Associate Professor

Commerce

Lakshmibai College, University of Delhi,

 Delhi, India 

Abstract

This chapter focuses on the concept of sustainability reporting and its evolution in India as well as globally. The rise of a plethora of voluntary as well as mandatory reporting guidelines encourages a study into the aspects of what these frameworks are and what challenges the exercise of reporting presents.

Objectives of the Chapter

This chapter has the following objectives:

1. To understand the scope of sustainability reporting.

2. To identify who are the users of such reports.

3. To explore how India’s position on sustainability reporting has evolved.

4. To understand the European Union’s efforts on sustainability reporting.

5. To evaluate the global position on sustainability reporting.

6. To understand the challenges faced while preparing sustainability reports.

Introduction

The rise of Sustainability and Sustainable Development Goals focuses on developing not only an ESG-centric business model but also transparency in the way the initiatives, progress, and key performance indicators (KPIs) are reported.

Sustainability Reporting is the formal communication by an entity about its Environmental, Social, and Governance related information in its annual accounts or other periodic reports. While this started as a voluntary practice, there is a growing regulatory trend globally to ensure that companies include ESG reporting in their annual accounts.

There are three kinds of reporting depending on the level of formality, integration, and coordination of information within the firm.

1. A lot of companies publish separate reports on different ESG topics at different time frames during the financial year. Some examples of these reports include the 20-F filing required by the US Securities and Exchange Commission, the TCFD Report, the GRI index, etc. This is the least preferable option as some data points can get outdated very quickly and may not hold well by the end of the year, which is when the annual report is created and published.

2. A recent trend shows the publication of a dedicated ESG report (sometimes also called a Sustainability report or a Non-Financial report), in addition to the Annual Report of the company. The ESG report is usually created with reference to international standards of reporting, with details on specific initiatives, KPIs, etc.

3. The final level of reporting is producing an Integrated Report which covers both the financial and non-financial aspects. This is a single annual report that helps collate all information in one place, ensures a single outreach for assurance, and helps link ESG factors to the top line (revenue) and bottom line (profit) of the company.

Key Elements of a Sustainability Report

A quick analysis of the ESG reports of some companies will tell you that there is no defined structure of a report such as this, just as a financial annual report can be drafted and organized as per the discretion of the company, except for the financial statement formats.

However, across reports, there are some key themes and elements that are important to report on, given either the global focus or regulatory mandate. These include:

1. The sustainability strategy of the firm and how that relates to the strategies of individual business lines.

2. ESG goals and targets, and progress against them.

3. Internally – environmental footprint data, diversity data, board independence data, policies and practices on anti-financial crime, data protection, culture, and integrity, etc.

4. Externally – ESG associated products and services, ESG risks and their mitigation plans, stakeholder engagement, human rights due diligence, climate risk, corporate social responsibility

5. Extracts or appended versions of other voluntary ESG reporting such as SASB, GRI, UN Global Compact, and Task Force on Climate-related Financial Disclosures (TCFD).

Importance of Sustainability Reporting

Sustainability Reporting has grown in scope and importance to its various stakeholders that wish to analyze a company based on its ESG data.

Internal Stakeholders

1. Board and Management – these two groups are instrumental in steering a company forward and a sustainability report helps to establish their strategy and communicate the same to other stakeholders. It helps to build credibility and shows commitment to solving environmental and social problems on behalf of the firm.

2. Equity Investors – the shareholders or owners of a firm are impacted by the ESG commitment and performance. They need to know the direction the firm is going to take as it helps with their investment decisions. Financial stability and asset valuations are important aspects to consider with regard to climate-related considerations. Furthermore, institutional investors are active in shaping the said strategy by raising critical issues at Annual General Meetings and voting accordingly.

3. Debt Investors – companies often raise money by way of corporate bonds, notes, etc. Bondholders may need to see the use of proceeds of the financing in order to estimate returns, future risks, and whether the purpose aligns with their interests.

