The Rise of Sustainable Finance and ESG Reporting: What Businesses in India Need to Know.

Introduction to Sustainable Finance and ESG Principles

What is Sustainable Finance?

Sustainable finance refers to the practice of considering environmental, social, and governance (ESG) aspects in making financial decisions (investment, lending, insurance, etc.). It is about mobilizing capital to aid economic growth and at the same time respond to fundamental global issues such as climate change, resource constraints, inequality, and social injustice.

Key Characteristics

• Beyond Profit Maximization: While financial returns remain important, sustainable finance broadens the scope to include the non-financial impacts of economic activities.
• Long-Term Value Creation: It emphasizes creating value over the long term, considering the sustainability of business models and the resilience of the financial system to ESG risks.
• Systemic Perspective: It acknowledges the interconnectedness of economic, environmental, and social systems and seeks to create positive feedback loops between them.
• Multi-Stakeholder Approach: It considers the interests of a wide range of stakeholders, not just shareholders, including employees, customers, communities, and the environment.

What are ESG principles?

ESG stands for:

1. Environmental (E)

It focuses on how company's operation effects the firm

Examples:

• Greenhouse gas emissions
• Renewable energy use
• Waste and pollution management
• Biodiversity impact
• Climate risk and adaptation

2. Social (S)

It examines how a company manages relationships with people (employees, communities) and its impact on society.

Examples:

• Labour right and fair wage
• Health & safety practices
• Diversity, equity, and inclusion (DEI)
• Community engagement
• Customer data privacy

3. Governance (G)

It focuses on how a company is directed and controlled. It examines rules and practices.

Examples:

• Board independence and diversity
• Executive compensation
• Anti-corruption practices
• Shareholder rights
• Transparent reporting and disclosures

OVERVIEW OF EVOLVING REGULATORY LANDSCAPE FOR ESG REPORTING IN INDIA

The landscape of ESG reporting regulations in India is experiencing a significant transformation, fuelled by the growing demand for greater transparency, accountability, and adherence to global sustainability standards. A key highlight in this shift is the rollout and ongoing enhancement of the *Business Responsibility and Sustainability Reporting (BRSR) framework* by the Securities and Exchange Board of India (SEBI).

Here's an overview of the evolving landscape

1. Early Stages: Business Responsibility Reporting (BRR)

• The foundation for ESG reporting in India was laid with the introduction of the Business Responsibility Reporting (BRR) guidelines in 2009 by the Ministry of Corporate Affairs (MCA).
• In 2012, SEBI mandated the top 100 listed companies to file BRR as part of their annual reports.
• In 2019, SEBI extended this requirement to the top 1000 listed companies by market capitalization.
• The BRR focused on nine principles based on the National Guidelines on Responsible Business Conduct (NGBRCs), encompassing ethical business conduct, product sustainability, employee well-being, stakeholder engagement, human rights, environmental care, and more. However, the disclosures were primarily qualitative.

2. The Shift to Business Responsibility and Sustainability Reporting (BRSR)

• Recognizing the need for more quantifiable and standardized ESG disclosures aligned with global best practices, SEBI introduced the Business Responsibility and Sustainability Reporting (BRSR) framework in May 2021
• BRSR replaced the BRR for the top 1000 listed companies, making it mandatory from FY 2022-23 onwards.
• The BRSR aims to provide a more comprehensive picture of a company's ESG performance, enabling stakeholders to make informed decisions.
• It is structured around three key sections:

o General Disclosures: Basic information about the company, its products, operations, and employee details.

o Management and Process Disclosures: Details about the company's policies, processes, and governance mechanisms related to the nine NGBRC principles.

o Principle-wise Performance Disclosures: Quantitative and qualitative disclosures against specific indicators under each of the nine principles, categorized as *essential* (mandatory) and *leadership* (voluntary).

3. Introduction of BRSR Core

• In July 2023, SEBI introduced a more focused subset of the BRSR called BRSR Core.
• BRSR Core comprises a set of key performance indicators (KPIs) across the E, S, and G attributes that are considered critical.
• The implementation of BRSR Core is being done in a phased manner, starting with the top 150 listed companies in FY 2023-24, extending to the top 250 in FY 2024-25, the top 500 in FY 2025-26, and finally the top 1000 by FY 2026-27.
• A significant aspect of BRSR Core is the requirement for assurance or assessment of these key disclosures by independent third parties, enhancing the reliability and credibility of the reported data. Initially termed "assurance," SEBI has provided an option for "assessment or assurance" to reduce the compliance burden.

4. Focus on Value Chain Disclosures

• Recognizing the significant ESG impact of a company's supply chain, SEBI has introduced requirements for value chain disclosures.
• Listed companies are required to disclose ESG-related information pertaining to their top upstream and downstream partners, cumulatively comprising 75% of their purchases or sales by value, respectively.
• The implementation timeline for value chain disclosures has been revised. It will be voluntary for the top 250 listed entities from FY 2025-26, with assessment or assurance becoming compulsory from FY 2026-27.

