Balancing BRSR standards and business ease in India

The Securities and Exchange Board of India (SEBI) recently concluded a consultation paper seeking feedback on significant revisions to the Business Responsibility and Sustainability Reporting (BRSR) framework. This framework, mandated by SEBI, requires the top 1,000 listed companies by market capitalisation to disclose their Environmental, Social and Governance (ESG) performance in a standardised, quantitative format. The consultation paper is aimed at reducing the compliance burden of companies, thereby lowering the cost of doing business. It reflects a broader effort to streamline regulations while promoting sustainable business practices.

Redefining Value Chain Partners

SEBI’s proposal to redefine value chain partners as entities comprising 2% or more of a company’s purchases or sales and cumulatively covering at least 75% of the value chain is a crucial change in the paper. This adjustment aims to simplify reporting by reducing the number of value chain partners that a company needs to disclose. While this is a welcome move towards easing the reporting burden on regulated entities, it raises concerns about potential loopholes. If multiple supply chain partners collectively comprise 75% but individually fall below the 2% threshold, they should still be included. This would ensure comprehensive coverage and prevent companies from evading disclosure requirements through possible manipulation of the composition of their value chains.

Voluntary ESG Disclosures

Another significant proposal for value chain partners is shifting from a ‘comply or explain’ approach to voluntary ESG disclosures. SEBI believes this will reduce the compliance burden, especially for Micro, Small and Medium Enterprises within larger companies’ supply chains. However, this could also dilute existing standards. The current ‘comply or explain’ approach, part of the globally accepted European Sustainability Reporting Standards (ESRS) and the International Sustainability Standards Board’s S1 and S2 standards, needs to be retained. This approach strikes a balance by allowing companies to either comply with specific reporting requirements or explain their inability to do so, along with alternative measures taken. Providing a valid rationale for non-compliance enhances transparency and accommodates diverse circumstances.

Addition of Green Credits Disclosure

SEBI’s proposal to include a leadership indicator under Principle 6 (which states that businesses should respect and make efforts to protect and restore the environment) for green credits generated by companies and their value chain partners is a forward-thinking one. Given the increasing role of carbon credits or offsets in achieving decarbonisation targets, this measure could significantly impact high-emission sectors. While this is a significant development, there is also a need for credibility in the carbon credit market that has been marred by controversy in the recent past. Hence, green credit disclosures should include details on certification and global inventories to which credits can be tracked, ensuring transparency, quality and reliability.

Assessment vs. Assurance

Ensuring the credibility of disclosed sustainability-related data is crucial for regulated entities. While assurance is an established field and practice with industry best standards, assessment of sustainability disclosures is an emerging field and there are differing methodologies that different entities use. Additionally, while assessment is cost effective, it may dilute the credibility of sustainability disclosures.  

SEBI’s proposal to replace ‘assurance’ of BRSR core disclosures with ‘assessment’ represents a significant relaxation of regulations. While aimed at reducing compliance costs, this change could weaken the credibility and reliability of ESG disclosures. Rigorous external assurance by qualified independent providers is crucial for data quality and investor/stakeholder confidence.

The BRSR core currently applies to the top 150 companies by market capitalisation. For these companies, maintaining the requirement for reasonable assurance is essential. For others, it should be a best practice. For large-size companies, the cost of assurance may not be substantial, yet it significantly boosts global capital providers’ confidence in India’s commitment to building a robust, sustainable finance ecosystem.

Assessment lacks globally recognised standards, unlike assurance, which has well-established standards. The ESRS requires limited assurance, with potential for reasonable assurance over time. Assurance requirements enable better comparison across companies, unlike verification, which can lead to inconsistent claims and potential “verification shopping” by companies for more favourable verification standards.

If cost concerns drive this change, a more measured approach could be to explore making assurance more affordable and accessible, particularly for smaller companies, rather than compromising on the core requirement. Another approach could mandate assurance for specific BRSR core disclosures, such as greenhouse gas inventory, while keeping assurance as a leadership metric for other key performance indicators.

Balancing compliance and sustainability

SEBI’s proposed changes to the BRSR framework aim to balance compliance with sustainability. However, there is a need for rigorous standards to ensure the credibility and effectiveness of ESG disclosures. By addressing potential loopholes, advocating for mandatory disclosures, and suggesting a phased approach to assurance, SEBI can align with global best practices.

While reducing the compliance burden may lower short-term costs for companies, it could increase future compliance costs. Investors would also face higher investment costs due to the additional risk assessment efforts required to identify companies with robust ESG risk management practices.

As India continues strengthening its sustainable finance ecosystem, a measured approach is needed to uphold integrity while providing reasonable transition periods and support. Collaboration between regulators, industry experts and stakeholders is key to developing a robust ESG reporting framework aligned with global best practices that fosters transparency, accountability and investor confidence.

This article was first published in ET Energy World.