In a recent exclusive interview with moneycontrol.com, Smitha Shetty – ๐ฅ๐ฒ๐ด๐ถ๐ผ๐ป๐ฎ๐น ๐๐ถ๐ฟ๐ฒ๐ฐ๐๐ผ๐ฟ – ๐๐ฃ๐๐ shares her insights on the complexities and nuances of ESG reporting, especially in the Indian context. Discover why the current “๐ฐ๐ผ๐บ๐ฝ๐น๐ ๐ผ๐ฟ ๐ฒ๐ ๐ฝ๐น๐ฎ๐ถ๐ป” approach in the BRSR Core framework is more than just a transparency toolโit’s a catalyst for deeper accountability and a thoughtful consideration of ESG factors. Smitha sheds light on the complexities of social reporting, especially for Indian MSMEs and highlights the sectors in India that are leading the charge in ESG practices. Read the full Interview here:
1. Which point in the consultation paper would cause a serious dilution of ESG reporting? Could you elaborate on why?
The proposal to shift from a “comply or explain” approach to a voluntary disclosure framework for ESG reporting in India’s value chains marks a potential turning point. While voluntary reporting offers initial flexibility, it carries the risk of fragmented disclosures, hindering stakeholder comparison and informed decision-making. The strength of the “comply or explain” model lies in ensuring a baseline level of mandatory disclosure, fostering both transparency and accountability across the market.
Moreover, the “comply or explain” approach goes beyond simply fostering transparency. By requiring companies to explain the inclusion or omission of certain elements in their disclosures, it necessitates a deeper understanding of material ESG impacts, risks, and opportunities. This helps to prevent superficial “tick-box” exercises that have often been criticized, encouraging a more mature and comprehensive approach to ESG reporting. In essence, the “comply or explain” framework not only ensures a minimum level of disclosure but also drives companies towards greater accountability and a more thoughtful consideration of ESG factors.
2. You had mentioned that a new definition had brought down the companies covered under the BRSR Code down from a 1,000-plus to a number in the double digits. Could you share that point once more and which proposal had caused this significant scaling down of the coverage?
The reduction in companies covered under the BRSR Code stems from the proposal to redefine value chain partners in point 7, Para 7.1.1. By focusing on partners contributing to at least 75% of the listed entity’s value-added purchases or sales and individually representing 2% or more of purchases or sales, the number of covered companies is drastically reduced. While this aims to streamline reporting, it also limits the breadth of ESG disclosures, potentially hindering the adoption of sustainable practices across a wider range of industries.
An Example
(Current: BRSR framework defines โvalue chain” as encompassing upstream and downstream partners that cumulatively account for 75% of a listed entity’s purchases or sales (by value). This means a company needs to report ESG disclosures for all partners, no matter how small their individual contribution, until they reach the 75% threshold.
Proposed: The proposed definition refines this by introducing two criteria:
- Individual Contribution: Each upstream or downstream partner must individually comprise 2% or more of the listed entity’s purchases or sales by value.
- Cumulative Contribution: The partners meeting the 2% threshold must collectively account for at least 75% of the listed entity’s purchases or sales.
Example: Let’s say Company X has 100 suppliers. Under the current definition, they might need to report on all 100 if they cumulatively contribute to 75% of purchases.
Under the proposed definition, Company X would only need to report on those suppliers who individually contribute at least 2% to their purchases. If, for instance, only 30 suppliers meet this criterion and together contribute 75% of purchases, Company X would only need to report on these 30 suppliers.)
3. In your suggestions to the regulator on the BRSR Code, you have said that ‘comply or explain’ clause on the voluntary reporting framework may later add to the companies’ burden with the mandatory reporting is introduced. Could you explain why and share any example, from any country, where this has led to this added burden?
The introduction of a ‘comply or explain’ clause for voluntary reporting can create challenges when transitioning to mandatory reporting. Companies may be lulled into a false sense of security, relying on the flexibility of the ‘explain’ option and not investing in comprehensive ESG reporting systems. This lack of preparedness can cause significant difficulties when faced with the stringent requirements of mandatory reporting, leading to increased costs and administrative burdens as companies scramble to comply.
