ESG reporting in an increasingly volatile world

ESG reporting in an increasingly volatile world - Relevance and evolution

New Delhi: Amid rising social inequalities, an unprecedented health crisis, mounting economic pressures, global climate crisis, Environment, Social and Governance (ESG) has emerged as an important facet in decision-making in the corporate ecosystem, with management, board, regulators and other stakeholders, each using an ESG lens in their decision making. The World Economic Forum’s annual Global Risk Report 2022 identified environmental and social risks as majority of top 10 significant risks in terms of severity and short, medium, and long-term threat. The pandemic further exposed corporate vulnerabilities, especially in the social dimension. Similarly, investors, have demanded greater transparency around the impact of such risks on the capital, operations, and overall performance of the business.

These factors have acted as a catalyst for the growing momentum among corporates to focus on enhanced ESG reporting. Companies that have kept pace with this rising stakeholder sentiment and proactively embraced ESG reporting have seen some early benefits with some of them going on to be a part of some ESG indices. As both investors and regulators become increasingly wary of greenwashing, the advantages of ESG reporting can only be sustained with constantly enhancing the quality and transparency of ESG disclosures, and ultimately move towards an integrated approach to corporate reporting in the near-term, integrating both the ESG and financial reports.

Global trends

Existing and evolving ESG-related requirements are as varied as the jurisdictions that are required to follow them. While some focus on climate change, other cover the full set of ESG factors. With voices for climate-aware investing and carbon controls increasing the globe, the first year of mandatory reporting by companies in the United Kingdom on Task Force on Climate-related Financial Disclosures (TCFD) aligned disclosures has been challenging for many. Reasons include complexities of data collection, the need to establish robust new processes, sometimes involving information provided by third parties in the company’s value chain, and the lack of established good reporting practice. Similarly, approximately 50,000 companies in the European Union that are gearing up for the new reporting requirements under the Corporate Sustainability Reporting Directive, are also facing similar challenges. Premium listed companies in sectors that are more subjected to climate change – have generally risen to the challenge and are broadly able to provide the TCFD disclosures.

The US Securities and Exchange Commission (SEC)’s action underscores the imperative for businesses to understand likely reporting requirements and connect them to their strategy and operations. Their proposed rules are intended to provide more consistent, comparable, and reliable information so that investors can better evaluate the impact of climate-related matters on a registrant, and are to be accompanied by assurance reports on several key elements of those disclosures.

Climate risk and ESG reporting in India

In line with global trends, enhanced momentum on sustainability as a corporate agenda has been observed in India as well over the years. However, the mandates in India are transforming, becoming more inclusive of societal needs and expectations, in addition to environmental aspects. While pioneering Indian corporates have been publishing sustainability reports since the early 2000s, most of the large Indian corporates are now rigorously navigating their way through both mandatory and voluntary ESG reporting regulations, standards and frameworks. Furthermore, robust ESG disclosures can also support corporates to effectively respond to key stakeholder requirements while also enhance their performance across a myriad of ESG rating indices.

With the nudge from Securities and Exchange Board of India (SEBI) some years back, the Integrated Reporting Framework has been widely used by the top 100 companies in India to showcase ESG performance. It enables companies to provide information in a simple, yet holistic manner, by highlights the interlinkages between six distinct but interrelated capitals – financial, manufactured, intellectual, human, social and relationship, and natural. SEBI’s mandate on Business Responsibility and Sustainability Reporting (BRSR) with a focus on many more measurable metrics across nine principles has been another landmark step, and is set to transform how companies track, measure, and perform on ESG parameters. Through its consultation paper in February 2023, SEBI is going a step further, to both introduce mandatory reasonable assurance on select ESG parameters (called BRSR Core) and also extending the disclosure requirements to the supply chain of the listed company. Both of these are expected to significantly enhance the quality, rigour and relevance of BRSR reports.

Indian companies, taking a cue from the challenges and complexities being faced by companies in UK, Europe and US, should step up their level of readiness to undergo greater scrutiny of their ESG reports as and when reasonable assurance, which is akin to an audit, becomes mandatory. This would require investment into systems, processes, people and technology, and bring them to a level of rigour and maturity similar to that on financial reporting.

The way forward

The International Organisation of Securities Commissions (IOSCO) in its Sustainable Finance work plan 2022 reiterated the requirement of credible, consistent, and quantitative metrics in reporting practices. Parallelly, priority must be given by corporates to ensure reporting practices are complete, comparable, and consistent, to effectively inform business strategy and risks, while identifying strategic climate and ESG opportunities to capitalise on. With regulators pushing for mandatory assurance of ESG reports, it is also imperative for companies to comprehensively assess their level of readiness. To prepare for these changing demands and for the growing expectations of companies’ financial and non-financial reporting, action is needed now on assessing ESG risks and opportunities for their businesses and on proper ESG disclosures.

[This piece was authored by Sai Venkateshwaran, Partner, KPMG in India]