SEBI’s new requirement for independent assurance and regulated rating will enhance the credibility of ESG disclosure

The growing emphasis laid by governments and stakeholders globally on ESG in general and on climate change in particular, SEBI has raised the bar for ESG requirements.

The government and the Securities and Exchange Board of India (SEBI) have been persuading companies for more than 10 years to adapt to and adopt environmental, social and governance (ESG) aspects as integral to corporate culture. Towards this end, SEBI mandated Business Responsibility and Sustainability Reporting (BRSR) for the top 1,000 listed companies from the financial year 2020-21 on a voluntary basis and mandatorily from 2022-23. The Companies Act, 2013 required disclosure on the conservation of energy in the report of the board of directors.

Given the nascent stage of development of best reporting practices, standards, and also preparedness of the corporates, SEBI followed a flexible approach. It made ESG reporting mandatory in 2012-13 for the top 100 listed companies by market capitalisation and then extended it to the top 500 from 2016-17 and then to the top 1,000 from 2022-23.

With the growing emphasis laid by governments and stakeholders globally on ESG in general and on climate change in particular, SEBI has raised the bar for ESG requirements through a number of structural measures. In order to enhance reliability and transparency SEBI has introduced BRSR Core with a limited set of key performance indicators (KPIs) which shall be disclosed with reasonable assurance by the top 1,000 listed companies following a glide path by 2026-27. The requirements shall also be applicable to the value chain of these companies. SEBI has also mandated a regulatory framework for ESG Rating Providers (ERPs) to lend credibility, consistency and comparability to ESG ratings.

Compliance Lags

While the approach of SEBI has been pragmatic in implementing the rigour of compliance through a glide path, most corporates are yet to institutionalise ESG compliance particularly related to environmental aspects. The inclination so far has been primarily driven by the increasing focus of global lenders and investors on ESG while making investment decisions. While the BRSR is mandatory from 2022-23, less than 40 per cent of the top 500 listed companies have any form of sustainability reporting now. Users of ESG disclosures face challenges of poor quality of data, lack of data, and ad hoc reporting on ESG parameters. Information on ESG in the supply chain, particularly in relation to climate change, in most cases is too general to be meaningful. They find difficulty in getting appropriate data even from secondary sources.

The new requirements of verified disclosures on specified KPIs with reasonable assurance and rating, for the top 1,000 listed companies, through a glide path, would bring a sense of urgency and discipline in ESG compliance. This is in alignment with the requirements of the Companies Act 2013, which require the directors to remain conscious of and concerned about the effects of the company's operations on climate change. Any act of the board which is in the financial interests of the company but is detrimental to the environment may be against the letter and spirit of the law and the directors may be held accountable jointly as well as individually. Indeed, the quality of disclosures in the top 150 listed companies has significantly improved over the years.

Boards Need To Take Charge

Hopefully, ESG will now have a prime place in boardroom agenda and organisation-wide governance. ESG risks impinge on a company's sustainability. Boards need to steer companies into developing ESG agenda, both for the short term and long term. They should identify gaps between what they should know and what they actually know. The level of knowledge should be assessed in its overall context as it may affect the company. It should further ensure that a comprehensive ESG risk matrix relevant to the company is made an integral part of its enterprise-wide risk framework and organisation.

Unless that happens, companies may not be able to comply with ESG-related, and in particular climate change and supply chain-related compliance. Trade and industry associations and rating agencies should come forward work to develop industry-specific standards relevant to domestic conditions, and tools and techniques for measuring data on all KPIs in a reliable manner.

Room For Improvement

As stated, SEBI has followed a glide path. It is expected that the ESG framework would be graduated from 2027-28 to the next level of compliance by increasing the number of KPIs, prescription of industry-specific measurement methodology and standards, guidance on rating methodology, and prescription of internationally accepted assurance standards to increase quality and integrity of ESG disclosures. Even under the new framework, there are no constraints on rating agencies for issuing other or additional ratings as required by their clients though the core ESG Rating will be based on the specified parameters. Companies aspiring for global capital and market reach may prefer to demonstrate that they meet global standards and best practices.

Regulatory measures coupled with market forces will drive the ESG disclosures to be as important, if not more, as the accounting and financial disclosures. Within the ESG framework, disclosures of climate-related risks, oversight and governance would get more and more emphasis. Companies, their boards and their management will be subjected to closer supervision and greater scrutiny of the regulators, investors and ESG activists. ESG claims in India and globally are already on increase. It is high time that companies build capacity and competencies at all levels of management to adequately respond to emerging imperatives.

Ashok Haldia is a chartered accountant. Views are personal, and do not represent the stand of this publication.