider these modifications. For directors to be held accountable, additional information is required concerning the potential legal consequences of false or misleading ESG reporting.

It is likely to strengthen SEBI's BRSR framework and ensure that it keeps promoting modifications in corporate ESG performance in India by addressing these drawbacks. More transparency, accountability, and sustainability among Indian companies can be encouraged by SEBI by expanding the scope of mandatory disclosures, enhancing data quality and assurance processes, strengthening enforcement mechanisms, incorporating industry-specific concerns into account, and addressing legal considerations.

How to overcome these Gaps?

To overcome the identified issues with SEBI's BRSR framework, several measures can be implemented. Firstly, expanding the scope of mandatory disclosures to encompass a broader range of ESG indicators would enhance transparency and accountability. This could involve collaborating with stakeholders to develop a comprehensive set of standardized criteria for reporting, ensuring that both achievements and shortcomings are adequately addressed.

Secondly, it is essential to improve accuracy and inspection procedures. Smaller companies can receive advice and assistance from SEBI on how to effectively gather and analyze complex ESG data. Furthermore, incorporating ESG data into the area of assurance could render reported information more credible and reliable.

Thirdly, there would be more incentive for accurate and comprehensive ESG reporting if enforcement mechanisms were improved and severe penalties were introduced for infringement with BRSR reporting requirements. In addition, the efficacy of the framework would be enhanced by giving clear instructions on how investors could employ BRSR data to impact voting or participation in ESG performance.

Furthermore, industry-specific issues could be more effectively addressed by taking a more flexible approach and enacting sector-specific laws. This would guarantee a more customized and fair approach to ESG reporting among various industries.

The BRSR framework should also be revised and reviewed periodically by SEBI to adhere to changing global standards and recommendations for ESG reporting. Further imparting directors with clear guidance about the possible legal consequences of fraudulent or deceptive ESG reporting would promote responsibility and discourage unethical behavior.

Conclusion:

In conclusion, India's step towards corporate sustainability and transparency has reached an important turning point with the enactment of mandatory Environmental, Social, and Governance (ESG) reporting standards by SEBI. While the blog highlights a commendable effort to incorporate non-financial considerations into corporate disclosures, it also highlights several issues and shortcomings that must be addressed for the framework to function as planned.
The BRSR framework must be continually improved upon and modified due to concerns about industry-specific issues, enforcement and accountability, data quality and assurance, and restricted required disclosures. To address these issues, SEBI could think about expanding the scope of required disclosures, enhancing data quality and assurance procedures, strengthening enforcement mechanisms, considering industry-specific issues, and providing precise instructions on legal implications.

Citations:

1. Evolution of ESG reporting in India – ESG Preparedness Survey Report by Deloitte, May 2023 available at https://www2.deloitte.com/content/dam/Deloitte/in/Documents/about-deloitte/in-Deloitte-India-ESG-Preparedness-Survey-Report_noexp.pdf

2. Business Responsibility and Sustainability Reporting: The Evolution of Sustainability Reporting in India by EY, April 2023 available at https://www.ey.com/en_in/climate-change-sustainability-services/brsr-reporting-and-the-evolving-esg-landscape-in-india

3. Relevant Provisions under the Companies Act, 2013 – Section 134 and Rule 8(3)(A) of the Companies (Accounts) Rules, 2014

4. SEBI Disclosures – Regulation 34(3) of the SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 and SEBI Circular on Disclosure Requirements for Issuance and Listing of Green Debt Securities available at https://www.sebi.gov.in/legal/circulars/feb-2023/revised-disclosure-requirements-for-issuance-and-listing-of-green-debt-securities_67837.html

5. National Guidelines on Responsible Business Conduct, 2019 and SDGs – National Guidelines on Responsible Business Conduct, 2019 available at https://www.mca.gov.in/Ministry/pdf/NationalGuildeline_15032019.pdf

6. The 17 Goals | Sustainable Development, Department of Economic and Social Affairs, United Nations, available at https://sdgs.un.org/goals

REFERENCES

[1] Kakran,Shubham, Kumar, Ashish, “ESG REPORTING LANDSCAPE IN INDIA: CONTRASTING APPROACHES AND INSTITUTIONAL FRAMEWORKS” 01 2023.

[2] Evolution of ESG reporting in India – ESG Preparedness Survey Report by Deloitte, May 2023 available at https://www2.deloitte.com/content/dam/Deloitte/in/Documents/about-deloitte/in-Deloitte-India-ESG-Preparedness-Survey-Report_noexp.pdf

[3] Anklesaria-Dalal, Karishma Thaker, Nimit, “ESG and Corporate Financial Performance: A Panel Study of Indian Companies”18 2019.

[4] Business Responsibility and Sustainability Reporting: The Evolution of Sustainability Reporting in India by EY, April 2023 available at https://www.ey.com/en_in/climate-change-sustainability-services/brsr-reporting-and-the-evolving-esg-landscape-in-india

[5] Guha Kumar Shouvik, Paul Sourav, “Evaluating India’s Regulatory Regime For ESG Rating Agencies”, India Corp Law,2023.