India's Sustainability Reporting Framework: Path Forward to a Sustainable Future

Introduction:??

Sustainability has become pivotal in an era marked by escalating environmental and social concerns. Within this context, nations face the intricate challenge of balancing economic growth, ecological conservation, and societal fairness. Consequently, the demand for a robust framework dedicated to Sustainability Reporting has reached the utmost significance.?

Environmental, Social, and Governance (‘ESG’) reporting has recently gained significant traction in India, transforming the corporate and investor decision-making landscape. ESG reporting provides a comprehensive framework for companies to disclose their non-financial performance metrics, addressing environmental impact, social responsibility, and corporate governance.??

Companies increasingly recognize the importance of integrating ESG principles into their operations to enhance long-term value and mitigate risks. ESG rating service providers play a vital role in this transformation, offering valuable insights and assessments that inform investors, stakeholders, and businesses.?

Role of ISSB:??

The establishment of the International Sustainability Standards Board (ISSB) indeed marks a significant milestone in the global effort to advance sustainability and address climate change. Its primary goal of developing globally accepted sustainability standards has the potential to revolutionize the way companies disclose their ESG performance. The comprehensive set of international sustainability standards adopted by organizations globally aims to enhance transparency, consistency, and comparability in sustainability reporting. As more entities, investors, and regulatory bodies acknowledge the importance of sustainability, the ISSB is well-positioned to play a central role in shaping a more sustainable and responsible future for businesses worldwide. The extent to which it achieves standardization, uniformity, and active engagement with stakeholders will be a determining factor in its enduring influence on global sustainability initiatives. The ISSB issued its inaugural standards—IFRS S1 and IFRS S2—on 26 June 2023. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1. Both fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

However, there is no specific information about the ISSB instructing its staff to create educational resources related to IFRS S2. The ISSB’s significance lies in its potential to drive sustainable practices and accelerate progress toward global sustainability goals. Its standards are expected to influence corporate behavior by fostering greater accountability and transparency.?

Regulatory Framework for ERPs:??

The establishment of a regulatory framework for ESG Rating Providers (‘ERPs’) indeed marks a significant step forward in sustainable investing. This framework effectively addresses the need for uniformity, transparency, and reliability in ESG ratings, ensuring that investors have access to reliable data to make informed decisions. As this regulatory structure continues to evolve, it is poised to play a central role in shaping a global financial system that prioritizes sustainability and responsibility, making ESG factors integral to investment decisions, corporate behavior, and societal progress.?

Given the current lack of regulatory or supervisory oversight over ERPs, the increasing reliance on these unregulated services by investors in the securities markets raises concerns about potential risks. These risks include concerns about investor protection, market efficiency, the accuracy of risk assessment, capital allocation, and notably, the risk of greenwashing. Hence, the presence of a regulatory framework for ERPs is crucial.?

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The proposed regulatory framework for ERPs includes amendments to The SEBI (Credit Rating Agencies) Regulations, 1999 (‘CRA Regulations’), which will introduce a new section specifically addressing ERPs. Under these changes, all ERPs will be required to register with the regulatory authority. This development is prompted by the striking similarities between the regulatory structure governing Credit Rating Agencies (CRAs) and the forthcoming regulatory framework for ERPs. The latter has been designed in line with IOSCO's (International Organization of Securities Commissions) recommendations and takes inspiration from the existing CRA Regulations.?

To ensure transparency, an ESG Rating Provider should prioritize providing high levels of public disclosure and transparency in their ESG rating offerings. This includes making their methodologies and procedures openly accessible to the public. The suggested regulatory framework also addresses the ESG rating procedure. Under this framework, an ERP must have adequate internal capabilities to assign ESG ratings. Furthermore, it is essential to ensure that any newly introduced ESG rating instruments or symbols are communicated to the general public.?

BRSR Core:?

The BRSR Core [1] represents a subset of the broader BRSR framework, comprising a specific collection of Key Performance Indicators (‘KPIs’) and metrics associated with nine distinct ESG attributes. Recognizing the importance of tailoring these indicators to the specific needs of the Indian and emerging market context, certain new KPIs have been introduced for assurance purposes. These additional metrics include factors like job creation in small towns, business transparency, and the total gross wages disbursed to female employees, among others.?

On May 10, 2021, SEBI (Securities and Exchange Board of India) implemented the Business Responsibility and Sustainability Report (BRSR), which was subsequently officially incorporated on July 11, 2023. Following recommendations from the ESG Advisory Committee and following a period of public consultation, the Board has chosen to introduce the BRSR Core, which will be subject to assurance by listed entities.??

Additionally, the Board has decided to implement disclosure and assurance requirements for the value chain associated with listed entities, in accordance with the BRSR Core. To facilitate these changes, amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations of 2015 have been made and are now in effect, as indicated in the Gazette notification.?

Conclusion:??

Sustainability reporting, often called corporate or nationwide sustainability disclosure, has become a critical tool in today's world, where environmental and social challenges are increasingly intertwined with economic concerns. This practice involves the transparent communication of a company's or nation's efforts, achievements, and shortcomings in addressing a wide range of sustainability-related issues.?

An effectively regulated environment for ESG Rating Providers has a significant influence on sustainable investment practices. It fosters trust in ESG ratings, empowering investors to make well-informed choices that align with their sustainability goals. Additionally, it incentivizes businesses to enhance their ESG performance to attract conscientious investors. Furthermore, such regulation acts as a deterrent against ‘ESG washing,’ which involves portraying an artificially positive ESG image, as ERPs come under increased regulatory scrutiny.

References:

[1] https://www.sebi.gov.in/legal/circulars/jul-2023/brsr-core-framework-for-assurance-and-esg-disclosures-for-value-chain_73854.html