In July 2023, SEBI added new ESG metrics for mandatory disclosure under ‘BRSR Core’ for certain listed companies in India. The Business Responsibility and Sustainability Report (BRSR) format was initially introduced in May 2021 and replaced the previous Business Responsibility Report (BRR). While SEBI has stipulated a timeline for mandatory compliance under the BRSR Core, as of FY 2023, all of the top 1000 listed companies by market cap in India must file their BRSR Report.

The Securities and Exchange Board of India (SEBI) requires the top 1000 listed entities in India by market capitalization to make filings as per the Business Responsibility and Sustainability Report from FY 2023. It should be included in their Annual Reports.

Further, upon the recommendations of the ESG Advisory Committee and after conducting public consultations, the SEBI is implementing the ‘BRSR Core’ for assurance by specific listed entities. In addition, the Board has decided to introduce disclosures and assurance for the value chain of listed entities, aligning with the guidelines set out in the BRSR Core.

What is BRSR Core?

The BRSR Core represents a subset of the comprehensive BRSR and includes a specific set of key performance indicators (KPIs) / metrics across nine ESG attributes. With a focus on the Indian / emerging market context, additional KPIs have been identified for assurance, such as job creation in small towns, business openness, and gross wages paid to women. To facilitate better global comparability, intensity ratios based on revenue adjusted for purchasing power parity (PPP) have been incorporated.

Also for easy reference, the BRSR Core includes a cross-reference to the disclosures found in the BRSR.

Example of KPIs under BRSR Core and cross-reference to the BRSR

Note: For complete information on attributes, parameters, measurement, data & assurance approach, and cross-reference to the BRSR report, see Annexure-I of the SEBI Circular.

Compliance timeline for BRSR Core

In its circular issued July 12, 2023 (SEBI/HO/CFD/CFD-SEC-2/P/CIR/2023/122), the following timeline was provided by SEBI where the BRSR Core compliance will become mandatory for listed entities.

Consequently, SEBI mandates the top 150 listed companies in India by market capitalization to provide “reasonable assurance” on Environmental, Social, and Governance (ESG) metrics starting FY 2023-24.

Multinational companies in India are advised to tread carefully in this regard as most regions at the forefront of ESG compliance, such as the European Union, only require limited assurance currently. By limited assurance, it is meant that auditors can be expected to rely on company management disclosures. However, under SEBI’s direction in India, the company’s auditors would need to check the organization’s ESG metrics and verify its disclosures against actual protocols, performance, and standards.

SEBI guidance on assurance providers

The Board of the listed entity is responsible for ensuring that the assurance provider of the BRSR Core possesses the requisite expertise to carry out reasonable assurance.

The listed entity must guarantee the absence of any conflict of interest with the assurance provider selected to assess the BRSR Core. Specifically, it should ensure that the assurance provider and its associates do not engage in the sale of their products or offer any non-audit/non-assurance services, including consulting services, to the listed entity or its group entities. This measure ensures independence and impartiality in the assurance process, enhancing the credibility and reliability of the assessment.

Updated BRSR reporting format

For the convenience of users, the format of the BRSR Core, which is subject to reasonable assurance, is presented in Annexure I (see here) of the SEBI’s July 12, 2023 circular. Meanwhile, the BRSR format, encompassing the newly added KPIs of the BRSR Core, can be found in Annexure II (see here). Consequently, the BRSR format as previously prescribed in Annexure 16 of the Master Circular issued on July 11, 2023, has been revised to accommodate these updates.

ESG disclosures for value chain

In the Annual Report, listed companies are required to disclose ESG-related information pertaining to their value chain, following the guidelines set out in the BRSR Core. The value chain should encompass the principal upstream and downstream partners of the listed entity, which collectively account for 75 percent of its purchases or sales (by value).

For reporting purposes, listed entities must present the KPIs outlined in the BRSR Core that are relevant to their value chain partners and attributed to their business interactions with them. This reporting can be provided separately for upstream and downstream partners or presented in an aggregated format.

