With ESG reporting, companies can redefine identity, brand and purpose

‘There are no passengers on Spaceship Earth,’ said Marshall McLuhan, communications and media theorist, ‘we are all crew.’ As India’s largest companies get ready to take on the now-mandatory requirement of reporting on their environmental, social and governance (ESG) impact, that statement, made in 1965, should help them redefine their purpose.

For many companies, the process is not exactly new; ESG reporting began on a voluntary basis, after the government announced National Voluntary Guidelines, or NVG, in 2011. In 2012, a Securities and Exchange Board of India (SEBI) circular asked the top 100 companies (increased to 500 in 2015-216, or FY16) by market capitalisation to provide a Business Responsibility Report (BRR), either separately or as part of their in annual reports.

But starting this financial year – FY23 – the scale and scope of ESG reporting has changed dramatically. The top 1,000 companies are now mandatorily required to file detailed reports that include almost 40 key performance indicators (KPIs), in a Business Responsibility and Sustainability Report (BRSR), which replaces the BRR. How ready are companies for this?

In 2017, KPMG, the management consulting firm analysed business responsibility reporting, drawing on FY15 BRRs filed by the 100 top companies by market capitalisation. They found that a) 96 created reports and published them; b) while all ESG-related policies, no links were provided and c) the reporting was mostly descriptive and lacked quantitative data.

KPMG found that on average, roughly 45 per cent of the BRR was about environmental impact of products and services provided, and 46 per cent covered risks and opportunities. But only 5 per cent of the report addressed social aspects, because companies probably did not look at the entire value chain, or ‘cradle to the grave’ life-cycle, of products/services.

In 2019, the Indian Institute of Corporate Affairs (IICA) analysed 490 BRRS filed in FY16 in its Baseline Assessment of Business and Human Rights Situation in India; it concluded that a) companies had the capacity to understand and produce BRRs; b) reporting, however, varied widely across different industries, and c) accuracy and clarity in the reports were weak.

In May 2020, a Ministry of Corporate Affairs, or MCA appointed Committee on Business Responsibility Reporting reviewed the experience on ESG reporting, including the findings in the IICA report and other analyses. Based on recommendations drawn from that review, the MCA made an expanded BRSR, aiming for standardised reporting, effective from FY23.

Given what we now know, what comes next? As companies ready themselves to apply the new framework and make deeper disclosures, a quick review of the reporting landscape will help. First, the ESG framework includes both financial and non-financial disclosures; the BRSR will be analysed both quantitatively and qualitatively.

Second, policies and corporate processes will be examined through the lens of the National Business Responsibility and Sustainability Guidelines (NBRSGs), which are classified under 9 principles. Third, ESG performance will be assessed or scored principle-wise.

While the BRSR is mandatory only for the 1,000 largest companies, it will inevitably be made applicable to all listed companies. Those currently outside the top 1,000 can select a few KPIs that apply to them and begin reporting voluntarily, and build capacity by adding new KPIs every year; when mandatory reporting becomes applicable, they will be well-prepared.

Chief financial officers (CFOs) are constantly wrestling with managing compliance costs, which is always a thorny issue. ESG reporting could – at least initially – increase them. CFOs in smaller companies should get familiar with the MCA’s ESG Guidelines, which list 37 laws – yes, 37 – that are relevant for business sustainability.

Sebi leads ESG regulation; the largest stakeholders in its ambit are investors. Soon, private equity (PE) and venture capital (VC) firms will begin to use ESG reporting as a selection filter for identifying investments. Start-up entrepreneurs should factor this in when looking for investors, or the next round of funding. Starting early could make a difference.

One point should be emphasised, and perhaps more than once: ESG reporting is not a box-ticking exercise. The information sought is both varied and nuanced. The BRSR report has been designed – and will be updated periodically – with consistency as an objective. Box-ticking approaches will expose big holes in a company’s ESG narrative.

ESG reporting is not just about what companies do and the actions they take, but also about how they perceive themselves and their role within the broader social framework. It’s not inconceivable that ESG will define the corporate brand. Corporate vision, mission and values will be assessed and judged against a company’s ESG reputation. “Corporate citizen” is no longer a label, it’s a behavioural standard.

The ESG agenda – globally and domestically – requires companies to more than just do their part; it is about showing up and stepping up. Because as Robert Swan, the first man to walk to both the North and South Poles – 600 miles and 900 miles respectively – said, “The greatest threat to the planet is the belief that someone else will save it.”

“This article was first published on June 6, 2022 in Voices, India, The Times of India”