4. Employees – for large organizations, only some employees may be involved in the creation of the sustainability report and hence, will know the overall direction of the firm. For all others, the report serves as the knowledge platform to understand how different teams interact to drive the strategy and initiatives forward.

External Stakeholders

1. Clients and Customers – an ESG report hosts information about the ESG products and services that the firm may offer, such as low emission engines produced by an automobile company, green home loans by a bank, sustainably procured cotton clothes by a garment company, etc. The report serves as a brochure to the clients and customers and helps increase business prospects.

2. Business Partners – companies have initiated introducing policies for due diligence of suppliers, distributors, and other business partners. Information hosted in an ESG report helps create the big picture view about the company a prospective supplier or distributor may want to do business with. This can help create the base for further engagement on specific due diligence requirements.

3. Regulators – regulatory authorities regularly review and analyze the reports published by the companies in different sectors. This helps them understand the gaps in current reporting and draft laws to help mend them. Regulators usually undertake an impact assessment as well to determine the need for regulatory action and the possible solutions.

4. Community – the society at large may be interested in the impact the company has on them and vice versa. Information about corporate social responsibility (CSR) activities aids community groups in comprehending the company's area of focus. This information can be used by NGOs when looking for corporate partners.

5. Rating Firms – similar to the concept of credit ratings, ESG ratings have started becoming popular. Sustainability reports are a golden source for rating analysts as they host all relevant information that can be mapped to the rating indicators and scored.

6. Competitor Firms – sustainability is an evolving space and comparable peer firms regularly monitor each other to understand their developments and benchmark themselves against the industry. This helps them stay abreast of the competition and market the firm as a sustainability leader.

Evolution of Sustainability Reporting in India

National Voluntary Guidelines (NVG) on Corporate Social Responsibility were released by the Ministry of Corporate Affairs (MCA) in 2009.These guidelines lay down the following aspects:

1. The fundamental principle of these guidelines is to develop a CSR policy that incorporates the strategic CSR initiatives and is integrated into the business policy.

2. There are six core elements that emphasize focusing on the needs of all stakeholders, workers’ rights, ethics, environment, human rights, and inclusive development.

3. The implementation guidance focuses on an implementation strategy, budget, and information transparency.

Business Responsibility Reports (BRR) were launched by SEBI in 2012 and made necessary for the top 100 market-capitalization businesses listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).The reporting requirement covers the following details, among other details:

4. Expenditure on CSR as a percentage of profit after tax

5. Details on the Business Responsibility (BR) Head

6. NVG-based policy establishment, stakeholder engagement, principles’ implementation

7. Governance related to the Business Responsibility Report, including assessment of performance, and frequency of publication.

This was later adopted in the Listing Regulations 2015 of SEBI, and the 2012 mandate was rescinded. The BRR was also extended to the top 500 companies in 2015, and the top 1000 companies in 2019.

In 2013, section 134 – 3(m) of the Companies Act requires details on energy conservation to be included in the report by the Board of Directors, to be attached to statements laid before the company in general meeting.

In 2014, section 135 of the Companies Act laid down the provisions on CSR:

1. At least two percent of the average net profits of the company made during the three immediately preceding financial years must be used in pursuance of the CSR policy¹. There must be at least three directors on the CSR Committee, at least one of whom must be independent.¹

In 2017, SEBI introduced disclosure requirements related to green debt securities. It defined what “green” means, to create a common understanding, avoid greenwashing and improve investor confidence. Some of the disclosures required are:

1. Environmental objectives being pursued

2. Decision-making process on the eligibility of projects for use of proceeds

3. Tracking the use of proceeds

4. Independent third-party reviewer

5. Half-yearly and annual reporting

SEBI also recommended top 500 listed companies voluntarily adopt Integrated Reporting FY 2017-18 onwards. The integrated report was envisaged to cover the strategic focus of the firm, stakeholder relationships, and other material issues.

