India: Decoding BRSR Disclosures For FY 23-24 Onwards

1. EVOLUTION OF SUSTAINABILITY REPORTING IN INDIA

In recent times, the world has recognized the urgency of addressing climate change and embracing sustainable development. Companies are now carefully examined in the capital markets, where their social standing is directly linked to financial performance. Investors in particular, are looking for environmental, social, and governance indicators to identify companies that are not only financially sound but also align with their ethical standards. The shift towards sustainable investment is becoming increasingly pronounced among investors.

Responding to the need for a robust framework for sustainability reporting in India, the Securities and Exchange Board of India introduced the Business Responsibility Report in 2012. This was replaced by the more comprehensive Business Responsibility and Sustainability Reporting (BRSR) in 2021, to keep up with evolving global ESG standards.

2. BRSR FRAMEWORK

The 12^th July, 2023, BRSR is a compulsory reporting requirement for all listed companies in India and stems from the National Guidelines on Responsible Business Conduct (NGRBC). It facilitates a comprehensive analysis of the company's resilience, prospects, and long-term viability for regulators, investors, and stakeholders. The BRSR operates on a "comply or explain" basis, requiring publicly listed companies to provide detailed ESG information as per the prescribed format or to provide a credible explanation for any non-disclosure.

The framework is divided into three key segments: (a) general disclosures, (b) management and processes disclosures, and (c) principle-wise performance disclosures. These principles correspond with the nine principles outlined in the 'National Guidelines on Responsible Business Conduct'. The section dedicated to Principle-wise Performance Disclosure, helps organizations in demonstrating how they have integrated these principles and their core elements into their primary processes and decision-making strategies. The disclosures are categorized into Essential and Leadership indicators. Essential indicators represent the mandatory disclosures that all entities reporting under the BRSR framework are expected to disclose. Leadership indicators, on the other hand, are optional and can be reported by companies that are motivated to demonstrate a higher level of commitment to social, environmental, and ethical governance.

3. BRSR CORE

On July 12 2023, SEBI introduced a sub-set of the BRSR, consisting of a set of Key Performance Indicators (KPIs) / metrics under 9 ESG attributes called BRSR Core to keep up with the emerging market trends. As of FY 2023-24, the top 1000 listed entities are now obligated to disclose their BRSR Core reports as part of their Annual Reports.

These attributes include disclosures like job creation in small towns, gross wages paid to women, accounts payables days, spending on employee welfare activities, details of sexual harassment complaints received etc.

Additionally, intensity ratios based on revenue adjusted for Purchasing Power Parity (PPP) have also been added to improve global comparability. Purchasing Power Parity is an economic concept that enables the comparison of different countries' currencies in terms of their purchasing power. It calculates what the cost of goods and services would be if a universal currency were used across nations. Essentially, PPP is the exchange rate at which the value of one currency is equivalent in terms of purchasing power to another currency.

The nine attributes are as follows:

• Greenhouse Gas (GHG) Footprint: Regarding the reporting of Scope 1 and Scope 2 greenhouse gas emissions and their intensity, listed companies have to additionally report the overall intensity of Scope 1 and Scope 2 emissions relative to each rupee of turnover, adjusted for Purchasing Power Parity(PPP), as well as in terms of physical output. This offers a nuanced view of a company's environmental impact in economic terms, which enhances comparability across global markets. Reporting emissions in relation to physical output allows stakeholders to assess a company's efficiency and effectiveness in managing its carbon footprint in direct correlation with its production activities.
• Water Footprint: The listed entities are also obligated to disclose the water intensity per rupee of turnover, adjusted for Purchasing Power Parity, as well as water intensity in terms of physical output. Additionally, details related to water discharged for the current and previous financial year, which were earlier voluntary, have been made mandatory. This provides a clear measure of a company's water efficiency relative to its economic activities, facilitating cross-border comparisons and enhances transparency and accountability for water resource management.
• Energy Footprint: Details of total energy consumed from renewable and non-renewable sources, Energy intensity per rupee of turnover adjusted for Purchasing Power Parity (PPP) and Energy intensity in terms of physical output, which were earlier voluntary, have also been made mandatory. This mandatory disclosure informs stakeholders of a company's energy profile and efficiency as well as encourages comparative analysis and responsible energy management practices within the industry.
• Embracing Circularity-Details related to Waste management: In addition to each category of waste generated and the total waste recovered and disposed for each category of waste including the method of recovery and disposal, the listed entities are also required to disclose waste intensity per rupee of turnover adjusted for Purchasing Power Parity (PPP) and in terms of physical output. This allows for a more precise assessment of a company's waste reduction efficiency in the context of its economic performance.
• Enhancing Employee well-being and safety: Listed entities are required to disclose spending on measures towards well-being of employees and workers. Additionally, under details of safety related incidents, the company is now required to include contract workers. This helps highlight the company's commitment to the social aspect of sustainability and its investment in human capital. Including contract workers in safety-related incident reports extends accountability and ensures a comprehensive view of workplace safety.
• Enabling Gender Diversity in Business: The listed entity is now required to disclose gross wages paid to women and Complaints filed under the POSH Act, 2013 for the current and previous financial year. Mandatory disclosure of gross wages paid to women ensures transparency in the wage structure, emphasizing a company's stance on fair compensation practices. Reporting complaints under the POSH Act from the current and previous financial year underscores the organization's commitment to workplace safety and the seriousness with which it addresses sexual harassment allegations.
• Enabling Inclusive Development: The listed entity is now required to disclose wages paid to persons employed in smaller towns. Earlier the entities were required to disclose input material directly sourced from MSMEs and small producers and within the district and neighboring districts, which has now been replaced by Input material directly sourced from MSMEs/ small producers and from within India. This can help gauge the impact of the company on regional development and job creation outside major urban centers. Further, shifting the focus of reporting from local sourcing to material sourced from MSMEs and small producers within India as a whole fosters understanding of the company's support for domestic enterprises and its role in boosting the local economy.
• Fairness in engaging with Customers and Suppliers: The listed entity is required to disclose Number of days of accounts payables for the current and previous financial year. Additionally, disclosure of instances relating to data breaches, which was earlier voluntary, has also been made mandatory.
• Openness of Business: The listed entity is required to disclose the concentration of purchases and sales with trading houses, dealers, and related parties along-with loans and advances and investments, with related parties. Disclosing the concentration of transactions with trading houses, dealers, and related parties, as well as loans, advances, and investments with related parties, enhances the transparency of a listed entity's business dealings and helps stakeholders assess potential conflicts of interest or undue influence on financial decisions. This information is crucial for investors and regulators to monitor and evaluate the integrity of a company's financial and operational practices.

To ensure the credibility of reported data, SEBI has also introduced the concept of "assurance providers" to validate the disclosures under BRSR Core. If an assurance provider sells any products or offers any services (financial or non-financial) that are not audit-related, or not assurance-related, to the reporting company or any of its group entities, such a provider will be disqualified from offering assurance services for the BRSR Core. The circular has not specified the qualifications for an assurance provider but has left it up to the Board of the listed entity to ensure that the assurance provider has the "necessary expertise for undertaking reasonable assurance in the area of sustainability."

SEBI has provided a non-exhaustive list of activities that can and cannot be undertaken by the assurance provider. Certain audit and assurance activities, including but not limited to providing third-party certifications, conducting tax audits, performing system audits, and managing tax filings, may be carried out by an assurance provider for the BRSR Core of a listed company or its group entities, provided the entity determines these activities do not lead to conflicts of interest or impinge upon the assurance provider's independence. Conversely, there are activities that are prohibited for an assurance provider to perform for the BRSR Core of a listed entity or its group entities. These include risk and project management, management consultancy, investment advice, investment banking, designing and implementing information systems, offering outsourced financial services, and providing actuarial, as well as accounting and bookkeeping services.

The Circular refrains from stipulating the adoption or endorsement of any particular assurance standard. It permits the assurance provider to appropriately select a globally recognized standard for sustainability or non-financial reporting. Options include the "International Standard on Assurance Engagements 3000" or standards issued by "The Institute of Chartered Accountants of India," such as "Standard on Sustainability Assurance Engagements 3000" or "Standard on Assurance Engagements 3410 'Assurance Engagements on Greenhouse Gas Statements'". Additionally, it is required to disclose which assurance standard has been applied.

The timeline for implementing reasonable assurance for BRSR Core is phased, beginning with the top 150 listed entities in FY 2023-24. It extends to the top 250 listed entities by FY 2024-25 and eventually includes the top 1000 listed entities by FY 2026-27.

Additionally, the BRSR Core includes specific disclosures regarding the value chain, which should cover major upstream and downstream partners that represent 75% of the entity's purchases or sales by value. Entities can choose to report this data separately for upstream and downstream entities or provide a combined report. The top 250 listed entities are expected to follow the "comply-or-explain" approach for value chain disclosures starting in FY 2024-25, and limited assurance on these disclosures will be mandated by FY 2025-26.

Although these initiatives serve as a solid starting point, further clarity is necessary. Firstly, SEBI should clarify the base year for determining the threshold of 75 percent of purchases/sales (by value). Additionally, SEBI should address the absence of industry-specific disclosures within the BRSR framework in the coming years.

Overall, the introduction of BRSR Core is testament to India's commitment to corporate sustainability practices and is set to play a key role in increasing transparency and accountability in businesses while promoting ethical and sustainable business conduct and growth.

