With aggregate ESG assets expected to exceed USD 50 trillion by 2025 (representing more than one-third of the aggregate projected global assets under management (AUM)) together with the backing of prominent investors, such as BlackRock and Brookfield, ESG investing can hardly be described as merely an investing trend. In India, for example, the AUM of ESG funds in 2021 totalled to INR 123 billion, nearly five times the AUM from two years ago. There are at least 10 ESG mutual funds in India today and, for benchmarking, investors here can now choose from multiple ESG indexes.
ESG investing, in simple terms, means investing based on not just traditional financial factors but also non-financial environmental, social and governance (or ESG) factors. An important part of the contemporary debate of shareholder versus stakeholder capitalism, ESG investing continues to gain momentum today, as a growing number of institutional investors (and their clients, in particular) look to align financial returns with ethical and other non-financial considerations. This momentum is further supported by increasing empirical evidence of a positive correlation between rates of return and higher ESG scores as well as policy and regulatory actions by governments and regulators aimed at combating climate change and economic and social inequalities.
Like most investors, ESG investors also seek and depend on reliable information before choosing how to allocate capital and where to invest. This explains the current emphasis on ESG disclosure and reporting, not just by investors and lenders but by governments and regulators as well.
This article looks at ESG reporting in general and focuses on the reporting framework in India. This article also highlights some key issues that would be of interest to investors, public companies and other market participants associated with ESG investing in India.
GLOBAL ESG REPORTING STANDARDS
Unlike financial reporting, for which the IFRS standards for public companies have been adopted in 144 countries, there is currently no single, global reporting standard for ESG disclosures.
The most widely adopted ESG framework in the world are the sustainability standards published by the Global Reporting Initiative (GRI), an international non-governmental organisation founded in 1997. Other widely adopted standards include those published by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Disclosures (TFCD). Many prominent international investors are known to adopt more than one or a combination of these standards.
There are key differences, however, in these reporting standards. For example, the GRI standards are stakeholder (and not shareholder) focused and require very detailed disclosures. The standards published by the TFCD focus on climate change risks and are applicable to financial companies only. The SASB’s standards apply to all companies, but unlike the GRI standards, they limit disclosure to ‘financially material’ issues only.
Efforts are now being made towards a common, global standard. In September 2020, it was reported that the GRI, SASB, CDP and the Integrated Reporting and Climate Disclosure Standards Board will aim to unify their respective standards. In that same month, a similar announcement was made by the Big 4 accounting firms. Finally, in November 2021, the IFRS Foundation announced the creation of the International Sustainability Standards Board, which aims to publish unified, global ESG disclosure standards later this year.
ESG REPORTING IN INDIA
The BRSR framework
From financial year 2022-2023, the top 1,000 listed companies in India (by market capitalisation) will need to prepare a ‘business responsibility and sustainability report’ (or “BRSR”), containing detailed ESG disclosures. The BRSR has to be a part of the annual report, which gets notified to the stock exchanges, published on official company websites, and separately provided to shareholders.
Before the BRSR became mandatory, the top 1,000 listed companies in India (by market capitalisation) had to publish a relatively shorter ‘business responsibility report’ (or “BRR”).
Both the BRSR and the BRR were designed around the nine business sustainability principles identified by the Ministry of Corporate Affairs in their voluntary ESG guidelines published in 2011 (“MCA ESG Guidelines”), but that is where the similarity ended.
The BRR was not well received, since it based its ESG disclosure requirements almost entirely on the nine sustainability principles from the MCA ESG Guidelines (often, as a Y/N questionnaire) and provided very little meaningful ESG data. The BRSR, on the other hand, built upon the framework of the MCA ESG Guidelines, derives inspiration from international reporting frameworks like the GRI standards, and provides for detailed ESG data, both qualitative and quantitative.
A summary of the ESG metrics and other key disclosures required by the BRSR is as follows:
|SUBJECT MATTER||KEY DISCLOSURES*|
|General||Key quantitative and/ or qualitative KPIs:|
Other key disclosures:
|Environmental||Key quantitative and/ or qualitative KPIs:|
Other key disclosures:
|Social||Key quantitative and/ or qualitative KPIs:|
Other key disclosures:
|Governance||Key quantitative and/ or qualitative KPIs:|
Other key disclosures:
*Certain KPIs/ disclosures (particularly, those relating to value chain partners) are voluntary only.
