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The Enterprises along with focusing on delivering returns to stakeholders, are now being looked upon to fulfil social responsibility for sustainable development.
Sustainable development has been gaining importance-and businesses are now required to do more than just looking it as a reporting requirement or just ticking checklists, rather they have to exercise religiously and more comprehensively.
The enhanced reporting requirements and the transparency required to meet the disclosure standards are expected to further enhance the communicative value of financial reporting.
The reporting frameworks surrounding the sustainability of operations and development have emerged and enterprises are adopting these frameworks for measuring, exercising, and reporting performance in areas associated with ESG Environment, Social, and governance.
Applicability
- As per SEBI Notification dated 5th May 2021, SEBI has amended Regulation 34 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
- As per the amended regulation, now companies will be required to submit a BRSR-Business Responsibility and Sustainability report instead of the earlier Business Responsibility Report (BRR).
- For the Financial year 2022-23, it is mandatory for the top 1000 listed companies on the basis of market capitalization to report on BRSR. The Market capitalization shall be calculated as of the 31st of March of every financial year.
Outline of ESG and BRSR
ESG stands for Environment, Social, and Governance and it forms the base or say pillars for BRSR.
Environmental-Deals with Organization’s impact on Environment, Social-Deals with Organization’s impact on the community, staff, and customers, etc, Governance-Deals with transparency in operations, ethics, etc.
BRSR has been divided into 3 sections:
Section A: General Disclosures requires some general information such as:
- Details of Listed entity,
- Products/services, Operations/Markets served,
- Details about Employees, corporate structure, details about related parties, CSR Details
Section B: Management and Process Disclosures aims at reporting policies and processes put in place towards adopting the NGRBC Principles/guidelines. NGRBC stands for national guidelines on responsible business conduct, and it gives 9 principles.
These principles deal with Business integrity, Making and providing sustainable goods and services, Employee well-being, Stakeholder interests, Human rights, Environment, Public engagement, Equitable Growth, and Creating and delivering value.
Section C: Principle-wise performance disclosures is aimed at helping entities demonstrate their performance in integrating the Principles and Core Elements with key processes and decisions. This section comprehensively covers management performance on each principle and lists specific questions and disclosures under the same.
Developments in ESG across the globe
- The importance of ESG reporting and compliance has grown by leaps and bounds across the globe in recent times. Sustainability has become strategically important for companies as they gear up for the future.
- Regulators across nations are playing a crucial role in mandating the reporting requirements and also making them continuously evolving to ensure comprehensiveness and transparency.
- For example: as per European Green Deal, the Corporate Sustainability Reporting Directive (CSRD) includes the mandate to report sustainability information under the reporting framework of the European Sustainability Reporting Standards (ESRS).
- As per a recent statement from the Australian Securities and investment commission, markets are now pushing into new areas of ESG like nature and biodiversity rather than just focusing on climate change.
- Similarly in the US, the Securities and Exchange Commission has created a Climate and ESG Task Force in the Division of Enforcement which is actively engaged in identifying potential violations including material gaps or misstatements in issuers’ disclosure of climate risks under existing rules, and disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.
- ICAI has also been taking a lot of initiatives to educate on sustainability reporting and has been conducting training and developing standards on ESG and social audit standards.
- Further SEBI recently published a consultation paper on ESG disclosures, rating and investing whereby the key highlight included mandating reasonable assurance on BRSR which will improve the reliability of reporting as well as ESG investing.
The current scenario in terms of reporting by the companies
- With the onset of the financial year ending, companies have to publish annual reports for year ending 31 March 2023.
- The reporting is comprehensive, and the requirement is being mandated for the 1st time, some challenges are obviously expected to come since the reporting requirement is not only quantitative but also has a focus on qualitative aspects.
- However, since reporting has limited applicability over the top 1000 companies only, these companies have strong control over data and hence are prepared to report on BRSR. Further, as of date, many companies have already published their annual reports including BRSR disclosures.
Readiness of the companies in terms of reporting:
In our opinion, companies are well prepared to report on BSRS and consider it a welcoming step as it gives further thrust to investor relations.
With sustainable growth gaining importance, there is a growing expectation from companies to provide comprehensive, accurate, and reliable ESG disclosures. Since ESG investing is expected to become increasingly popular in the coming years, the readiness of companies for ESG reporting and disclosures is an added advantage for the companies to gear up for global competitiveness as ESG ratings are likely to play a prominent role in investment decisions. Further companies with good compliance practices on ESG fronts are expected to hugely benefit from it since this ensures their sustainable growth in the long run.
By: Kunal Mehra managing partner and co-founder of SW India and Jitin Aggarwal- Director (Audit & Advisory) at SW India