Introduction
Since the last decade, there have been efforts from the Government of India to increase focus on making businesses sustainable and environmentally conscious. The filing of the business responsibility report (“BRR”) containing environmental, social and governance (“ESG”) disclosures was first introduced by the Securities and Exchange Board of India (“SEBI”) for listed companies in 2012.[1]
The disclosures were as per the National Voluntary Guidelines on the Social, Environmental and Economic Responsibilities of Business introduced by the Ministry of Corporate Affairs in 2011.[2]
Later, the Ministry of Corporate Affairs revised these guidelines and formulated the National Guidelines on Responsible Business Conduct (“NGRBCs”).[3]
SEBI vide its circular no. SEBI/HO/CFD/CMD-2/P/CIR/2021/562 dated May 10, 2021 (“2021 Circular”) emphasized on mandatory reporting (for large listed companies) of the company’s performance on sustainability related factors in addition to the financial performance and introduced the format of the Business Responsibility and Sustainability Report (“BRSR”).[4] The BRSR is accompanied with a guidance note to enable the companies to interpret the scope of disclosures.
Applicability
The BRSR seeks disclosures from top 1,000 (one thousand) listed companies (as per their market capitalization) on their performance against the nine principles of the NGRBCs and reporting under each principle is divided into essential and leadership indicators. The essential indicators are required to be reported on a mandatory basis while the reporting of leadership indicators is on a voluntary basis.
The essential indicators include percentage of research and development and capital expenditure (capex) investments in specific technologies to improve the environmental and social impacts of product and processes to total research and development and capex investments made by the company, respectively. The leadership indicators which are voluntary include the processes for consultation between stakeholders and the board of directors on economic, environmental, and social topics or if consultation is delegated, how is feedback from such consultations provided to the board of the company.[5]
In order to give time to companies to adapt to the new requirements, the reporting of BRSR has been made voluntary for Financial Year 2021 –22 and mandatory from Financial Year 2022 –23 and applicable to the top 1,000 (one thousand) listed companies (as per their market capitalization).[6]
Key ESG Requirements:
What all is required to comply?
A few of the key disclosures sought in the BRSR are highlighted below:
a. An overview of the entity’s material ESG risks and opportunities, approach to mitigate or adapt to the risks along-with its financial implications[7]
b. Sustainability related goals & targets and performance[8]
c. Environment related disclosures covering aspects such as resource usage (energy and water)[9], air pollutant emissions[10], green-house (GHG) emissions[11], transitioning to circular economy[12], waste generated and waste management practices[13] and impact on bio-diversity[14]
d. Social related disclosures covering the workforce, value chain, communities and consumers, as given below:
While disclosing under entry 24, Section A, Annexure I of the 2021 Circular, the entity may approach an ESG-related risk or opportunity to its business in the following manner while providing ESG report:
a. Classify the risk / opportunity as environment or social and provide its description. For instance, risk arising from climate change can include impact on operations, worker health, demand for products or services etc. Climate change opportunities can include cost savings through resource efficiency, development of new products and services, access to new markets etc.
b. Rationale for identifying the risk, which may include a description of the impact associated with the risk or opportunity. In case of identified risks, approach to mitigate or adapt to the risk.
c. Indicate the positive and negative impact of such risk or opportunity on the financials of the company. The company may make qualitative disclosures in this regard and should not include any forward looking quantitative information. However, in case of previous years, impact can be disclosed in quantitative terms. The company may also consider impact on parameters such as demand for products & services/ capital or operational costs/, investment opportunities.
Companies Act
Section 134 (3) (m) of the Companies Act, 2013 mandates companies to include a report by their board of directors on conservation of energy, technology absorption, foreign exchange earnings and outgo, along with annual financial statements.
This requirement is further detailed under Rule 8(3)(A) of the Companies (Accounts) Rules, 2014, which mandates the board of a company to provide information regarding conservation of energy including (i) the steps taken or impact on conservation of energy; (ii) the steps taken by the company for utilising alternate sources of energy; and (iii) the capital investment on energy conservation equipment.
SEBI (Listing Obligations and Disclosure Requirement) Regulations
Regulation 34 of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015, as amended (“LODR Regulations”) lays down the requirement of submission of annual report by listed companies. Regulation 34 (2) specifically lists down the contents of the annual report and inter alia includes for the top 1,000 (one thousand) listed companies based on market capitalization, a business responsibility report describing the initiatives taken by the listed companies from an environmental, social and governance perspective, in the format as specified by SEBI from time to time. The proviso to the Regulation 34 (2) (f) mentions that with effect from the financial year 2022–23, the top 1,000 (one thousand) listed companies based on market capitalization shall submit a business responsibility and sustainability report in the format as specified by SEBI from time to time. However, remaining listed companies including the companies which have listed their securities on the small and medium enterprises exchange, may voluntarily submit such reports.