The National Guidelines on Responsible Business Conduct (NGRBC)were released by the MCA in 2019.These guidelines revised the National Voluntary Guidelines of 2009 and cover the following:

1. There are nine principles, focusing on ethics and integrity, sustainable goods and services, employee well-being, stakeholder interests, human rights, environment, responsible lobbying, equitable development, and value to customers.

2. Mapping of Sustainable Development Goals and Indian Laws against the 9 principles

3. Development of a reporting framework

The latest development came in 2021, SEBI replaced the Business Responsibility Report (BRR) with the Business Responsibility and Sustainability Report (BRSR).

Business Responsibility and Sustainability Report

In May 2021, SEBI made the Business Responsibility and Sustainability Reporting mandatory for the top 1000 companies by market capitalization from FY 2022-23. BRSR aims to increase ESG compliance in India, regardless of the sector and size of the company.

The report has the following sections:

1. Section A talks about General Disclosures such as details of the listed entity, business activities and products that account for more than 90% of the turnover, regional coverage of the setup and services, employee-related data, and CSR contribution, among others.

2. Section B talks about Management and Process Disclosures. This covers questions of the establishment of policies such as those for implementation of NGRBC, international labels, sustainability governance, targets set, performance measurement, and external evaluation.

3. Section C talks about Principle-wise Performance Disclosures. The nine principles of the National Guidelines on Responsible Business Conduct are analyzed one by one, in terms of essential indicators which are mandatory, and leadership indicators that as voluntary to report on. These indicators are both qualitative and quantitative. Some examples of these indicators are:

a. Principle 1 on Ethical Conduct

i. Essential Indicators include the number of training programmes held for the board of directors, key managerial personnel, and other employees; the number of complaints received with regards to conflicts of interest.

ii. Leadership Indicators include the number of awareness programmes held for members of the value chain; policies to avoid conflicts of interest among the Board members.

b. Principle 3 on Employee Well-being

i. Essential Indicators include the percentage of male and female employees covered by health insurance; percentage of employees covered by retirement benefits; retention rates; membership of employees in unions; implementation of occupational health and safety management systems.

ii. Leadership Indicators include transition assistance provided to employees; corrective actions to address health and safety risks in the workplace; the number of employees who have been injured.

c. Principle 6 on Environment Protection

i. Essential Indicators include electricity consumption; water withdrawal from surface, ground, sea, etc.; fuel consumption; scope 1, and 2 greenhouse gas (GHG) emissions; waste generation such as plastic, electronic, battery, and radioactive.

ii. Leadership Indicators include electricity consumption from renewable sources; percentage of water discharge treated; scope 3 greenhouse gas (GHG) emissions; business continuity and disaster management plans.

d. Principle 8 on Equitable Development

i. Essential Indicators include social impact assessment undertaken; establishment of a grievance redressal mechanism; inputs sourced from small and medium entities.

ii. Leadership Indicators include mitigation measures on the negative impacts identified in the social impact assessments; benefits derived from intellectual property rights owned; beneficiaries of CSR projects.

Some distinguishing features of the BRSR format are:

1. It extends the scope of the KPIs beyond the company itself and requires data on the value chain as well.

2. Smaller companies are encouraged to adopt BRSR voluntarily. A simpler version called BRSR Lite can be used.

3. This may soon be integrated into annual reporting as per MCA requirements.

4. This report may also be used to rate companies, leading to the creation of a Business Responsibility Sustainability Index

5. BRSR is aligned with NGRBC, which in turn is aligned with the UN SDGs. This ensures performance can be aggregated and demonstrated towards meetings the targets under the UN SDGs.

How is BRSR different from BRR?

While the BRR started out with applicability to only the top 100 listed companies, the current applicability is the same under both regimes. BRSR has introduced quantifiable KPIs instead of only Yes/ No answers. It also widens the scope of reporting to topics such as human rights, diversity ratios more granular disclosures about greenhouse gas emissions, etc.

