ESG Disclosures: Navigating corporate misconduct and investor confidence

Recent trends have shown that entities are voluntarily choosing to disclose ESG metrics and companies failing to comply on these metrics are risk losing investors.

By Sara Sundaram and Somesh Lund 

From claiming phantom carbon credits to the mid-air opening of a plane door, recent events highlight the role of robust corporate governance in preventing and identifying corporate misconduct. Moreso, these events have had a direct impact on the share price of these companies.

Investors are progressively looking at Environmental, Social, and Governance (ESG)-related disclosure to evaluate potential risks and opportunities associated with companies.

This article explores India’s regulatory regime regarding ESG disclosures with a special focus on corporate misconduct related disclosures and companies that set an agenda for climate-resilient growth will likely be seen as more attractive prospects by investors.

Metamorphosis of ESG framework

Taking cognizance of increasing focus on business responsibility globally, the Ministry of Corporate Affairs, in July 2011, issued the National Voluntary Guidelines on the Social, Environmental and Economic Responsibilities of Business. These guidelines were subsequently replaced in 2015 by the National Guidelines on Responsible Business Conduct.

In May 2021, the Securities and Exchange Board of India (SEBI) introduced ESG reporting requirements called the Business Responsibility and Sustainability Report (BRSR or BRS report) and mandated filing of the same for top 1000 listed companies from financial year 2022-2023.

As the NGRBCs are voluntary in nature, ESG related disclosures are mandated only for 0.059%[1] of total active companies registered in India.

Interplay between BRSR and Corporate Misconduct

Corporate misconduct, such as corrupt practices, environmental violations, or unethical governance practices leads to significant penalties, legal repercussions and reputational damage. Further, news of corporate misconduct exacerbates the risk of losing the trust and confidence of stakeholders. This may result in a decline in stock price and increased difficulty in raising capital.

Resultantly, the importance of ESG disclosures cannot be overstated. Recent trends have shown that investors are no longer passive recipients of ESG information. They are actively using these disclosures to identify risks that may not be evident from mere review of financial reports. The BRS report aims to address this very need.

The BRS report mandates a laundry list of non-financial disclosures relating to ESG factors.  Some of the key disclosure that form a part of the BRSR are-details of the complaints/grievances received, disciplinary action taken by any law enforcement agency for charges of bribery or corruption against the directors / Key Managerial Personnels / employees, details of significant social or environmental risk arising from the production or disposal of products or services, details regarding purchases, sales, loans & advances, and investments with related parties and, instances regarding breach of data including those involving personally identifiable information.

SEBI, in July 2023, introduced BRSR Core comprising of nine ESG attributes disclosures such as employee wellbeing and safety, energy footprint, and openness of business. Further, it mandated that listed entities undertake reasonable assurance of BRSR Core. The same will be applicable in a phased manner to the top 1000 listed entities from Financial Year 2026 – 2027.

Thus, analogous to the statutory audit of financial statements, onus has been placed to undertake reasonable assurance of disclosures that form a part of BRSR Core. This requirement further facilitates transparency and assurance regarding company’s environmental impact, social responsibility and governance impact.

ESG Reporting: The way forward:

Regardless of the forces driving ESG investing forward, there are still barriers to overcome. With the introduction of the BRSR framework, it is apparent that even regulators are not only focusing on financial attributes but also on non-financial attributes. Although a step in the correct direction the current ESG disclosure regime is excessively cumbersome.

Recognising the same, SEBI issued a consultation paper in May 2024, seeking public comments on simplifying and reducing compliance costs related to BRS report.

Further, as these disclosures are mandated for only a small sub-set of all entities registered in India, recent trends have shown that entities are voluntarily choosing to disclose ESG metrics and companies failing to comply on these metrics are risk losing investors. Effective management and mitigation of ESG risks and assessing the potential impact of such risk on business, ensures investments aim for positive impacts and boost investor confidence.

(The authors, Sara Sundaram, Partner, Cyril Amarchand Mangaldas and Somesh Lund, Consultant, Cyril Amarchand Mangaldas.)

Views are personal and do not represent the stand of this publication.