India – An Introduction Of ESG Disclosures In Indian Regulatory Space – Part 1.

Introduction
 

The 2021 conference of parties (CoP26) on climate change was recently held in Glasgow, with the global community negotiating ways to manage climate change and mitigate its impact while ensuring that no adverse effect is felt on employment, food security, and living standards of the masses. Addressing climate change is one the most urgent tasks before us, particularly for India, due to rising threats from drastic physical events, such as floods, droughts, hurricanes, rising temperatures, and other climate change related events. It has become necessary to take immediate and consequential steps towards climate change adaption and mitigation; otherwise, the global community is set to lose trillions of dollars and millions of jobs.

 

Thus, India, at CoP26, has pledged to achieve net zero emissions by 2070.[1] This is in line with the policies adopted by Indian regulators over the past few years, which indicate that India has made an aggressive move towards decarbonization, by nudging as well as mandating market players to adopt sustainable ways of doing business. One of the indicators of the same is the introduction of comprehensive sustainability and Environment, Social and Governance (“ESG”) related disclosures to nudge companies to look beyond the traditional finance-centric models.
 

ESG disclosures are highly relevant for all stakeholders involved in a business process:
 

• Investors – If a business is not conscious about sustainability, there are chances that either the business processes might become redundant in the future, due to legal and regulatory changes, which might forbid particular ways of doing business, or demand for its business products or services might go down. Therefore, ESG disclosures are highly consequential for investors for the following reasons:
   

  1. including climate-related considerations in asset valuation and finance allocation processes;

  2. determining the environmental and social impact of a company’s business processes; and

  3. assessing how climate change could affect a company’s financial stability in the future.
      

• Businesses – ESG disclosures allow companies to identify potential transition risks, self-assess its ability to sustain in the future, and undertake necessary steps to adapt to the likely future changes. In case companies are not conscious of this exercise, they not only stand the risk of losing profit-making capacity, but also market reputation. At the same time, ESG disclosures help companies in identifying certain opportunities for innovation that might yield high results in the future. They also help companies in reassuring their stakeholders about their values and respect towards responsible business. The introduction of the Companies Act, 2013, has codified the stakeholder model of governance and mandated companies to think beyond their shareholders by addressing the concerns of the larger group of stakeholders. For instance, Section 166(2) of the Companies Act states that ‘a director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.’
   

• Consumers – ESG disclosures aid consumers in identifying responsible businesses, which not only concentrate on maximizing profits, but also on growing in a responsible manner. Businesses could also use their disclosures as a part of their marketing strategy to attract more consumers.
   

This demonstrates that ESG disclosures are significant from the perspective of all stakeholders involved in the business processes. Therefore, special focus must be given to preparing the foundational principles and framework for such disclosures. As part of a two-parts blog-series, this first part will focus on the journey of ESG disclosure frameworks in India and provide a general overview of the newly introduced Business Responsibility and Sustainability Reporting (“BRSR”) framework, while discussing its implication on businesses.
 

Evolution of ESG Disclosures in India
 

The Companies Act, 2013 introduced one of the first ESG disclosure requirements for companies. Section 134(m) mandates companies to include a report by their Board of Directors on conservation of energy, along with annual financial statement.[2] This requirement is further detailed under Rule 8(3)(A) of the Companies (Accounts) Rules, 2014, which mandates the board to provide information regarding conservation of energy.
 

In addition to this, companies are mandated to include disclosures on opportunities, threats, risks and concerns as part of their annual reports under Regulation 34(3) of the SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 (“LODR Regulations”).[3] However, such disclosure requirements do not seek details about the metrics and  processes adopted by companies to identify such opportunities or risks nor mandates the companies to chart its progress over the course of time.
 

In 2017, SEBI issued a circular on ‘Disclosure Requirements for Issuance and Listing of Green Debt Securities’,[4] to introduce the regulatory framework for issuance of green debt securities in India and enhance investor confidence. It supplements the SEBI (Issue and Listing of Debt Securities) Regulation, 2008[5] and envisages a list of disclosures that an issuer must make in its offer document before and after the commencement of a project financed by green debt. These additional disclosure requirements have been prescribed in order to attract the finance reserved for ESG-compliant projects, such as renewable and sustainable energy, clean transportation, sustainable water management, climate change adaption, energy efficiency, sustainable waste management, sustainable land use, and biodiversity conservation.[6]
 

In addition to this SEBI circular, the Indian Banks’ Association (IBA) has also released the National Voluntary Guidelines for Responsible Financing, laying down broad and general principles towards ‘integrating ESG risk management into Financial Institution’s (FIs) business strategy, decision-making process and operations.’[7] For instance, Principle 2 provides that FIs ‘should integrate the analysis of environmental, social and governance factors in their investment, lending and risk-management processes across business lines to minimize adverse impact on their own operations and on society. However, these Guidelines do not envisage any framework for credible and transparent issuance of green debt instruments.
 