5. Emphasis on Green Credit Disclosures

• SEBI has introduced a new leadership indicator under Principle 6 of the BRSR to track Green Credits generated or procured by the listed entity and its top 10 value chain partners. This aims to promote and increase the visibility of the government's Green Credit Programme. This disclosure is mandatory from FY 2024-25.

6. Alignment with Global Standards

• The evolution of ESG reporting in India, particularly with the BRSR framework, demonstrates an effort to align domestic norms with globally accepted reporting frameworks like the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and Task Force on Climate-related Financial Disclosures (TCFD). This enhances the comparability and relevance of Indian ESG disclosures for international investors and stakeholders.

7. Regulatory Oversight and Enforcement

• SEBI is the primary regulatory body overseeing ESG reporting by listed companies in India.
• The regulator is increasingly focused on ensuring the quality and accuracy of ESG disclosures and may take action against companies for misleading or inadequate reporting, including concerns around "greenwashing."

BENEFITS OF ADOPTING SUSTAINABLE PRACTICES AND TRANSPARENT ESGREPORTING

1. BENEFITS OF ADOPTING SUSTAINABLE PRACTICES

Enhanced operational efficiency and cost saving

• Implementing sustainable practices helps in reducing energy consumption, water usage and waste generation.
• Investing in renewable energy sources can reduce dependence on volatile fossil fuel markets and offer long-term cost stability.

Improved risk management

• Sustainability initiatives help businesses identify and reduce environmental and social risks, such as climate change impacts, reduces scarcity, and social unrest.
• Proactive measures can prevent costly environmental accidents, legal liabilities , and reputational damage

Stronger brand reputation and enhanced stakeholder trust

• Consumers are increasingly favouring brands that commit to environment and social responsibility. Sustainable practices enhance brand image and build consumer loyalty.
• Transparent sustainability efforts foster trust with investors, employees, communities and regulatory bodies.

Attracting and Retaining Talent:

• Employees, particularly younger generations, are more likely to work for companies with strong sustainability values and a clear purpose beyond profit.
• A commitment to social responsibility and ethical practices can improve employee morale, engagement, and retention rates, reducing recruitment and training costs.

2. BENEFITS OF TRANSPARENT ESG REPORTING

Increased Investor Confidence and Attractiveness:

• When companies provide clear ESG reporting, it gives investors the insights they need to evaluate sustainability performance, risks, and opportunities. This empowers them to make informed investment choices and attracts those who prioritize ESG factors.
• Consistent and transparent reporting helps bridge the information gap, fostering trust within the financial community.

Enhanced Stakeholder Engagement:

• By openly sharing ESG information, companies can enhance communication and engagement with all their stakeholders, including customers, employees, communities, and NGOs.
• Transparency allows stakeholders to grasp a company's impact and hold it accountable, nurturing stronger relationships and mutual understanding.

Improved Reputation and Brand Value:

• Transparent reporting showcases a company's dedication to accountability and ethical practices, which in turn bolsters its reputation and brand image.
• Being open about both achievements and challenges in ESG performance cultivates credibility and trust.

Better Risk Identification and Management:

• The act of gathering and reporting ESG data can help companies pinpoint potential environmental, social, and governance risks that might not show up in traditional financial reports.
• Transparency promotes a more proactive stance on risk management and mitigation.

KEY ESG METRICS THAT BUSINESSES SHOULD FOCUS ON

1.ENVIRONMENTAL METRICS

These track a business's environmental impact and sustainability practices.

. Carbon Emissions (Scope 1, 2, and 3)

• This measures both direct and indirect greenhouse gas emissions.
• It's crucial for understanding your carbon footprint and setting reduction goals.

2. Energy Consumption

• This keeps track of the total energy used and how much comes from renewable sources.
• It's helpful for planning energy efficiency and saving on costs.

3. Water Usage and Wastewater Management

• This monitors how much water is withdrawn, recycled, and the quality of what's discharged.
• It's essential for industries like manufacturing and textiles.

4. Waste Generation and Management

• This looks at the total waste produced, what gets recycled, and what ends up in landfills.
• There's a strong focus on circular economy models here.

5. Biodiversity Impact

• This is particularly important for businesses operating near sensitive ecosystems.

SOCIAL METRICS

These relate to a company's relationships with employees, suppliers, customers, and communities.

1. Employee Turnover and Retention Rates

A high turnover rate can indicate underlying cultural or operational problems.

2. Workplace Health and Safety

This encompasses accident rates, how often injuries occur, and the safety measures in place.

3. Diversity and Inclusion

This looks at the representation of different genders, ages, and ethnic backgrounds in various roles and leadership positions.