A prime example of this challenge is the ongoing transition from voluntary to mandatory reporting under the Corporate Sustainability Reporting Directive (CSRD) in the European Union. Companies, especially those with complex global supply chains extending into developing economies, are finding it difficult to meet the rigorous standards imposed by CSRD, even with its phased rollout. This difficulty stems directly from their lack of preparedness, despite having had time to adapt under the previous voluntary reporting framework.
Furthermore, an analysis by the Institut der Deutschen Wirtschaft on the effects of the ย German Supply Chain Act reinforces this point. The Act, in place since 2023, has led to a demonstrable trade impact, particularly affecting apparel suppliers in developing economies like Bangladesh and Pakistan. This impact highlights the challenges companies face when forced to rapidly adapt their supply chains to meet stringent sustainability requirements. It also underscores a growing trend where companies prioritize suppliers from countries with high human rights and environmental standards to pre-emptively mitigate compliance burdens.
4. You have also said that this option it limits the transparency that markets expect. Could you elaborate on that? What transparency parameters in particular are we talking about and which market participants would these help?
A voluntary reporting approach can limit transparency by enabling companies to selectively disclose ESG information, leading to potential gaps and inconsistencies in data availability. Key transparency parameters include disclosures on environmental impact, social responsibility and governance practices throughout the value chain, encompassing industry-specific indicators. Robust ESG reporting empowers investors to make informed decisions, allows consumers to choose sustainable products and services and supports regulators in monitoring and enforcing compliance. Inconsistent or incomplete data hinders stakeholders’ ability to accurately assess a company’s ESG performance, ultimately affecting market confidence and impeding sustainable progress.
5. What is your feedback on the initial BRSR Code? How effective or not effective has it proved?
The initial BRSR Code framework represents a commendable step towards enhancing ESG reporting in India. It has established a structured framework for companies to disclose their ESG performance, fostering greater transparency and accountability. The BRSR Code’s alignment with the Indian context, including KPIs relevant to emerging markets, while ensuring global comparability through intensity ratios, demonstrates its thoughtful design. However, challenges persist in terms of implementation, particularly for smaller companies and MSMEs grappling with data collection and reporting complexities within vast and diverse value chains. To fully realize the potential of the BRSR Code, a concerted effort is needed to foster a cultural shift towards ESG integration, promote collaboration among stakeholders, and address the practical challenges faced by companies. SEBI’s proactive approach in seeking public feedback on the recommendations further reinforces the commitment to continuous improvement.
6. Why is ESG reporting crucial to the development of Indian capital markets? How would a dilution of it impact Indian capital markets’ growth?
ESG reporting has emerged as a critical factor influencing the global competitiveness of Indian companies, directly impacting their ability to attract capital. By fostering transparency, accountability, and sustainable practices, robust ESG reporting resonates with the values of global investors, enhancing a company’s appeal.
Conversely, diluting ESG standards could have a domino effect. It risks eroding investor confidence, diminishing the allure of Indian companies for international capital, and potentially escalating the cost of capital. Such repercussions could hinder the growth and global integration of Indian capital markets, where ESG considerations are rapidly becoming a cornerstone of investment decisions.
The interconnectedness of ESG reporting and global business opportunities is further underscored by the trend of companies seeking regions with streamlined reporting requirements. Mature, transparent, and standardized ESG reporting in India not only strengthens investor confidence but also bolsters export prospects and attracts greater global investment. It positions Indian companies favorably in the eyes of international entities looking to minimize regulatory complexities while upholding sustainable practices.
7. Are companies and stakeholders (such as investors and regulators) in other countries watching these parameters more closely now? Will any dilution in ESG reporting mandate effect the integration of Indian capital markets with global markets? If yes, how?
