Current events dictate that ESG considerations are increasing in importance for companies as well as regulators, warns Ashutosh Senger, lead counsel at Florence Capital

The challenges faced by societies due to the pandemic and the climate crisis have reinforced the need to embed environmental, social and governance (ESG) considerations into business decision-making. The pace at which corporations are communicating ESG issues with their shareholders, investors and other stakeholders has seen a significant increase.

ESG regulations enhance transparency and aid investors and other stakeholders in identifying and assessing sustainability-related risks and opportunities. But there are many entities that still underestimate the importance of ESG issues and the impact they have on their business operations. This article discusses the evolving focus of Indian regulators for devising ESG regulations, and finds that more ESG regulations are on their way ‒ and it is in the interest of businesses to pay attention to them.

Taking into consideration the ESG dimension has strong financial, as well as environmental and societal, benefits. A key component of the post-pandemic green economy is the need for transitioning to a sustainable business ecosystem, and making it resilient for the future. A natural consequence of this focus on building sustainable businesses has placed ESG into the mainstay of Indian businesses.

ESG’s regulatory journey

In December 2007, the Reserve Bank of India (RBI) through a circular communicated the concepts of corporate social responsibility (CSR), sustainable development and non-financial reporting to all scheduled commercial banks. This was one of the first efforts by the RBI to initiate discourse on sustainability with banks.

With respect to the concept of business sustainability, the genesis of ESG disclosure efforts in India can be traced back to the Voluntary Guidelines on Corporate Social Responsibility issued by the Ministry of Corporate Affairs in 2009.

Subsequently, after consultations with several stakeholders from business, academia, civil society organisations and the government, these guidelines were revised in 2011 and named the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business.

These guidelines also align with the essence of the Companies Act, 2013, which directs businesses to be mindful of their stakeholders. Section 166(2) of this act casts fiduciary duties on the directors of a company: “A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community, and for the protection of environment.”

ESG reporting by a company refers to disclosure by the company on its performance across ESG factors. Globally, companies are recognising the significance of such reporting parameters to communicate their business strategy, and investors are taking the assistance of ESG reporting to avoid companies that may pose a superior financial risk due to their poor ESG performance.

The ESG score is increasingly used by investors to anticipate a company’s capability to manage future risks and opportunities. Therefore, those with poor ESG scores are at the risk of appearing as a less attractive proposition.

From an ESG perspective, 2012 was an active year for India, as the Securities and Exchange Board of India (SEBI) mandated the inclusion of Business Responsibility Reports (BRRs) as part of the annual reports for the top 100 listed entities based on market capitalisation. In addition to the national voluntary guidelines, it was the increasing attention towards public disclosure of steps taken by listed entities from an ESG perspective that made the inclusion of BRRs mandatory.

This requirement for preparing BRRs was later extended to the top 500 listed entities in 2015-16. Subsequently, in December 2019, the BRR requirement was expanded to the top 1,000 listed companies by market capitalisation. In 2017, the SEBI advised that integrated reporting (IR) may be adopted voluntarily from the financial year 2017-18 by the top 500 listed entities, which are required to prepare BRRs.

The IR framework is much broader than that of BRRs as it helps companies obtain a holistic view of their business by providing a clear overview of their financial and non-financial performance. The IR framework helps an entity convey its value creation story, as it allows the entity to make business disclosure through six capitals that guide its success – namely financial capital, manufactured capital, intellectual capital, human capital, social and relationship capital, and natural capital.

Encouraging proactivity

Several companies in India use sustainability reporting for assessing their sustainability performance with regard to existing frameworks. To capture the best of progressive ESG thinking, the BSE (formerly Bombay Stock Exchange) in 2018 introduced the guidance document on ESG disclosures. The aim of this document was to assist listed entities to incorporate ESG reporting into their existing reporting processes.

To align the earlier mentioned national voluntary guidelines with the sustainable development goals and the “respect” pillar of the UN Guiding Principles, the national voluntary guidelines were subsequently revised and updated in 2019. The updated principles were named the National Guidelines on Responsible Business Conduct (NGRBC). The NGRBC assists businesses to perform beyond regulatory compliance requirements and urges them to conduct their business sustainably, as well as encouraging other stakeholders to follow NGRBC principles.

