Over the past few years, ESG, or environmental, social and governance investing, has slowly and steadily evolved into an investment strategy through which investors put their money into companies that seek to make the world a better place. . ESG investing requires balancing the consideration of environmental, social and governance factors with financial factors in the investment decision-making process. Investors are increasingly applying these non-financial factors as part of their analysis process to identify material risks and opportunities for growth. ESG measures were typically not part of mandatory financial reporting, although in recent times several countries have increasingly made such disclosures mandatory for companies in their annual report or in a standalone sustainability report. Several ESG-conscious companies also voluntarily choose to make ESG information publicly available.
Many institutions, such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD) are working on developing standards and defining materiality to to facilitate the integration of these factors into the investment process. ESG reporting in India started in 2009 with the publication by the Ministry of Commercial Affairs (MCA) of the Voluntary Guidelines on Corporate Social Responsibility. Since then, the reporting landscape has come a long way with the introduction of Corporate Responsibility Reporting (BRR), Corporate Social Responsibility (CSR), IR, National Guidelines on Responsible Business Conduct (NGRBC) and the new corporate responsibility and sustainability report (BRSR) (introduced by a SEBI circular dated 10and May 2021).
The Securities and Exchange Board of India (SEBI) introduced the ESG reporting requirement in 2012 and required the top 100 listed companies by market capitalization to file a corporate responsibility report. This was later extended to the top 500 listed companies by market capitalization in 2015. The 10and In May 2021, SEBI introduced a new ESG reporting structure under the name Business Responsibility and Sustainability Report (BRSR). Under BRSR, listed entities (top 1000) must provide an overview of the entity’s material ESG risks and opportunities, the approach to mitigate or adapt to the risks as well as the financial implications thereof. The BRSR was introduced with the aim of making it mandatory for the top 1000 listed companies to report on their sustainability performance in order to maintain transparency with stakeholders.
BRSR is a questionnaire-based report that is divided into 3 sections as follows:
- Section A: General Disclosures
This section contains details of the listed entity; Products; operations; employees; holdings, subsidiaries and associated companies (including joint ventures); CSR; transparency and disclosure compliance.
- Section B: Management and Process Information
It contains questions related to policy and management processes, governance, leadership and oversight.
- Section C: Principles-Based Performance Disclosures
Companies are required to report KPIs in accordance with the nine principles of the National Guidelines on Responsible Business Conduct (NGRBC). The section categorizes KPIs into two sub-categories that companies are required to report on: essential indicators (mandatory) and leadership indicators (voluntary).
While SEBI introduced the BRSR requirement in its May 2021 circular, to give businesses time to adapt to the new requirements, SEBI required reporting to be on a voluntary basis for the financial year. 2021-22. However, for the 2022-23 fiscal year, BRSR is mandatory for the top 1000 listed entities. The pandemic along with the passage of the Paris Agreement and other climate change initiatives have been key contributors accelerating the relevance of ESG considerations for investors. ESG-related reports provide stakeholders with comparable information on top companies to help them make informed investment choices. ESG criteria are used by socially responsible investors to screen potential investments. Below is an overview of the three criteria used to assess companies for ESG investing:
- Environment. What is the impact of the company on the environment? How does it protect/safeguard the environment? This can include a company’s carbon footprint, the toxic chemicals involved in its manufacturing processes, its corporate climate change policies, and the sustainability efforts that make up its supply chain.
- Social. How does the company improve its social impact, both within the company and in the wider community? Social factors include everything from LGBTQ+ equality, racial diversity in both the executive suite and general staff, and inclusion programs and hiring practices. Social criteria look at how a company manages its relationships with its employees, suppliers, customers and the communities where it operates.
- Governance. How do the company’s board and management drive positive change? Governance includes everything from issues surrounding the direction of a company, executive compensation, diversity of management, how that management responds to and interacts with shareholder audits, internal controls and shareholder rights.
With ESG investing becoming more mainstream, the above disclosure requirements from SEBI via BRSR have been introduced to keep pace with these investment strategies and growing concerns about responsible corporate governance and climate change.