To ensure transparency and clarity, the scope of reporting, as well as any assumptions or estimations made, should be clearly disclosed in the report. This comprehensive approach will enhance the understanding of the listed entity’s ESG performance and its impact on the value chain.

ESG disclosures for the value chain will be mandatory (on a comply-or-explain basis) for the top 250 listed entities (by market capitalization) starting from FY 2024-25. Companies falling under this category must comply with the disclosure requirements. In exceptional cases where compliance may not be feasible, they are required to provide a clear explanation for their decision.

The limited assurance of the above shall be applicable on a comply-or-explain basis from FY 2025-26.

What is BRSR?

Through the Business Responsibility and Sustainability Report (BRSR) report, investors are provided with standardized information on a company’s ESG parameters, thereby facilitating the identification and assessment of sustainability-related risks and opportunities for the enterprise and enabling better-informed investment decisions.

The disclosures under BRSR (updated format as well) are made under the following sections:

• Section A: General disclosures about the listed entity
• Section B: Management and process disclosures
• Section C: Principle-wise performance disclosure

The National Guidelines for Responsible Business Conduct (NGRBCs) as prescribed by the Ministry of Corporate Affairs (MCA) advocates nine principles as indicated in the table below:

Highlights of key disclosures related to sustainability are indicated below:

• A comprehensive overview of the entity’s material ESG (environmental, social, and governance) risks and opportunities, along with their approach to mitigating or adapting to these risks, including their financial implications.
• Disclosure of sustainability goals, targets, and the entity’s performance in achieving them.
• Environment-related disclosures covering resource usage (energy and water), air pollutant emissions, greenhouse gas (GHG) emissions, transition to a circular economy, waste generation and management practices, biodiversity, and more.
• Social-related disclosures encompassing aspects related to the workforce, value chain, communities, and consumers, such as gender and social diversity among employees/workers, measures for differently-abled employees/workers, turnover rates, median wages, welfare benefits for permanent and contractual employees/workers, occupational health and safety, training initiatives, Social Impact Assessments (SIA), Rehabilitation and Resettlement efforts, Corporate Social Responsibility (CSR), and consumer-related aspects like product labeling, product recall, and consumer complaints pertaining to data privacy and cyber security.

Entities already reporting sustainability information based on internationally accepted frameworks like Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-Related Financial Disclosures (TCFD), or Integrated Reporting () can cross-reference their disclosures to align with the BRSR requirements.

Rules and regulations for ESG ratings providers in India

Effective from July 5, 2203, only entities certified by SEBI will be permitted to provide ESG rating services. See the Board’s Master Circular issued July 12, 2023 here.

To qualify for certification, the ESG rating service provider (ERPs) must be incorporated as a company under the Companies Act, 2013, with specified ESG rating activity as the primary objective in its Memorandum of Association. If the ESG rating provider is associated with or a subsidiary of a credit rating agency, it must clearly distinguish ESG ratings from credit ratings on its website and ESG rating reports.

Business model

ERPs can follow either one of two business models:

• Subscriber-pays model – where the ESG rating provider derives its revenues from ESG ratings from subscribers like banks, insurance companies, pension funds, or the rated entity itself.
• Issuer-pays model – where the ERP derives its revenues from ESG ratings from the rated entity, in terms of a written contractual agreement between such entity and the ERP, which may contain such provisions as specified by the SEBI.

Note: To avoid potential conflicts of interest, ERPs are required to refrain from adopting a hybrid business model. Specifically, an ERP should not assign certain ESG ratings based on an issuer-pay model while using a subscriber-pays business model for other ESG ratings. This mandate ensures transparency and impartiality in the ESG rating process, promoting trust and credibility in the ratings provided by the ERP.

Audit documents

ESG rating providers are obligated to submit all necessary information and reports to SEBI as per regulatory requirements. Additionally, they are required to furnish financial statements at the conclusion of each accounting period. To ensure adherence to applicable laws, these providers must appoint a compliance officer responsible for monitoring compliance. Furthermore, they must maintain books of accounts, records, and documents for a minimum period of five years.