Globally, companies and stakeholders are intensifying their scrutiny of ESG parameters. While India’s ESG reporting mandate might not have an immediate, isolated impact on its capital market integration, any dilution of these standards could significantly influence international investor perception. This, in turn, could limit Indian companies’ access to global capital and hinder their growth within the global financial ecosystem. Investors and regulators increasingly favor transparency and comparability, making comprehensive ESG reporting essential. With heightened reporting and due diligence requirements in Europe and North America, it’s crucial for Indian businesses to demonstrate transparency in their ESG performance. Failing to do so may decrease investor interest and affect India’s integration into the global capital markets, ultimately impacting its economic growth and global standing.
8. You had said that ‘social’ part ESG reporting is most challenging. Could you elaborate?
The ‘social’ component of ESG reporting presents unique challenges due to its inherent complexity and qualitative nature. Issues such as labor practices, community engagement, human rights, and diversity and inclusion often lack easily quantifiable metrics, making comparisons across companies and sectors challenging. Cultural and regional differences further complicate the development of a standardized reporting framework. We’ve observed that smaller companies, especially MSMEs, often struggle with how to articulate and document their social practices, even when they are implementing them. This lack of formalization and awareness adds to the difficulty in achieving consistent social reporting.
9. Which industries/sectors in India have been most open and most effective in ESG reporting and why?
While awareness of ESG reporting is growing across Indian industries sectors such as energy, cement, steel, manufacturing, and large IT companies have demonstrated greater openness and effectiveness in ESG reporting in India. These sectors often have strong international ties and exposure to global ESG standards, driving them to adopt robust reporting practices. Companies with significant environmental and social impacts or those operating in global supply chains are also likely to be more proactive in ESG reporting.
10. Which industries/sectors have been resistant to ESG reporting and why?
While many Indian companies are increasingly recognizing the importance of ESG reporting, there remains a degree of hesitancy across certain sectors. Industries with less direct environmental and social impacts, or those with limited exposure to international markets, may view ESG reporting as less relevant or an additional burden. This perception can be particularly strong among smaller companies and those operating in sectors with complex supply chains, where practical challenges in data collection and reporting are significant obstacles.
Additionally, as we’ve observed, certain industries are still in the early stages of their ESG reporting journey. For instance, the agricultural sector, with its complex and often informal supply chains, faces unique challenges in collecting and reporting ESG data. Similarly, sectors like IT and certain financial services might perceive ESG reporting as less directly relevant to their core operations, potentially leading to lower prioritization.
Moreover, sectors that are heavily regulated or capital-intensive, such as traditional manufacturing or heavy industries, often prioritize compliance with existing regulations over proactive ESG initiatives, viewing them as non-essential to their primary business objectives. The integration of ESG practices in these sectors is further complicated by the high transition costs and the need for significant organizational shifts.
11. You had said that shipping industry’s adoption of ESG reporting can play a key role in wider adoption of ESG reporting. Could you explain why?
The shipping industry’s adoption of ESG reporting holds the potential to catalyze wider adoption across sectors. Given its significant environmental impact and crucial role in global trade, the industry’s embrace of robust ESG practices can influence its entire supply chain, encouraging suppliers and customers to follow suit. By demonstrating the feasibility and benefits of transparent ESG disclosures within complex global operations, the shipping industry can inspire other sectors to embark on their ESG reporting journey.
12. What are Indian companies’ biggest worries in adopting ESG reporting? Is it the cost of implementation, lack of skilled professionals internally, data privacy concerns or any others?
Indian companies face a multifaceted challenge in adopting ESG reporting. The cost of implementation, particularly for smaller firms, and the scarcity of skilled professionals capable of managing and reporting ESG data are significant hurdles. Additionally, data privacy concerns, the complexity of integrating ESG reporting into existing business practices, and the potential for increased scrutiny and regulatory burden contribute to their apprehensions. Addressing these challenges will require a collaborative effort from companies, regulators, and industry associations to create an enabling environment for effective ESG reporting.
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