Other ESG disclosure requirements
As indicated above, the BRSR framework is not mandatory for smaller listed companies and unlisted public or private companies in India. Such companies can still voluntarily adopt the BRSR framework, but for many, the reporting costs would likely outweigh any potential investment or other benefits.
Outside of the BRSR framework, there are very few mandatory ESG disclosure requirements in India. These include, for example, disclosures regarding energy conservation in the annual reports of Indian companies and statements in board reports regarding compliance with laws prohibiting sexual harassment.
For now, ESG reporting remains a priority for large-listed companies only, but smaller companies, particularly those seeking private investments from VC or PE funds, should also start thinking about their ESG risks and opportunities. In addition, ESG considerations are expected to soon find their way into credit assessments by banks and other private lenders. In fact, India’s banking regulator, the Reserve Bank of India, is reportedly looking at issuing ESG-based lending guidelines.
At the most basic level, smaller companies should look to strengthen their compliance protocols for the various laws that apply to their business and involve ESG issues. As a starting position, these companies can refer to the MCA ESG Guidelines, which have identified thirty-seven important laws in India that are relevant for business sustainability. To further improve their ESG scores, smaller companies can adopt specific KPIs from the BRSR (if not the entire BRSR), consider KPIs from other, more specialised reporting frameworks – such as the B Impact Assessment, Future-Fit Business Benchmark and the Impact Reporting and Investment Standards – and consider adopting the ISO 26000 standard, which provides guidance on social responsibility.
COMPARISON WITH OTHER ASIAN COUNTRIES
India’s attempt to regulate ESG reporting through the BRSR framework compares favourably with frameworks in other Asian countries.
At a preliminary level, it is worth highlighting that the duties of directors of Indian companies are owned not only to shareholders but other stakeholders as well. This provides a solid legal foundation for ESG disclosures by Indian companies and creates room for further legislative and regulatory reform. In general, and in several Asian countries, directors’ duties under company law are owed to the company or its shareholders.
The shift from voluntary ESG disclosures (or disclosures on a ‘comply or explain’ basis) in favour of mandatory disclosures is gradually picking pace. Like India, which has made the BRSR mandatory for its largest listed companies, China, Malaysia, and Indonesia also require their largest listed companies to provide mandatory ESG disclosures. Singapore and Japan, on the other hand, are looking to make the transition from ‘comply or explain’ to mandatory reporting. Hong Kong, however, follows a hybrid approach by imposing mandatory disclosures for certain ESG issues but allowing a ‘comply or explain’ approach for climate-change issues.
Regarding the content and format of disclosures, Vietnam and Philippines are reported to have issued ESG guidelines that are based on the GRI standards, while many listed companies in Thailand choose to provide ESG disclosures using the GRI standards. On the other hand, while Singapore’s sustainability reporting guide does not prescribe a specific reporting framework, but its ESG metrics are reportedly based on global standards such as the GRI and SASB standards.
With respect to integrated reporting or requiring ESG disclosures in annual reports, Japan shares India’s approach with the BRSR.  Companies in Hong Kong are required to provide their ESG disclosures in their directors’ report. Singapore, on the other hand, requires its listed companies to provide ESG disclosures in a separate sustainability report.
Finally, like India, Singapore and Hong Kong have not made external assurance mandatory, but encourage companies to obtain independent third-party assurance, to strengthen the credibility of their ESG disclosures. 
KEY ISSUES TO WATCH OUT FOR
Quality of reporting and engagement
Although the BRSR framework derives inspiration from global reporting standards, listed companies in India should not assume that issuing BRSR reports on time will be sufficient to satisfy investor expectations on ESG, going forward. Foreign investors still rank emerging markets poorly on ESG metrics (corporate governance, in particular) and are expected to demand better disclosures supported by actual engagement and follow-up action. European investors, in particular, are also likely to stress upon the concept of ‘double materiality’, which requires companies to evaluate and disclose not only how ESG issues impact their business but also how their business impact or cause ESG issues.
First and foremost, a ‘box-ticking’ approach to disclosure (for which the earlier BRR framework was criticised) must be avoided and listed companies should provide more financial or quantifiable metrics and incorporate more narrative than boilerplate disclosures.