Methodology

Certified rating agencies will be required to disclose their rating methodologies for all ESG ratings on their websites, while maintaining a balance between proprietary or confidential aspects of the methodologies. Additionally, they must include category-wise weightages of environmental, social, and governance factors in ESG ratings, as well as the weightage of high-level themes or key issues within each of the three factors.

Products offered by ESG rating providers

As per CRA Regulations, “environmental, social, and governance ratings” (ESG ratings) are rating products offered as opinions about an issuer or a security’s ESG profile, characteristics, exposure to ESG risk, governance risk, social risk, climatic or environmental risks, or impact on society, climate, and the environment. These ratings are assigned using a defined ranking system of rating categories, regardless of whether they are explicitly labeled as “ESG ratings.”

An ERP must provide the following ESG rating products at minimum:

• ESG Rating
• Transition or Parivartan Score
• Combined Score
• Core ESG Rating
• Core Transition or Parivartan Score
• Core Combined Score

The ESG Transition or Parivartan Score evaluates the speed and magnitude of a company’s efforts and investments towards achieving Net Zero Goals and enhancing ESG risk management. In essence, this score reflects the incremental changes the company has undertaken in its transition journey in recent years, or the concrete plans and targets set to address the risks and opportunities involved in moving towards more sustainable operations. Unlike solely assessing their current profile, this score considers the company’s progress and commitments to sustainability.

The Transition or Parivartan Score may monitor changes in quantitative metrics, such as trend-lines or shifts in revenues generated from environmental/social services and products, or any other quantitative assessments based on the ERP’s model. This approach allows for a comprehensive evaluation of the company’s sustainability efforts and encourages a forward-looking perspective towards continuous improvement.

Rules for foreign ESG ratings providers

Even foreign agencies offering ESG rating services to entities in India will need to obtain SEBI certification.

Further, foreign ESG rating providers seeking certification should be incorporated in a jurisdiction that is a member of the Financial Action Task Force (FATF) and recognized under their respective laws. They should also possess a minimum of five years of experience in providing ESG ratings of securities or companies.

Global efforts to improve sustainability reporting and emphasis on ESG targets

As the momentum behind sustainable development and the climate change movement continues to build, the global landscape of sustainability reporting is rapidly transforming. This shift is primarily driven by the increasing demands of investors, who are now pushing companies to be more transparent and accountable for their sustainability performance. As a result, reporting on environmental, social, and governance or ESG parameters has become essential for companies to maintain a strong relationship with their stakeholders.

Over time, sustainability reporting frameworks have evolved, and companies worldwide have embraced these frameworks to effectively measure, monitor, and disclose their performance in ESG areas. Some of the prominent global ESG/sustainability disclosures and frameworks include the GRI, , SASB, United Nations Global Compact (UNGC), and CDP. Each of these frameworks outlines specific key performance indicators (KPIs) and principles that companies are required to disclose to showcase their sustainability efforts.

In addition to these global frameworks, ISO 26000 (Social Responsibility Guidance Standard) provides voluntary guidance on social responsibility, offering further support for companies seeking to incorporate sustainable practices into their operations.

Many countries across the world, like India, have also taken the initiative to introduce and mandate various forms of ESG-related disclosures, reinforcing the importance of sustainability reporting on a global scale.

Inaugural global sustainability disclosure standards from ISSB

On June 26, 2023, the International Sustainability Standards Board (ISSB) marked a significant milestone by releasing its inaugural standards, IFRS S1 and IFRS S2. These Standards establish a universal language for disclosing the impact of climate-related risks and opportunities on a company’s prospects.

IFRS S1 sets out comprehensive disclosure requirements, allowing companies to communicate sustainability-related risks and opportunities over the short, medium, and long term to investors. Meanwhile, IFRS S2 focuses on specific climate-related disclosures, designed to complement and be used in conjunction with IFRS S1.

Both Standards fully incorporate the recommendations of the Task Force on Climate-related Financial Disclosures.