The introduction of mandatory and voluntary indicators is also new within the reporting framework.

The metrics selected, and alignment with UN SDGs ensures that there is global comparability and that India is not working in silos.

Sustainability Reporting in the European Union

The European Union (EU) has been front-running the regulatory regime of sustainability reporting among all regional regulators. Widely acknowledged as Europe’s “man on the moon moment” (Von der Leyen, 2019), the EU initiated an action plan in 2018 with the aid of a High-Level and a Technical Expert Group. These groups provided recommendations on the pillars of the European strategy that would help connect sustainability with finance and investment. This action plan was revised in 2021 and was published as the Renewed Strategy to encourage further momentum in areas of inclusion, transition, and resilience. Both these initiatives leverage existing regulations of the region and have introduced a “top-up” or an amendment with regard to ESG. In some topics, they have also introduced new regulations, guidelines, and frameworks. The initiatives are cross-cutting with regards to the theme, such as financial labels, products, fiduciary duty, and so on, but reporting on these is a common thread or requirement, and lays down the foundation of transparency in sustainability.

Some of the key regulations are:

1. Non-Financial Reporting Directive (NFRD) – In 2014, the EU amended its Accounting Directive to require all “large” companies to report on non-financial information such as the environment, human rights, employee matters, anti-bribery, anti-corruption, diversity, etc. This came into force in 2018. The applicability depends on meeting certain thresholds in terms of balance sheet totals, net turnover, and employee count. Approximately 11000 companies were in scope. As per the EU regulatory structure, member states could adapt NFRD in varying degrees and with their own guidelines and exemptions. However, as part of the action plan, the EU noticed irregularities in the use and implementation of NFRD. The directive was quite flexible while allowing companies to report the required information to any level of degree, in any order, in any format, and on any platform. The value of such reporting is little as there is no consistency in the information reported and no comparability with other companies. Hence, a proposal to revise NFRD was floated with wide public consultation.

2. Corporate Sustainability Reporting Directive (CSRD) – Born out of the revision of NFRD, the CSRD aims to fill the gaps that were present in the previous regime. To start with, the applicability extends to all “large” companies and all companies listed on the EU-regulated markets. This implies that non-EU companies with securities listed on EU exchanges, platforms, etc. will be in scope as well. The information disclosure has been standardized, the platform has been specified to be the Management Report, and the coverage is estimated to be approximately 49000 companies across the EU. The reporting is based on the concept of double materiality which requires information disclosure on how the ESG aspects affect the company and what impact the company has on those ESG aspects. For example, reporting on physical and transition risks suggests the impact of climate change on the company. On the other hand, information on greenhouse gas emissions indicates the company’s impact on the climate. Other reporting requirements include business model details with emphasis on the integration of sustainability strategy, sustainability targets and KPIs, due diligence policy, principal risks, and adverse impacts in the value chain. This is due to go live in 2024.

3. Green Taxonomy – One of the first of its kind, the Taxonomy regulation is essentially a labelling scheme that aims to prevent greenwashing. It lays down the scientific criteria that need to be met for calculating how “green” a product and its underlying economic activity is, based on their contribution to certain environmental objectives. For example, for a portfolio consisting of hydroelectricity projects or companies, each project or company needs to be evaluated on whether the plant is run-of-river and not an artificial reservoir, the power density is as prescribed, the greenhouse gas emissions are below the prescribed limit. They also need to be checked for compliance with other EU regulations and basic social standards. At the heart of these scientific criteria that have been developed for more than 90 types of economic activities, lies the requirement to ensure transparency in pre-contractual disclosures and periodic reports. The information required includes specifying which environmental objective is being prioritized and the extent to which the underlying economic activities of the financial products meet the technical screening criteria explained above. In addition, companies that are obliged to report under NFRD (and going forward, CSRD) must calculate specific KPIs relating to their Taxonomy alignment. For example, non-financial companies have to report on what percentage of their turnover, operating expenditure and capital expenditure qualify under the Taxonomy criteria.

