The growing consciousness of investors about environmental and social responsibilities is forcing companies to undergo a transformation in terms of disclosures and reporting and to be accountable for their actions. The image of the corporate entity as a faceless entity that is only focused on generating profits is gradually undergoing a metamorphosis, now it identifies with a more humane approach with a genuine concern for the environment, the society and its corporate governance. The stakeholders in the ecosystem have started demanding more transparency and accountability from corporates in the form of ESG (Environmental, Societal, and Governance) reporting.
On 5th May 2021, The Securities and Exchange Board of India replaced BRR (Business Responsibility Report) with the BRSR (Business Responsibility and Sustainability Report) which includes the ESG principles. For a start, BRSR has been made applicable to the top 1000 listed companies by market capitalization as on 31st March of the applicable financial year. This needs to be complied with, on a voluntary basis for the financial year 2021-22 and on a compulsory basis from the following year.
The environmental angle evaluates how efficiently enterprises conserve the environment by minimising their carbon footprint, reducing pollution and improving waste management. The social angle measures how the enterprise deals with the creation of fair value propositions for the community, gender equality at the workplace, inclusion of disadvantaged communities in the mainstream and fair dealings with customers. The governance angle focuses on the corporate governance structure, executive remuneration, regular audits, internal controls, business ethics and avoidance of malpractices like bribes and corruption.
Conscious sets of investors are focusing their investments in companies which are ESG compliant. The increased focus on ESG will lead businesses towards helping the nation achieve it sustainable development goals which will be a win-win for all stakeholders concerned.
A detailed format has been prescribed by SEBI along with a guidance note for BRSR and all the listed entities are required to disclose their performance against the nine principles of the National Guidelines on Responsible Business Conduct. Each principle has the Essential and the Leadership indicators. While the Essential indicators have to be mandatorily reported, the Leadership indicators can be reported on a voluntary basis.
The nine principles include Ethics, transparency, accountability and integrity, sustainable and safe business practices, promotion of the well-being of employees, responsiveness to the interests of stakeholders, promotion of human rights, protection and conservation of the environment, responsible and transparent manner of influencing public policy, promotion of inclusive and equitable growth and provide value to customers in a responsible manner.
Merits of ESG Reporting:
ESG is the driver for long term returns as that is a continuous goal. Global stakeholders are taking a close look at material ESG risks. Performance on the ESG front is becoming a measure of a healthy enterprise. Disclosure of ESG is becoming a global norm and shareholders are using it as a measure of a corporation's health and its future.
While the reporting may seem to be extremely detailed, it provides a comprehensive report to investors regarding the contribution of the Company on each of these important fronts and helps them to make an informed decision.
Going forward, this will be the basis on which companies will be valued and this could have a far-reaching impact on brands and businesses. Investors are closely watching how the company deploys its funds towards these causes and whether it is being environmentally and socially responsible while conducting its daily business operations.
ESG reporting cannot be considered as a compliance burden but as the way forward for cleaner and more transparent reporting. It provides a framework for more responsible corporate reporting. Financial reporting provides only visibility of the company’s operations and performance for a short period of time while a sound ESG report may indicate the sustainability of the business and can be useful information while predicting the outlook for that organisation from an investor’s point of view.
Conservation of the environment is imperative to preserve the planet for future generations. The ESG compliance is a step in this direction as companies have to fulfil the requirements necessitated by the changing investment habits of well-aware investors.
The need to conserve the environment has been felt for a few decades now as the world grapples with the adverse impact of climate change in our daily lives. Corporates can no longer shirk their responsibility towards the environment. The mindset has switched to impact investment patterns as investors have shifted focus from mere creation of wealth to sustainable growth for future generations which would require a greener planet with social equality and better governance. The time has come for company boards to take note of the need of the hour and integrate ESG practices into their corporate DNA. In the long run, ESG compliance will be a very important measure of corporate performance and will decide company valuations.
ESG reporting cannot be considered a compliance burden and be reduced to ticking off a checklist. It should be addressed with due diligence as it is laying the foundation for building conscious corporates that will endeavour to preserve the planet for future generations. ESG funds ( Funds that invest in ESG compliant companies) will ensure that good ESG compliant corporates benefit in the long run while those that fail will lose their standing and valuation. This, by itself, can provide sufficient impetus to push corporates to make accurate and detailed disclosures.
Exchange Connect helps companies to improve their ESG reporting. The platform offers detailed scoring and ranking of disclosures to identify gaps and provides recommendations to enhance the disclosures. For your corporate reporting and disclosure needs for ESG compliance, you can visit us on https://www.exchangeconnect.in/ and we will be happy to assist you.