ESG Compliance And Reporting: An Overview
With the increasing mandate of transparency that is demanded from all major organizations, ESG or Environmental, Social and Governance Reporting is an innovative way to ensure the same. An ESG Report is a document that outlines the environmental, social, and governance (ESG) implications of a firm or organisation.
ESG REPORT AND ITS IMPORTANCE
ESG Reports allow a business to be more open about the threats and opportunities it encounters. Subsequently, the Report enables investors to evaluate companies better and make informed decisions accordingly to make sure that their investment encounters reduced financial risks in the future.
Companies with exceptional ESG performance have showed higher investment returns, lower risks, and enhanced crisis resiliency. This is because creation of an ESG Report automatically pushes the company to be more compliant with factors of ESG, consequently making them more attractive to investors. ESG reporting includes both qualitative and quantitative measures that are used to assess a company’s performance in relation to ESG risks, opportunities, and initiatives.
ESG Reports not only analyses companies’ past performances but also helps in determining points of weakness. As the age-old adage goes, “Prevention is better than cure”. Similarly, successful identification of potential risks and liabilities only help the company in the long run by taking measures before-hand to ensure maximum compliance. Hence, effective due diligence of ESG concerns and accurate reporting of the results of that diligence, as well as taking consideration of global ESG disclosure standards, are crucial.
The following are the components of ESG:
- Environment: The environment refers to how businesses use energy and manage their environmental impact. Energy efficiency, climate change, carbon emissions, biodiversity, air and water quality, deforestation, and waste management are all factors taken into account. Companies that ignore these environmental hazards may incur unanticipated financial costs as well as investor scrutiny.
- Social: Social is a social criterion that looks at how a firm develops a sense of belonging among its employees and encourages culture, as well as how this affects the broader community. Inclusion, gender and diversity, employee engagement, customer happiness, data protection, privacy, community relations, human rights, and labour standards are all factors taken into account.
- Governance: Governance is concerned with a company’s internal system of controls, policies, and processes, and how it keeps track of any infractions. It ensures transparency and best practises in the industry, as well as engagement with authorities. The company’s leadership, board composition, executive compensation, audit committee structure, internal controls, and shareholder rights, as well as bribery and corruption, lobbying, political contributions, and whistle-blower programmes, are all taken into consideration.
ESG IN INDIA
Corporate Social Responsibility
India’s tryst with ESG reporting started way back in 2013 with the inculcation of a provision of Corporate Social Responsibility, or CSR, through Section 135 of the Companies Act of 2013. On April 1, 2014 the statute came into force and Indian became the very first country to legally mandate Corporate Social Responsibility. While there is no universal definition of CSR, it basically embodies the idea that corporations or companies must be responsible for their impacts on society and promote their development by integrating social, environmental, governmental and consumer concerns within their business. Section 135(2) mandates that a CSR board would also release a corresponding report outlining the company’s CSR achievements and initiatives. Over time, CSR initiatives have more less been perceived as philanthropic as they focussed more on the social parameter of CSR. Additionally, many companies, because of rising demands of environmental awareness release a separate sustainability report.
Hence, a comprehensive ESG Report should adequately cover all the different parameters reducing the need to have separate reports on separate concerns. Reporting guidelines are not absolute and differ according to various requirements. There are certain globally accepted standards for reporting-
- Global Reporting Initiative (GRI)
- The Value Reporting Foundation: Integrated reporting and the SASB standards
- UN Sustainable Development Goals (SDGs)
The new SEBI requirements: BRSR
On May 10 2021, the SEBI released a circular containing the format of the Business Responsibility and Sustainability Report (“BRSR”). The release of the Report was kept to be voluntary for the FY 2021-22. But this Report is mandatory for the top 1000 listed companies based on market capitalization from the FY 2022-23. The BRSR replaced the BRR or Business Responsibility Report
According to the official circular issues by SEBI, the BRSR is aimed at securing transparent and standardized disclosures by companies on their ESG parameters and sustainability-related risks. This approach is expected to help companies better demonstrate their sustainability objectives, position, and performance to the market, resulting in long-term value creation and increasing the ability of investors to make informed ESG-related decisions. The report notes that the pandemic of COVID-19 has also heightened the importance of environmental, social, and governance (ESG) factors for investors, resulting in increased investor awareness and a shift toward sustainable investing. The surge in new ESG-themed mutual fund launches and asset growth of such schemes, especially in India, reflects this new trend.
Few of the key disclosures as given in the circular as follows-
- An overview of the entity’s material ESG risks and opportunities, approach to mitigate or adapt to the risks along-with financial implications of the same
- Sustainability related goals & targets and performance against the same
- Environment related disclosures covering aspects such as resource usage (energy and water), air pollutant emissions, green-house (GHG) emissions, transitioning to circular economy, waste generated and waste management practices, bio-diversity etc
- Social related disclosures covering the workforce, value chain, communities and consumers, as given below:
- Employees / workers: Gender and social diversity including measures for differently abled employees and workers, turnover rates, median wages, welfare benefits to permanent and contractual employees / workers, occupational health and safety, trainings etc.
- Communities: disclosures on Social Impact Assessments (SIA), Rehabilitation and Resettlement, Corporate Social Responsibility etc.
- Consumers: disclosures on product labelling, product recall, consumer complaints in respect of data privacy, cyber security etc.
INDUSTRIES THAT REQUIRE FOCUS ON ESG COMPLIANCE
While ESG compliance and reporting is recommended for every company in every industry, there are certain sectors that have major ESG impacts, have low ESG ratings and thus need renewed efforts in this regard.
CRISIL Ltd. released ESG scores for 225 Indian companies across 18 sectors in 2021. Environmental considerations had the greatest influence on the scores, with financial and information technology firms receiving the best marks due to their minimal emissions and limited use of natural resources. They are also excellent job creators who have worked in their favour. Oil and gas, chemicals, metals and mining, and cement companies, on the other hand, received lower ESG scores, owing to their high natural-resource intensity, which translates to higher emissions, extractive use of natural resources, potential negative environmental and community impact, and generally more moderate levels of disclosure. As a result, these industries must redouble their efforts in ESG compliance and reporting.
Thus, in this globalized world, it is more crucial than ever to ensure that ESG reporting is done diligently. Simply, putting off one fire after another as and when they come is a very unsustainable approach that negatively affects the company in the long run. Encouraging a culture of compliance is the way to go forward. Different jurisdictions have different compliance requirements. But there is a global call for standardized reporting guidelines for ease of business and understanding.
About the author: This article is written by Ansruta Debnath, a legal intern at Vidma Consulting Group LLP. She is a law student, currently in her first year in National Law University Odisha.