4. Sustainable Finance Disclosure Regulation (SFDR) – One of the first regulations in the EU Action Plan package to have gone live, SFDR requires financial advisors and financial market participants (as defined in Article 2 of the regulation) to publish information on their websites, in their pre-contractual disclosures and their periodic reports. This information relates to adverse sustainability impacts and risks considered in their financial decision-making process or their products. At an organization level, disclosures are required on sustainability risk policies, integration of sustainability risks in remuneration and adverse sustainability impacts.

5. EU Green Bond Standard (GBS) – while not mandatory, this regulation is expected to set a “gold standard” on the labelling of green bonds and help raise finance from capital markets. The GBS draws on the Taxonomy regulation for the technical screening criteria required to determine whether the green bond can be labelled using the EU Green Bond Standard. There are detailed transparency requirements on how the bond proceeds are allocated. Two kinds of reports have been proposed – (i) the Allocation Report which must talk about the amounts allocated to green projects and their distribution, and (ii) the Impact Report which must talk about the environmental objectives, impacts, and metrics.

Voluntary Frameworks for Reporting

In addition to regional regulations, industry bodies, consortiums, and institutional working groups have developed reporting standards and frameworks on sustainability to encourage their members to disclose non-financial information in a consistent manner. Some of the most commonly used frameworks include:

1. Taskforce on Climate-related Financial Disclosures (TCFD) – developed by the Financial Stability Board (FSB), TCFD focuses on enhanced transparency on climate-related issues such as risks and opportunities. The recommendations cover four sections that must be included in the report – (i) Governance which requires details on the governance structures and policies in the organization that relate to climate-related matters; (ii) Strategy which includes details on the impact of climate on the organization’s business strategy and planning; (iii) Risk Management related to climate i.e., identification, management, and mitigation of climate-related risks; (iv) Metrics & Targets that have been set and are being tracked to assess risks and opportunities appropriately.

TCFD has proven to be a preferable format for climate reporting as it has a standardized structure and ensures comparability. Some countries have started making TCFD reporting mandatory for the companies in their jurisdiction. These include the United Kingdom, Switzerland, etc. A disadvantage of TCFD is that its remit is only on climate, hence the information disclosed does not cover the broader ESG spectrum.

Recently, a sister framework called the Taskforce on Nature-related Financial Disclosures (TNFD) was launched, and it focuses on similar disclosures on nature and biodiversity.

2. Global Reporting Initiative (GRI) – set up in 1997, GRI aims to establish a “common language” for reporting the sustainability impacts across organizations. They have developed universal and sector-specific standards to cover all material topics within a firm. These include ethics and integrity, governance, stakeholder management, tax, material procurement, resource efficiency, emissions, employment policies, and so on.

GRI is very comprehensive in the topics covered and represents an ESG repository for the organizations.

3. Value Reporting Foundation (VRF) – this is the merged entity of the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC). VRF provides the integration of the two tools together and allows for “integrated thinking” in decision-making. IIRC focuses on providing disclosures on both commercial and ESG aspects. SASB provides specific topics and metrics that need to be included in the report.

4. United Nations Global Compact (UNGC) and SDGs – while not formal reporting frameworks, organizations often annually report on the progress made in their contribution to SDGs and implementation of the Global Compact. The UNGC covers ten principles related to human rights, environment, labor, and anti-corruption, and is derived from other UN conventions and declarations. They require commitment from the highest level of the firm. SDGs are the 17 sustainable development goals to be met globally by 2030.

Global Status Quo

We have reached a global consensus that action on ESG is required and transparency is at the heart of it. Different countries or regions are on different journeys to introduce and permeate sustainability reporting for the organizations in their jurisdiction. A host of regulations are being introduced by regional regulators. In addition, stock exchanges also lay down listing requirements.