The role of external assurance is also very important. Although the BRSR framework addresses and requires companies to indicate if any independent assessment/evaluation has been carried out by an external agency on several environmental issues, overall assurance statements in India are not as common as they ought to be. External assurance improves disclosure quality and addresses investor concerns with self-reporting and ‘green washing’ (i.e., exaggerated but unsubstantiated or unverified ESG performance).
Finally, moving beyond disclosure quality, investors today expect actual meaningful engagement and follow-up action from listed companies. This would often require companies to think and do beyond what is required by law or what their competitors may be doing. For example, listed companies in India that separate the CEO and chairperson roles, despite not being required to, are likely to receive higher ESG scores.
Single v. multiple disclosure standards
Should public companies across jurisdictions follow a single, global reporting standard for ESG issues? This is currently a key debate for ESG investors worldwide.
Proponents of a common standard highlight the advantages of lower diligence costs (particularly for comparative assessments of companies) and, arguing against multiple standards, point out the risk of companies self-reporting and cherry-picking disclosures that show them in better light.
On the other hand, ESG information is far more varied and nuanced than accounting information, and involves both quantitative and qualitative factors, so a common reporting standard could create issues, particularly when comparisons are sought across industries or jurisdictions. For example, an ESG metric requiring disclosure of fines paid for environmental violations may be helpful in the United States or the European Union, but in India, which has much weaker enforcement of environmental laws, that metric is less useful.
Globally, the consensus appears to be moving in favour of a common standard – which could be the GRI standards or the standards to be proposed by the IFRS Foundation – although the ideal approach might be somewhere in the middle, involving a common, global standard but that also provides sector-wise guidance and allows exceptional reporting to account for variance in ESG data across different jurisdictions.
Regulation of ESG ratings?
The market for ESG ratings has grown rapidly, complementing the wider adoption of ESG reporting standards and increase in the volume of ESG disclosures by companies. Leading publishers of ESG ratings include MSCI, Bloomberg and S&P globally, and MSCI India and CRISIL in India. For investors who do not have the resources to develop their proprietary ESG diligence and evaluation systems, ESG ratings assume greater importance.
But the reliability of ESG ratings has been questioned, particularly due to perceived inconsistencies in rating methodologies, which raises the question of whether ESG ratings, like credit ratings, should be regulated. In a report issued in November 2021, the International Organisation of Securities Commissions (IOSCO) – the international association of various national securities regulators – recommended that securities regulators should give more attention to ESG ratings in their jurisdictions and consider ways to improve rating methodologies and minimise conflicts of interest. Following the IOSCO’s guidance, and in a very recent development, India’s securities market regulator, the Securities and Exchange Board of India (“SEBI”), has issued a consultation paper seeking views on a proposal to create an accreditation framework for ESG rating agencies in India.
It is hoped that as ESG disclosure standards are harmonised and disclosure quality improves, concerns regarding the reliability of ESG ratings also reduce. At the same time, ESG rating agencies could face further investor and regulatory pressure to be more transparent with their rating methodologies. In India, where the protection of retail investors is an important regulatory objective, in addition to the accreditation framework for ESG rating agencies being proposed by SEBI (see above), it may also be helpful to issue detailed ESG guidance, identifying specific, key KPIs, as part of the stewardship codes issued by SEBI and IRDAI (currently, these codes merely contain a general requirement to formulate an ESG policy).
Policy and regulatory measures
Like most countries, India’s commitment to achieving sustainability and meeting its international environmental targets has led to the formulation of various policies, which are expected to result in both risks and opportunities from an ESG perspective. For example, India’s commitment to achieve ‘net zero carbon emissions by 2070’ has resulted in several government initiatives, such as subsidies and other incentives for the electric vehicles (EV) industry. In the EV industry, government initiatives are likely to create ESG opportunities for EV manufacturers but can also lead to ESG risks for traditional automobile manufacturers that cannot or choose not to migrate to EV. Ultimately, investors will expect that any ESG risks or opportunities resulting from governmental and regulatory actions are being properly disclosed by affected companies.
The focus on ESG reporting in India is still being driven by European and other foreign investors and it is hoped that Indian institutional investors catch up soon. Like most developing countries, India has to contend with a number of ESG issues, which are further compounded by the scale of the country’s population, its socio-economic diversity, and its growth ambitions. Higher quality ESG reporting by Indian companies will therefore be an important tool in guiding greater volumes of capital towards sustainable purposes by rewarding companies that both promise and deliver on ESG commitments.