4. Community Engagement and CSR Initiatives

This involves spending on corporate social responsibility, assessing the impact of programs, and gathering feedback from stakeholders.

5. Labor Practices and Human Rights

This includes ensuring fair wages, reasonable working hours, and ethical sourcing practices.

GOVERNANCE METRICS

Governance reflects a company's internal practices and how it makes decisions.

Board Composition and Independence

• Diversity, independence, and expertise of the board.

Executive Compensation

• Whether pay is linked to performance and ESG goals.

1. Anti-Corruption Policies and Compliance
   • Existence of whistleblower programs, ethics codes, and legal compliance.
2. Tax Transparency
   • Disclosure of tax strategy, payments, and jurisdictions.
3. Shareholder Rights
   • Voting structures and protection of minority shareholders.

THE ROLE OF CHARTERED ACCOUNTANTS IN ESG ASSURANCE AND REPORTING

As businesses around the world, including those in India, strive for greater transparency and sustainability, Chartered Accountants (CAs) are in a prime position to play a crucial role in upholding the integrity, accuracy, and credibility of ESG reporting.

1. Assurance on ESG Disclosures

CAs are trusted for their expertise in audit and assurance, making them ideal to:

• Review and validate ESG data for accuracy, completeness, and consistency.
• Ensure compliance with regulatory frameworks like SEBI's BRSR (Business Responsibility and Sustainability Reporting) in India.
• Provide limited or reasonable assurance reports on ESG metrics, akin to financial audits.

2. Integration of ESG into Financial Reporting

CAs help bridge the gap between financial and non-financial data by:

• Advising on how ESG risks and opportunities affect financial performance.
• Integrating ESG considerations into Integrated Reporting (IR) and Management Discussion & Analysis (MD&A) sections of annual reports.

3. Framework and Standards Alignment

With their deep understanding of reporting frameworks, CAs help companies:

• Align with global standards such as GRI, SASB, TCFD, and ISSB.
• Interpret and apply India-specific mandates, such as BRSR.
• Prepare for future convergence of financial and ESG reporting norms.

4. Internal Controls and Data Governance

CAs assess and improve:

• Internal processes for ESG data collection and control.
• Accuracy and reliability of data management systems.
• Risk identification and mitigation related to ESG factors (e.g., climate risks, human rights, etc.).

5. Advisory and Strategy Support

Beyond compliance, CAs can act as ESG advisors by:

• Helping businesses define ESG KPIs and materiality thresholds.
• Structuring sustainability-linked KPIs that tie into financing or executive remuneration.
• Advising on green finance, carbon credits, and tax implications of sustainability investments.

6. Capacity Building and Training

CAs also play a role in:

• Educating boards and staff on ESG importance and best practices.
• Developing internal audit functions for sustainability.
• Participating in ESG-related policy development and regulatory consultations.

HOW BUSINESSES CAN ATTRACT ESG-CONSCIOUS INVESTORS

As responsible investing continues to gain traction, investors who care about ESG factors are now looking for companies that not only show strong profits but also have a genuine dedication to environmental, social, and governance principles. So, how can businesses make themselves more appealing to these mindful investors:

1. Strengthen ESG Disclosures and Transparency

• Publish comprehensive sustainability reports that align with global standards like GRI, TCFD, or SASB.
• Effectively utilize India's BRSR (Business Responsibility and Sustainability Report) to share sector-specific ESG data.
• Ensure the credibility of your data through third-party audits or assurances.

2. Integrate ESG into Core Business Strategy

• Embed ESG objectives into your corporate vision and decision-making processes.
• Connect sustainability performance with key financial metrics and overall business outcomes.
• Invest in green research and development, clean energy initiatives, ethical sourcing, and responsible product design.

3. Demonstrate Strong Governance

• Keep your boards independent and diverse.
• Clearly outline policies regarding ethics, anti-corruption, and stakeholder rights.
• Disclose executive compensation that is linked to ESG performance.

4. Highlight Risk Management Around ESG

• Identify and address climate-related financial risks.
• Establish supply chain due diligence and human rights protocols. Showcase business resilience through scenario analysis and stress testing.

5. Engage Proactively with Investors

• Conduct Host investor briefings and roadshows focused on ESG.
• Offer real-time ESG dashboards or key performance indicators on your website or investor portals.
• Respond to ESG ratings agencies (like MSCI and Sustainalytics) with transparent data.

6. Showcase Measurable Impact

• Report quantifiable ESG outcomes, such as:
• Percentage reduction in carbon footprint
• Percentage of women in leadership
• Community impact through CSR
• Use alignment with the Sustainable Development Goals (SDGs) to highlight global relevance.

7. Pursue ESG Certifications and Ratings

• Obtain recognized standards or certifications like:
• ISO 14001 (environmental)
• SA8000 (social accountability)
• ESG ratings from global agencies (e.g., S&P Global ESG Score)