Key Elements of 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:
8.
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:
i.
Environmental objectives being pursued
ii.
Decision-making process on the eligibility of projects for use of proceeds
iii.
Tracking the use of proceeds
iv.
Independent third-party reviewer
v.
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:
i.
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.
ii.
Mapping of Sustainable Development Goals and Indian Laws against the 9
principles
iii.
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:
a.It
extends the scope of the KPIs beyond the company itself and requires data on
the value chain as well.
b.
Smaller companies are encouraged to adopt BRSR voluntarily. A simpler version
called BRSR Lite can be used.
c.
This may soon be integrated into annual reporting as per MCA requirements.
d.
This report may also be used to rate companies, leading to the creation of a
Business Responsibility Sustainability Index
e.
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.