4. PERPETUAL APPLICABILITY OF BRSR

As mentioned previously, the top 1000 listed entities (by market capitalization) are obligated to disclose their BRSR report as part of their Annual Reports. This prompts the question of whether BRSR would be applicable perpetually to a company which was in the top 1000 listed entities by market capitalization as on 31^st March for a particular financial year, but not the next year.

This can be understood through the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. Regulation 34 (2)(f) states: "for the top one thousand listed entities based on market capitalization, a Business Responsibility and Sustainability Report on the environmental, social and governance disclosures, in the format as may be specified by the Board from time to time." The explanation to this clause states that "market capitalization shall be calculated as on the 31st day of March of every financial year." Further, Regulation 3(2) states: "The provisions of these regulations which become applicable to listed entities on the basis of market capitalization criteria shall continue to apply to such entities even if they fall below such thresholds."

Thus, when these two regulations are read together, it is clear that once BRSR becomes applicable to a company, it would become perpetually applicable regardless of the market capitalization in the current financial year. Thus, if the Company is in Top 1000 as on 31 March, 2024 – requirement to preparing BRSR becomes applicable – and further, if it is in Top 150 – applicability of assurance to BRSR Core becomes applicable.

5. Global Benchmarking of BRSR with ESRS

BRSR and ESRS (European Sustainability Reporting Standards) are frameworks designed for sustainability reporting that focus broadly on three parameters: Environment Social and Governance. There is a considerable thematic intersection between the two. With the new EU directive of CSRD (Corporate Sustainability Reporting Directive 2022/2464/EU), disclosures for the same would be done on 1000 plus elements of ESRS. ESRS obligates entities to include specific disclosures regarding climate, similar to BRSR's inclusion of such disclosures as key leadership indicators. Both place emphasis on detailing organizational efforts in greenhouse gas emissions, climate-focused strategies, and risk management protocols.

Within the social dimension, both BRSR and ESRS share common ground, concentrating on workplace practices that govern labor welfare, human rights, and policies fostering non-discrimination and equal opportunities. They underscore the importance of addressing human rights, labor rights, development opportunities for employees, enhancement of accessibility for those with disabilities, and processes for addressing grievances from various groups of stakeholders.

In governance, the frameworks are aligned in their requirement for disclosures concerning anti-corruption and anti-bribery measures, protections for whistleblowers, managing and communicating supply chain risks, and the implementation of training programs.

ERSR also has additional disclosures related to alignment with international instruments, penalties levied due to non-compliance with Human rights factors, risks of forced labor, global agreements related to respect of human rights of workers etc.

However, despite the overlap in themes, ESRS provides a more detailed set of disclosures than BRSR within the realms of Environment, Social, and Governance. Notably, ESRS incorporates further disclosures related to decarbonization levers, transition plan for climate change mitigation, tracking policies through targets, carbon credits and pricing scheme, climate related considerations in remuneration etc., which BRSR does not currently encompass.

Additionally, ESRS extends its detailed reporting to include disclosures related to alignment with international instruments, penalties incurred due to human rights violations, the risks associated with forced labor, global agreements related to respect of human rights of workers etc. — elements that are not explicitly covered by BRSR.

While the ESRS framework is particular to EU member nations, it has ramifications that reach companies worldwide. Indian enterprises, especially those with branches or operations within the EU, must understand these far-reaching effects. Those Indian businesses that fall under the ambit of ESRS reporting will be expected to provide extensive sustainability information, encompassing data on climate, diversity, and human rights matters, following a standardized method. By adopting these mandates into their reporting mechanisms, companies can proactively manage environmental and social hazards, which enhances their resilience and sustainability over time.

By embracing global standards and incorporating the common elements of ESRS and BRSR, Indian businesses may improve the reliability and coherence of their sustainability reporting. This alignment guarantees that Indian companies' sustainability reporting is comparable to that of European companies, which helps them stand out in the global marketplace. A company's adherence to global sustainability standards is indicative of its commitment to moral business practices, which could enhance its reputation among investors, partners, and customers. Companies must now align their reporting with ESRS in order to attract sustainable investments and gain the trust of investors, as investors, both inside and outside the EU, are placing a growing amount of weight on ESG criteria when making investment decisions. To remain competitive, attract investments, and satisfy evolving stakeholder needs, Indian enterprises with global aspirations or those with established foreign operations ought to proactively adhere to these international norms.

6. REFERENCES

• SEBI | BRSR Core - Framework for assurance and ESG disclosures for value chain
• Annexure_I-Format-of-BRSR-Core_p.pdf (sebi.gov.in)
• pdf (sebi.gov.in)
• Voices on Reporting Overview of BRSR Core and value chain (kpmg.com)
• What Is Purchase Power Parity? (thebalancemoney.com)
• SEBI | Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 [Last amended on July 4, 2023]

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