Some ways in which a business can perform beyond regulatory compliance requirements are: Considering climate-related issues when guiding its business strategy; assigning climate-related responsibilities to its key management personnel; incorporating feedback received from stakeholders for improving the environmental and social concerns of its goods/services; assessing the environment, health and safety practices of its supply chain partners; bringing external stakeholders within the scope of the human rights policy of its business; and conducting human rights due diligence.

With the aim of modifying the BRR to reflect NGRBC principles, and further encouraging companies to take on leadership roles in practices and disclosures, the Ministry of Corporate Affairs constituted a committee in 2018 to review and update the BRR formats for listed and unlisted companies.

Through its report, submitted in 2020, the committee recommended a new reporting framework called the Business Responsibility and Sustainability Report (BRSR). The change in name of the format from BRR to BRSR expresses the renewed thrust on sustainability, as well as business responsibility, in the format.

The BRSR seeks disclosure from listed entities on their performance against the nine principles of the NGRBC. The filing of a BRSR has been made mandatory for the top 1,000 listed companies by market capitalisation from the financial year 2022-2023. The SEBI in May 2021 communicated that listed entities that are preparing and disclosing sustainability reports based on internationally accepted reporting frameworks such as the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD) or integrated reporting may cross-reference these disclosures to those sought under the BRSR.

The BRSR is an attempt by Indian regulators to standardise sustainability-related disclosures by listed entities. Some of the significant aspects of the BRSR are as follows:

(1) Interoperability. Listed entities can cross-reference disclosures made by them under internationally adopted frameworks to the disclosures sought under the BRSR;

(2) Consistency. Listed entities are required to ensure consistency in reporting boundary across the BRSR report; and

(3)Applicability. In case a disclosure sought under the BRSR is not applicable to an entity, the said entity can state that such disclosure is not applicable, along with reasons for the same.

Proliferation of ratings providers

The interoperability aspect of the BRSR is a welcome step, as even before the development of the format entities in India have been publishing sustainability reports by following internationally accepted reporting frameworks such as GRI, SASB, TCFD, integrated reporting etc. The interoperability element of the BRSR will provide a major boost to the overall ESG reporting ecosystem of India.

In November 2021, the board-level sustainable finance taskforce of the International Organisation of Securities Commissions (IOSCO) suggested that while the market of ESG ratings and data does not typically fall within the remit of securities regulators, these regulators could consider focusing greater attention on the use of ESG ratings and data products, and the activities of ESG ratings and data product providers in their jurisdictions.

By applying its own set of criteria an ESG ratings provider (ERP) gives ESG ratings to assess a company’s long-term exposure to ESG risks, and its performance in managing those risks relative to industry peers. Recently institutional investors, asset managers, financial institutions and other stakeholders have started relying on ESG ratings in making their investment and lending decisions.

Further, due to an absence of consistent and comparable issuer disclosures, ESG ratings by ERPs have become a go-to source for making an objective opinion about the ESG characteristics of a company.

The ESG regulatory landscape in India is also expanding into the domain of evaluation and rating of ESG-related parameters by ERPs. This is evident from a recent consultation paper issued on 24 January 2022 by the SEBI, through which it sought public comments on a proposed framework to regulate ERPs and provide oversight.

It is pertinent to mention that in this consultation paper, the SEBI stated that the legislative and regulatory focus on ESG is expected to expand the ESG-related services industry worldwide. The paper also notes that investors are demanding the evaluation and rating of ESG-related parameters from ERPs.

The need for regulating ERPs in India has arisen because there is an enhanced reliance on unregulated ERPs in securities markets, and such reliance poses several concerns such as investor protection, the transparency and efficiency of markets, risk pricing, capital allocation, etc.

Focusing attention towards regulating ERPs in India aligns well with the mandatory BRSR disclosure. Disclosure of granular details by entities, along with regulating ERPs, will aid in the development of trustworthy credentials and attract more investment, adding confidence in the entire Indian ESG ecosystem.


Ashutosh Senger is the lead counsel of Florence Capital.

Law.asia subscripton ad blue 2022