Disclosures in Initial Public Offer Documents
A company offering its shares for allotment to public for the first time through stock exchanges (“IPO”) typically provide certain disclosures in the offer documents and representations in the issue agreements regarding ESG compliances. While the SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2018 do not specifically mandate any such disclosure, any company going for an IPO tends to disclose the risks related to ESG in the offer documents. In the business section of the offer document, an issuer company typically provides a brief write-up on the ESG standards that the company adapts to and the initiatives taken by the company in this regard to provide help the investors make an informed decision regarding investing in the company. Additionally, the company provides representations to the merchant bankers under the issue/offer agreement (that the company, the merchant bankers and the selling shareholders (if any) are a party to) that the company is in compliance and shall be in compliance with the ESG guidelines and filings required under the Companies Act, 2013 and the LODR Regulations.
Conclusion
The ESG reporting in India is still in its initial phases and the statutory and regulatory requirements are stricter for listed entities with higher market capitalization. The quality of reporting is therefore heavily driven by compliance standards of foreign jurisdictions.
Disclaimer
This note is for general informational purposes only and does not constitute professional legal advice. For any queries, please contact srishti.ojha@veristlaw.com, himani.sharma@veristlaw.com or umang.arya@veristlaw.com.
Footnotes
[1] SEBI Circular ‘Business Responsibility Reports’, available at <https://www.sebi.gov.in/legal/circulars/aug-2012/business-responsibility-reports_23245.html> [2] National Voluntary Guidelines on the Social, Environmental and Economic Responsibilities of Business, available at <https://www.mca.gov.in/Ministry/latestnews/National_Voluntary_Guidelines_2011_12jul2011.pdf> [3] National Guidelines on Responsible Business Conduct, available at <https://www.mca.gov.in/Ministry/pdf/NationalGuildeline_15032019.pdf> [4] SEBI Circular ‘Business responsibility and sustainability reporting by listed entities’ available at <https://www.sebi.gov.in/legal/circulars/may-2021/business-responsibility-and-sustainability-reporting-by-listed-entities_50096.html> [5] Entries 1 and 2, Leadership Indicator, Principle 4, Section C, Annexure I, 2021 Circular.. [6] Clause 7 of the SEBI Circular ‘Business responsibility and sustainability reporting by listed entities’ available at <https://www.sebi.gov.in/legal/circulars/may-2021/business-responsibility-and-sustainability-reporting-by-listed-entities_50096.html> [7] Entry 24, Section A, Annexure I, 2021 Circular (Mandatory) [8] Entries. 5 and 6, Section B, Annexure I, 2021 Circular (Mandatory) [9] Entries. 1 and 3, Essential Indicator, Principle 6, Section C, Annexure I, 2021 Circular. [10] Entry. 5, Essential Indicator, Principle 6, Section C, Annexure I, 2021 Circular. [11] Entry 6, Essential Indicator, Principle 6, Section C, Annexure I, 2021 Circular. [12] Entry 3, Essential Indicator, Principle 2, Section C, Annexure I, 2021 Circular. [13] Entries 8 and 9, Essential Indicator, Principle 6, Section C, Annexure I, 2021 Circular. [14] Entry 5, Leadership Indicator, Principle 6, Section C, Annexure I, 2021 Circular. [15] Entry 18, Section A, Annexure I, 2021 Circular (Mandatory). [16] Entry 20, Section A, Annexure I, 2021 Circular (Mandatory). [17] Entry 3, Essential Indicator, Principle 5, Section C, Annexure I, 2021 Circular. [18] Entry 1, Essential Indicator, Principle 3, Section C, Annexure I, 2021 Circular. [19] Entry 8, Essential Indicator, Principle 3, Section C, Annexure I, 2021 Circular. [20] Entry. 1, Essential Indicator, Principle 8, Section C, Annexure I, 2021 Circular. [21] Entry 2, Essential Indicator, Principle 8, Section C, Annexure I, 2021 Circular. [22] Entry 2, Leadership Indicator, Principle 8, Section C, Annexure I, 2021 Circular. [23] Entry 4, Essential Indicator, Principle 9, Section C, Annexure I, 2021 Circular. [24] Entry 3, Essential Indicator, Principle 9, Section C, Annexure I, 2021 Circular.