With the world facing an ever-increasing environmental and social challenges, the thought process of investors has been showing a radical change - from being focussed on profits out of their prospective investments, to being more interested in where the profits are coming from. Companies are expected to “do the right thing” and contribute positively to the society rather than just paying the taxes and fulfilling their corporate responsibility.
Sustainability reporting frameworks have evolved over time and companies worldwide have adopted these frameworks for measuring, monitoring and disclosing performance in areas related to Environmental, Social and Governance (“ESG”). ESG reporting started in the year 2009 by way of National Voluntary Guidelines (“NVG”) on Corporate Social Responsibility (“CSR”) introduced by the Ministry of Corporate Affairs (“MCA”). Prior to the Companies Act 2013 (“the Act”), CSR in India was only seen as a philanthropic activity. Over a span of time, the affairs of the companies operating in India started expanding. With limited resources available, the companies had to make use of natural resources and public spaces available to fulfil their objectives. Therefore, a strong need was felt by the regulators to make CSR a mandatory practice by giving it a structure, criteria and transparency. The idea behind it was for Corporates to gain competitive advantages such as enhanced access to capital and markets, increased sales and profits, improved productivity and quality, efficient utilization of human resources, improved brand image and reputation, enhanced customer loyalty and better decision making.
In 2014, the CSR Rules came into force wherein, it was made mandatory for every company covered under the ambit of Section 135 of the Act to spend 2% of their average net profits earned in the last three financial years. The section and rules framed under the Act were based on the principle of “comply or explain.” Section 135 of the Act and the rules pertaining thereto were further amended on January 22, 2021, in order to provide that mere statement of a reason for not spending the required amount on CSR activities would not suffice. Post April 2021, the companies shall be liable to make provisions for the unspent CSR amount and any unspent amount shall be transferred to specified funds after a particular period. Furthermore, on February 11, 2022, MCA notified a comprehensive 11 pager form, CSR-2, to be submitted by companies to the Registrar of Companies for the preceding financial year (2020-21), on or before March 31, 2022. Form CSR-2 amongst other things requires companies to report on matters such as the constitution of its CSR committee, its meetings, whether or not the company has disclosed on its website details about its CSR committee, CSR policy, and approved CSR projects. The purpose of introduction of the detailed form was to capture granular details about the CSR spending that is required for analytical purposes, which will help stakeholders to know what the companies are doing with their CSR obligations.
All organizations operating across the world make positive and negative contributions towards the goal of sustainable development through their activities and relationships and therefore, have a key role to play in achieving this goal. Observing the steps taken globally to combat environmental issues and climate change, Securities and Exchange Board of India (“SEBI”) took a step forward and became one of the early adopters of sustainability reporting for listed entities amongst its global peers. With its circular dated August 13, 2012, SEBI mandated a Business Responsibility Reporting (“BRR”) requirement for the top 100 listed entities based on market capitalization, which was later extended to top 500 listed entities. Further, through MCA’s ‘Report of the Committee on Business Responsibility Reporting’ (“the Committee Report”)1, the Committee recommended that BRR should be amended to include disclosures based on ESG parameters, as both the clarity and accuracy of the information provided by companies in BRR were weak. Hence, to fill these gaps, SEBI introduced Business Responsibility and Sustainability Reporting (“BRSR”) in May 2021 and made it a mandatory part of annual reports of top 1000 listed Companies by market capitalization.
From using clean energy and propagating waste management to enhancing diversity and transparency in contribution to the society, everything comes under the window of ESG. Stakeholders looking for socially responsible investment opportunities see it as a quantifiable indicator of the Company’s societal impact. Access to relevant and comparable information will enable investors to identify and assess sustainability-related risks and opportunities of companies and make better investment decisions. BRSR has evolved from the extant BRR and the 9 principles laid down in National Guidelines on Responsible Business Conduct (“NGRBC”) The disclosures under BRSR are segregated into the following sections:
■General disclosures about the entity
■Management and process disclosures about the management approach
■Principle wise performance disclosure, further segregated into essential (mandatory) and leadership (voluntary) indicators
The introduction and evolution in laws over the past decade has made it evident that it will be a violation of fiduciary duty not to consider ESG and CSR factors while forming business decisions. Both the factors are used interchangeably but one should know, that while CSR is an accountability criterion for corporates to give something back to the society, ESG is a measurement criterion for such an accountability by way of quantifying a company’s impact of resource consumption, its interaction with communities and the internal governance it follows.
Given the fallout of Covid-19 pandemic, there has been an urge for businesses to re-evaluate almost every aspect of their operations. Companies which have helped their staff and suppliers during these testing times have gained reputation and resultantly, secured more business. As the world will recover from the pandemic, investors will not lose sight of the importance of social good and sustainability, thereby making ESG and CSR as essential parameters for investments. In a way, CSR, ESG and financial performance of businesses is inter-linked. For business leaders, the real challenge is not only about riding the sustainability wave, but also making sure that it is inherent in the organisation’s culture.