Securities Market Regulator, SEBI, on 5 May 2021, made it mandatory for the top 1,000 listed entities (by market capitalization calculated as on the 31st day of March of every financial year) to provide annually a Business Responsibility and Sustainability Report (BRSR) from the financial year 2022-23. SEBI has recently constituted a committee to recommend enhancements to BRSR, rating and investments in Environment, Social and Governance (‘ESG’) practices.
With countries committing to reduce carbon emissions due to the impending climate risk, one of the indicators to measure implementation of the commitments is through the corporate reporting of the ESG factors.
India has no comprehensive legislation concerning ESG disclosures for Indian corporates. The ESG commitments in India can be traced to the Corporate Social Responsibility Voluntary Guidelines, 2009 formulated by the Ministry of Corporate Affairs (MCA), and updated through the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business, 2011 (‘NVGs’) which were later revised to National Guidelines on Responsible Business Conduct, 2019 (‘NGRBC’). The NGRBC lays down the principles to operate a business in an ethical, transparent, and accountable manner with emphasis on ESG practices.
One of the primary purposes of BRSR by SEBI is to have listed entities imbibe the NGRBC principles in the business practices. Businesses are required to demonstrate the structures, policies, and processes put in place towards adopting NGRBC principles.
While mandatory reporting is limited to top 1000 listed companies for now, the Companies Act, 2013 (‘Act’) already has provisions to measure certain ESG commitments by the corporates. This includes a mandatory corporate social responsibility (CSR) expenditure to a tune of 2% of average net profit of the past three (3) years. The annual board report requires disclosure of details on conservation of energy and energy absorption. Further, certain classes of companies are mandated to have a vigil mechanism in place to report acts of corruption and financial mismanagement.
While Indian laws impose certain ESG obligations, investors and customers from Europe and western countries are holding Indian investee companies / vendors to a more robust commitment.
ESG assessments often form a deciding factor for investments or for awarding contracts, thus making ESG compliance a strategic business initiative. Companies having ESG systems in place are often valued higher than the companies with bad ratings on the ESG front. ESG compliance also ensures avoidance of reputational risks for the investor, along with reducing environmental risk that the industry may be responsible for in usual course.
Implementation of ESG:
Written SDG policies: It is common for investors and customers to measure the ESG compliance of a company based on the 17 UN Sustainable Development Goals (‘SDGs’) which detail commitments towards human rights, labour, environment, and anti-corruption. Having written policies towards SDG commitments is an indicator of a company’s robust commitments towards ESG.
UN Global Compact partnership: Taking ESG compliance a further step, a company may also consider signing up for the United Nations Global Compact (UNGC) program which is a voluntary initiative based on CEO commitments to implement the SDGs in their internal policies and processes.
Supply chain management: A crucial factor that is often missed by the companies is ESG compliance in the supply chain, that can expose companies to risks concerning environmental asset abuse, human rights abuses including child labour and bonded labour, and corruption and terror financing. Supply chains, while outside the direct control of the company, can impact the reputation, operation, and financial performance of businesses of the investor and promoters. Therefore, it is essential to have defined procurement policies on identifying, managing, and remedying ESG issues in the supply chain.
Responsible procurement: When awarding contracts, decisions must not be based solely on economic, technological and process requirements. ESG factors must also play a vital role while choosing a contractor or a supplier. This includes seeking source of raw materials to ensure the raw materials do not originate through abusive procedures.
Stakeholder awareness: Another important exercise towards ESG compliance is the sensitisation of all stakeholders involved including the management, employees, and suppliers. The company should undertake regular training sessions of all stakeholders on the need to comply with ESG commitments.
Social dialogue and freedom of association: Having social dialogue systems in place is an indication of conducive work environment. Freedom of association including right to join trade unions is a cornerstone of workmen’s rights and is regarded as a crucial aspect to achieve sustainable economic and social development.
Waste management: The company must have procedures to recycle its wastes and handle residual wastes. Processes must be implemented in segregating organic and inorganic waste. To the extent possible, manure to energy conversion systems must be implemented for disposal of organic waste. Reuse of articles must be encouraged. India’s e-Waste Management Rules mandate companies to have recycle systems in place to enable consumers to dispose electronic waste in an environment friendly manner.
Transition to clean energy: A company must take steps towards transition to efficient clean energy equipment like use of LED lighting systems, installation of overtop solar equipment, or procuring from renewable sources wherever possible. Work processes must be implemented to ensure reduction of greenhouse gas emissions.
Know-your-customer (KYC) systems: All transactions must be entered into after obtaining necessary know-your-customer (KYC) documentation from customers and vendors. This will ensure tracing of the funds in case of allegations of money laundering or terror financing.
Avoiding cash transactions: Cash transactions must be discouraged and be undertaken only in exceptional cases with prior written permission of the reporting authority.
Cyber security risk: Companies must implement information security management systems to safeguard data in its possession. One widely used standard that corporates may adopt is the ISO/IEC 27001 that specifies the requirements for establishing, implementing, maintaining, and continually improving an information security management.
Vigil mechanism: Policies must be in place to ensure employees and other stakeholders can freely report violations of the company policies without fear of retaliation.
Mere compliance with Indian laws may not be adequate to meet the enhanced level of foreign investor or customer expectation towards ESG compliance. A corporate sustainable obligation must go beyond legal compliance to achieve the objectives of creating a better future for the next generations. Further, policies must translate into practices to achieve the intended goals. While BRSR is applicable currently only to top 1000 companies, all business houses must be encouraged to voluntarily disclose their ESG metrics.
[The author is a Senior Associate in the Corporate and M&A advisory practice at Lakshmikumaran & Sridharan Attorneys, Hyderabad]