In 2021, BloombergNEF published a report on the status of ESG disclosure policies in various countries. As previously identified, European countries have been leading the charts. U.S., India, and China despite being major economic forces have scored mediocre. Countries such as Turkey and Russia have been lagging.⁶

A deeper analysis of G20 countries, with scoring on the scope and strength of disclosures is presented below.

A review of the ECGI Working Paper on Mandatory ESG Disclosures⁷ that has analyzed 29 countries with ESG disclosure regulations as of 2017, suggests that countries that introduce regulations thematically for environment, social, or governance gradually introduce regulations in all areas. It may also hint at the fact that all three dimensions need transparency for a fuller assessment of a company.

We are now heading towards global harmonization in rules and frameworks. Notably, the International Platform on Sustainable Finance has initiated steps to establish a “common ground taxonomy”. Jointly developed by the EU and China, it focuses on the individual taxonomy rules of the two regions to identify commonality in methodology.

In 2021, the IFRS Foundation announced the establishment of the International Sustainability Standards Board (ISSB). ISSB will seek to solve the problem of having multiple reporting frameworks that lead to confusion. Having a single global standard setter will ensure higher quality and comparability of information published.

Challenges in the Reporting Process

1. Reporting Structure – an analysis of sustainability reporting of different companies in a region or even within a sector will highlight that there is no underlying structure or order of presenting data. Such a massively flexible aspect keeps reporting very vague and high level, and no comparability year on year, and among peer groups.

2. The Data Challenge –gathering data for each aspect of ESG within a company is a massive exercise and often, reliable audited data may not exist. Additionally, some companies may be dependent on the disclosures made by their clients or suppliers so as to incorporate the details in their disclosures. For example, scope 3 category 15 emissions require emission data from client companies.

A second challenge related to data is understanding how quickly it gets outdated and hence adjusting the frequency of the reports accordingly.

3. Interpretation – a data-associated challenge is being able to make sense of the disclosure. Using all available standards, frameworks and metrics may lead to a data overload without understanding the direction in which the company is moving.

In the case of qualitative information, it is easy to talk about only the achievements without addressing the missed targets. This is not good reporting. In the case of quantifiable information, the KPIs can be adjusted and interpreted with inclusions or exclusions as per the convenience of the reporting entity.

Conclusion

In theory, Sustainability Reporting is the medium of providing transparency to investors, analysts, employees, and other stakeholders about the company’s ESG profile.

In action, there is a global momentum, albeit slow. As we move toward removing the confusion around multiple frameworks, there is a need to encourage companies to shift to a single global standard and ensure there is appropriate coverage of all sectors in terms of required metrics and quality.

From India’s perspective, the BRSR must be the first among many such comprehensive and globally aligned rules to be introduced. Inspiration can be drawn from the EU about the thematic laws being revised or introduced.

Sources

1. Taxguru–
https://taxguru.in/company-law/csr-section-135-companies-act-2013- csr-rules-2014.html
2.  MCA–
https://www.mca.gov.in/Ministry/latestnews/CSR_Voluntary_Guidelines_ 24dec2009.pdf
3. SEBI–
https://www.sebi.gov.in/legal/circulars/may-2017/disclosure-requirements-for- issuance-and-listing-of-green-debt-securities_34988.html
4. BRSR format–
https://www.sebi.gov.in/sebi_data/commondocs/may-2021/Business%20responsibility% 20and%20sustainability%20reporting%20by%
20listed%20entitiesAnnexure1_p.PDF
5. PWC–
https://www.pwc.in/assets/pdfs/consulting/esg/business-responsibility- and-sustainability-report.pdf
6. Bloomberg NEF–
https://about.bnef.com/blog/europe-leads-on-esg-policy- but-trend-promising-for-all/
7. ECGI–
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3832745