Why ESG reporting could be 'significantly diluted' with voluntary disclosure, according to this industry expert

Smitha Shetty, Regional Director - Asia Pacific, Achilles Information, said that there is a trend of global companies seeking supplier regions with streamlined ESG reporting requirements.

The markets regulator has put forward a few proposals to make its much-lauded environmental, social and governance (ESG) compliance reporting framework, called Business Responsibility and Sustainability Reporting (BRSR) Core,  even easier to comply with. But the regional head of a firm that helps the top companies in India with ESG compliance of their supply chains said that one of the capital markets regulator's proposals—to replace 'comply or explain' with voluntary disclosure—could take ESG reporting back several steps and how an example from the European Union should act as a warning.

In a conversation with Moneycontrol, Smitha Shetty, regional director, Asia Pacific, Achilles Information, also spoke about the Indian sectors that are most open to ESG reporting, those that are resistant, the challenges companies face with ESG reporting and why ESG reporting is crucial to the development of Indian capital markets.

Also read: Sebi moots including Green Credits in BRSR Core, redefining value-chain partners

Edited excerpts:

In your opinion, which of the proposals put forward the Securities and Exchange Board of India (SEBI, in its May 22 consultation paper) would cause a serious dilution of ESG reporting? Why?

The proposal to shift from a 'comply or explain' approach to a voluntary disclosure framework for ESG reporting in India's value chains marks a potential turning point. While voluntary reporting offers initial flexibility, it carries the risk of fragmented disclosures, hindering stakeholder comparison and informed decision-making. The strength of the 'comply or explain' model lies in ensuring a baseline of mandatory disclosure, which leads to both transparency and accountability across the market.

‘Comply or explain’ goes even beyond fostering transparency. By requiring companies to explain the inclusion or omission of certain elements in their disclosures, it necessitates a deeper understanding of material ESG impacts, risks and opportunities. This helps prevent superficial "tick-box" exercises that have often been criticised, encouraging a more mature and comprehensive approach to ESG reporting. In essence, the 'comply or explain' framework not only ensures a minimum level of disclosure but also drives companies towards greater accountability and a more thoughtful consideration of ESG factors.

In your suggestions to the regulator on the BRSR Core, you have said that moving from the 'comply or explain' to a voluntary reporting framework will add to companies' burden if and when mandatory reporting is introduced at a later date'? Could you explain that a bit more?

Companies may be lulled into a false sense of security, relying on the flexibility of the 'explain' option and not investing in comprehensive ESG reporting systems. This lack of preparedness can cause significant difficulties when faced with the stringent requirements of mandatory reporting, leading to increased costs and administrative burdens as companies scramble to comply.

A good example is the ongoing transition from voluntary to mandatory reporting under the Corporate Sustainability Reporting Directive (CSRD) in the European Union. Companies, especially those with complex global supply chains extending into developing economies, are finding it difficult to meet the rigorous standards imposed by CSRD, even with its phased rollout.

Why is ESG reporting crucial to the development of Indian capital markets?

It can directly impact Indian companies’ ability to attract capital… Robust ESG reporting resonates with the values of global investors, enhancing a company's appeal.

Conversely, diluting ESG standards could have a domino effect. It risks eroding investor confidence, diminishing the allure of Indian companies for international capital, and potentially escalating the cost of capital. These could hinder the growth and global integration of Indian capital markets, where ESG considerations are rapidly becoming a cornerstone of investment decisions.

The interconnectedness of ESG reporting and global business opportunities is underscored by the trend of companies seeking regions with streamlined reporting requirements… There are heightened reporting and due diligence requirements in Europe and North America.

You have said that the 'social' part of ESG reporting is most challenging…

Issues such as labour practices, community engagement, human rights, and diversity and inclusion often lack easily quantifiable metrics, making comparisons across companies and sectors challenging. Cultural and regional differences further complicate the development of a standardised reporting framework. We've observed that smaller companies, especially MSMEs (micro, small and medium enterprises), often struggle with how to articulate and document their social practices, even when they are implementing them.

Which industries or sectors in India have been most open to ESG reporting?

While awareness of ESG reporting is growing across Indian industries, sectors such as energy, cement, steel, manufacturing and large IT companies have demonstrated greater openness to and effectiveness in ESG reporting in India. These sectors often have strong international ties and exposure to global ESG standards, driving them to adopt robust reporting practices.

Which ones have been the most resistant?

Industries with less direct environmental and social impacts, or those with limited exposure to international markets, may view ESG reporting as less relevant or an additional burden. This perception can be particularly strong among smaller companies and those operating in sectors with complex supply chains, where practical challenges in data collection and reporting are significant obstacles… The agricultural sector, with its complex and often informal supply chains, faces unique challenges in collecting and reporting ESG data. Similarly, sectors like IT and certain financial services might perceive ESG reporting as less directly relevant to their core operations.

Sectors that are heavily regulated or capital-intensive, such as traditional manufacturing or heavy industries, often prioritise compliance with existing regulations over proactive ESG initiatives, viewing them as non-essential to their primary business objectives.

You have said that the shipping industry's adoption of ESG reporting can play a key role in wider adoption of the practice. Why is that?

The shipping industry's adoption of ESG reporting holds the potential to catalyse wider adoption across sectors. Given its significant environmental impact and crucial role in global trade, the industry's embrace of robust ESG practices can influence its entire supply chain… By demonstrating the feasibility and benefits of transparent ESG disclosures within complex global operations, the shipping industry can inspire other sectors to embark on their ESG reporting journey.

What are Indian companies’ biggest worries or challenges when adopting ESG reporting?

Their challenges are multifaceted. The cost of implementation, particularly for smaller firms, and the scarcity of skilled professionals capable of managing and reporting ESG data are significant hurdles. Additionally, data privacy concerns, the complexity of integrating ESG reporting into existing business practices, and the potential for increased scrutiny and regulatory burden contribute to their apprehensions.