The Securities and Exchange Board of India (SEBI) has proposed significant measures aimed at easing the burden of ESG disclosures for listed companies and their value chain partners. These measures are part of a broader effort to streamline compliance and make ESG reporting more feasible, particularly for smaller players in the market.
Easing Compliance for Value Chain Partners
SEBI’s new proposal mandates ESG disclosures only for those value chain partners who individually account for 2% or more of a company’s purchases or sales by value. Consequently, this represents a significant reduction from an earlier directive which required disclosures from value chain partners cumulatively comprising 75% of purchases or sales. Additionally, the market regulator has proposed that these disclosures be voluntary for the first year, rather than on a “comply or explain” basis.
The aim of these changes is to reduce the compliance burden on smaller suppliers and partners of large listed companies. Smaller entities have raised concerns about the high costs and complex processes associated with ESG reporting, which require significant resources to collect, verify, and disclose data.
New ESG Disclosure Parameters
The proposed measures will be part of the key indicators in line with the Business Responsibility and Sustainability Reporting (BRSR) Core. BRSR Core focuses on a limited set of parameters with a greater emphasis on the verifiability of the data. Currently, the broader BRSR format is mandated for the top 1000 listed companies. On the other hand, the new measures target the top 250 companies.
For environment-related disclosures, the new parameters will require assurance on several key metrics. These include greenhouse gas emissions, water wastage, consumption and treatment, and waste management. Specifically for manufacturing companies, the information will need to be collected at each sale and purchase order level. Thus, this will add a layer of detail and complexity to the reporting process.
Shifting from Assurance to Assessment
In another significant move, SEBI has proposed changing the requirement from “assurance” of ESG data to “assessment”. This change aims to reduce the cost and complexity associated with auditing ESG data. This will make the compliance process less burdensome for companies. By shifting to an assessment model, SEBI intends to make it easier for companies to comply with ESG norms without incurring prohibitive costs.
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Addressing Industry Concerns
The proposal comes in response to concerns raised by companies about the stringent norms for the value chain, which impact thousands of ancillary companies and third-party suppliers. The cost burden and the time required to set up the necessary processes and data systems for reporting and verifying ESG disclosures have been significant challenges for these smaller players.
ESG metrics have become increasingly important as more investors prioritize responsible investing. Companies that demonstrate strong ESG performance are often viewed more favorably by investors, which can translate into better access to capital and improved market performance.
Introduction of Green Credits
In a related development, SEBI has recommended the introduction of green credits as a leadership indicator in the BRSR. Green credits are awarded to companies that engage in environmentally sustainable activities. This move aligns with the MoEFCC’s recent notification of the methodology for calculating green credits for activities like tree plantation.
The introduction of the Green Credit Programme (GCP) was proposed in the Union Budget for FY 2023-24. This program, to be notified under the Environment (Protection) Act, 1986, aims to encourage behavioral change by incentivizing environmentally sustainable and responsive actions by companies, individuals, and local bodies. The GCP is designed to help mobilize additional resources for sustainable activities. This will in turn aid in promoting a greener and more responsible approach to development and business practices.
In conclusion, SEBI’s proposed measures represent a significant step towards making ESG disclosures more manageable and less costly for listed companies and their value chain partners. Therefore, by reducing the scope of mandatory disclosures and shifting from assurance to assessment, SEBI aims to alleviate some of the compliance burdens while still promoting transparency and accountability in ESG practices.
The addition of green credits as a leadership indicator further underscores SEBI’s commitment to encouraging environmentally sustainable practices among listed companies. As responsible investing continues to gain momentum, these measures will likely play a crucial role in shaping the future of ESG reporting in India.