Introduction of the BRSR framework
 

To further strengthen the ESG disclosure regime in India, SEBI amended Regulation 34(2)(f) of the LODR Regulations to introduce the BRSR framework in May 2021.[8] This will replace the existing Business Responsibility Report (“BRR”). BRSR is aligned with nine principles of National Guidelines for Responsible Business Conduct (“NGBRC”)[9] and it will be mandatory for the top 1,000 listed companies to annually disclose ESG-related information from financial year 2022-23. The BRSR framework has been developed after years of evolution, as can be seen from the table below:
 

Year	Event
2009	Ministry of Corporate Affairs (“MCA”) issued the National Voluntary Guidelines (“NGVs”) on CSR.
2012	SEBI mandated the top 100 listed companies by market capitalization to file BRR based on the NGVs along with their annual reports.
2014	CSR was mandated and CSR Rules came into force.
2015	BRR was extended by SEBI to the top 500 listed companies by market capitalisation.
2017	SEBI advised that IR may be adopted by companies on a voluntary basis from financial year 2017-18 by the top 500 listed companies.
2019	MCA released the NGBRC.
2019	BRR was extended by SEBI to the top 1000 listed companies by market capitalisation.
2021	SEBI introduced BRSR in May 2021.

 

Apart from introducing a relatively comprehensive disclosure framework, BRSR also includes the following aspects, with an aim to enhance ESG complaint business practices in India:
 

• Implementation of the NGRBC principles to address ESG-related concerns;Apart from introducing a relatively comprehensive disclosure framework, BRSR also includes the following aspects, with an aim to enhance ESG complaint business practices in India:

• Disclosure of adequate policies and mechanism that a company implements to remain ESG-compliant. BRSR lays considerable emphasis on quantifiable metrics for ensuring comparison across sectors, companies, and time periods;

• Enhanced disclosures on climate and social related issues;

• Segregation of disclosures into essential and leadership indicators, the former being the mandatory requirement. The leadership indicators, inter alia, also emphasizes disclosures related to the value chain of eligible entities;

• BRSR allows interplay for organisations that are already publishing sustainability reports under other internationally recognized frameworks.
   

India is gradually moving towards developing regulations around ESG. With the introduction of the BRSR framework, SEBI has joined the group of countries and international organization to have released comprehensive sustainability reporting frameworks. Though the reporting mandate is presently restricted to the top 1,000 listed companies by market capitalization, the experience with BRR only indicates that a wider range of companies would soon be covered under the BRSR framework.
 

This concludes the introduction of the BRSR framework. In the next part of this blog-series, we will analyse it and suggest possible improvements that SEBI could adopt to address certain deficiencies and make it more comprehensive.

For further information, please contact:

Arjun Goswami, Partner, Cyril Amarchand Mangaldas

arjun.goswami@cyrilshroff.com
 

 

[1] https://www.theguardian.com/world/2021/nov/01/narendra-modi-pledges-india-will-reach-net-zero-emissions-by-2070

[2] https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf.

[3] https://www.sebi.gov.in/legal/regulations/jan-2020/securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-2015-last-amended-on-january-10-2020-_37269.html.

[4] https://www.sebi.gov.in/legal/circulars/may-2017/disclosure-requirements-for-issuance-and-listing-of-green-debt-securities_34988.html.

[5] https://www.sebi.gov.in/legal/regulations/jun-2008/sebi-issue-and-listing-of-debt-securities-regulations-2008_6503.html.

[6] SEBI, Memorandum to the Board on Disclosure Requirements for Issuance and Listing Green Bonds: https://www.sebi.gov.in/sebi_data/meetingfiles/1453349548574-a.pdf.

[7] Indian Bank’s Association, National Voluntary Guidelines for Responsible Financing, Executive Summary: https://www.cafral.org.in/sfControl/content/LearningT

akeaWays/1213201764617PMNationalVoluntaryGuidelinesfor

ResponsibleFinancing.pdf. 

[8] https://www.sebi.gov.in/legal/circulars/may-2021/business-responsibility-

and-sustainability-reporting-by-listed-entities_50096.html.

[9] https://www.mca.gov.in/Ministry/pdf/NationalGuildeline_15032019.pdf.