• April 5, 2023

SEBI’s new regulations boost ESG disclosure credibility

SEBI’s new regulations boost ESG disclosure credibility

SEBI’s evolving ESG regulations drive corporate focus on sustainability, but challenges persist in data quality and compliance readiness.

For over a decade, the Indian government and the Securities and Exchange Board of India (SEBI) have been urging companies to incorporate environmental, social, and governance (ESG) aspects as an integral part of their corporate culture. In pursuit of this objective, SEBI made it mandatory for the top 1,000 listed companies to report their Business Responsibility and Sustainability (BRS) on a voluntary basis from the financial year 2020-21, and mandated it from 2022-23 onwards. Additionally, the Companies Act of 2013 stipulated that the board of directors’ report should include disclosure on energy conservation.

As reporting practices and standards for ESG are still in the early stages of development, SEBI has adopted a flexible approach. In 2012-13, SEBI made ESG reporting mandatory for the top 100 listed companies by market capitalisation and subsequently extended it to the top 500 from 2016-17, and to the top 1,000 from 2022-23.

Given the growing global emphasis on ESG, particularly on climate change, SEBI has taken a number of structural measures to raise the bar for ESG requirements. To improve reliability and transparency, SEBI introduced the BRSR Core, which consists of a limited set of key performance indicators (KPIs) that the top 1,000 listed companies must disclose with reasonable assurance by 2026-27, following a glide path. These requirements also apply to the value chain of these companies. Additionally, SEBI has mandated a regulatory framework for ESG Rating Providers (ERPs) to ensure credibility, consistency, and comparability of ESG ratings.

Despite SEBI’s pragmatic approach to compliance through a glide path, most corporates have yet to fully institutionalise ESG compliance, particularly with respect to environmental aspects. The current inclination is primarily driven by global lenders and investors’ increasing focus on ESG when making investment decisions. Even though BRSR is mandatory from 2022-23, less than 40% of the top 500 listed companies currently have any form of sustainability reporting. ESG disclosure users face challenges due to poor quality data, lack of data, and ad hoc reporting on ESG parameters. Information on ESG in the supply chain, particularly with regard to climate change, is often too general to be meaningful. Even obtaining appropriate data from secondary sources presents a challenge.

The introduction of new requirements for verified disclosures on specified KPIs with reasonable assurance and rating, for the top 1,000 listed companies, following a glide path, is a significant step towards instilling a sense of urgency and discipline in ESG compliance. These requirements are aligned with the Companies Act 2013, which mandates that directors remain mindful and concerned about the impact of the company’s operations on climate change. Any action taken by the board that prioritizes the company’s financial interests at the expense of the environment may be deemed contrary to the law, and the directors may be held accountable jointly and individually. Notably, the quality of disclosures in the top 150 listed companies has improved considerably over the years.

It is imperative that ESG becomes a central focus in boardroom discussions and organization-wide governance. ESG risks have a significant impact on a company’s sustainability, and it falls upon boards to guide their organizations in developing an ESG agenda for both the short and long term. Identifying knowledge gaps between what they should know and what they do know is crucial. Companies should assess their level of knowledge in the overall context of their business, as it may have an impact on their operations. Furthermore, companies must integrate a comprehensive ESG risk matrix specific to their industry into their enterprise-wide risk framework and organization.

Without this concerted effort, companies may struggle to comply with ESG-related regulations, particularly in the areas of climate change and supply chain. It is necessary for trade and industry associations and rating agencies to work together to develop industry-specific standards tailored to domestic conditions, along with reliable tools and techniques for measuring data on all KPIs.

SEBI has laid out a well-planned trajectory for the implementation of the ESG framework, with a gradual increase in Key Performance Indicators (KPIs), industry-specific measurement methodologies and standards, guidance on rating methodologies, and internationally accepted assurance standards to ensure the quality and integrity of ESG disclosures. This new framework, however, does not limit rating agencies from issuing other or additional ratings as required by their clients, although the core ESG Rating will be based on the specified parameters. In order to demonstrate compliance with global standards and best practices and gain access to global capital and markets, companies may choose to prioritize meeting these ESG standards.

ESG disclosures are poised to become just as important, if not more so, than financial and accounting disclosures, driven by both regulatory measures and market forces. Within the ESG framework, disclosures related to climate risks, oversight, and governance will increasingly receive emphasis. Companies, their boards, and their management will face heightened scrutiny from regulators, investors, and ESG activists. The rise of ESG claims both in India and globally underscores the urgent need for companies to build capacity and competencies at all levels of management to effectively respond to these emerging imperatives.

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