The BRSR framework is a laudable milestone and should hopefully help provide public markets investors in India with more meaningful and reliable ESG data. As next steps, the BRSR framework can gradually be extended to other listed companies and unlisted companies operating in regulated or resource intensive areas, so long as their compliance burden is not unduly increased. Smaller companies, in particular SMEs, should continue to be encouraged to use their own KPIs (or those advised by their investors or lenders), whether through selective disclosures from the BRSR or specialised reporting standards like the B Impact Assessment, or adopting an international standard like ISO 26000.
 Bloomberg Intelligence Research, “ESG Assets Rising to USD 50 Trillion will reshape $140.5 Trillion of Global AUM by 2025”, July 2021, (accessed from Bloomberg.com).
 Bloomberg Law, “How BlackRock Made ESG the Hottest Ticket on Wall Street”, January 2022, (accessed from www.Bloomberg.com); and Jason Kelly and Derek Decloet, “Brookfield Pursues $7.5 Billion Fund Devoted to ‘Net-Zero’ Shift”, February 2021, (accessed from www.Bloomberg.com).
 Ashley Coutinho, “India ESG assets up 4.7 times in two years to Rs 12,300 crore, shows data”, December 2021, (accessed from Business-Standard.com).
 Morningstar, “ESG funds available in India”, March 2021, (accessed from www.morningstar.in); Mint, “India ESG funds AUM expands 4 times to Rs.11,800 in two years”, August 2021, (accessed from www.livemint.com); and List of Thematic Indices of National Stock Exchange of India Limited (accessed from www.nseindia.com).
 List of jurisdictions that have adopted the IFRS for mandatory reporting by public companies (accessed from www.ifrs.org).
 KPMG Impact, “The time has come; KPMG Survey of Sustainability Reporting”, December 2020, (accessed from assets.kpmg).
 About the Task Force on Climate Related Financial Disclosures, (accessed from www.fsb-tcfd.org).
 Janine Guillot, “Materiality: the world that launched a thousand debates”, May 2021, (accessed from www.sasb.org).
 CDP, CDSB, GRI, Integrated Reporting and SASB, “Statement of Intent to Work Together Towards Comprehensive Corporate Reporting”, September 2020, (accessed from www.integratedreporting.org).
 Esther Whieldon, “Big 4 corporate accounting firms announce mainstream ESG reporting metrics”, S&P Global Market Intelligence, September 2020, (accessed from www.spglobal.com).
 Bhakti Mirchandani, “The Biggest Change In Corporate Reporting Since The 1930s: How To Read IFRS Prototype Sustainability And Climate Standards”, November 2021, (accessed from Forbes.com).
 Securities and Exchange Board of India, “Business responsibility and sustainability reporting by listed entities”, circular no. SEBI/HO/CFD/CMD-2/P/CIR/2021/562, May 10, 2021.
 The MCA ESG Guidelines set out a reporting framework, intended to be followed for structured business responsibility reporting by businesses of all sizes and sectors and across various locations. The nine, core principles of these guidelines are: (i) ensuring ethical, transparent and accountable business conduct and governance; (ii) providing safe and sustainable goods and services, across the value chain and throughout their life-cycle; (iii) promoting dignity and wellbeing of all categories of employees; (iv) addressing the interests of all stakeholders, particularly those who are disadvantaged, vulnerable or marginalised; (v) respecting and promoting human rights, particularly by assessing and managing human rights impacts of operations; (vi) respecting and protecting the environment, following the precautionary principle, and making efforts to restore the environment; (vii) engaging responsibly in public advocacy; (viii) supporting, and collaborating towards, inclusive growth and equitable development; and (ix) responsibly engaging with, and providing value to, consumers.
 Section 134(m) of the Companies Act, 2013.
 Rule 8(5)(x) of the Companies (Accounts) Rules, 2014.
 M. G. Govardhana Rangan, “Why RBI should be careful while framing ESG lending rules”, Economic Times, December 2021, (accessed from www.economictimes.com).
 Ministry of Corporate Affairs, “National Guidelines on the Economic, Social and Environmental Responsibilities of Business”, 2018.
 Section 166 (2) of the Companies Act, 2013.
 Monica Sun, “China refines ESG disclosure rules for listed companies” Herbert Smith Freehills LLP, July 2021, (accessed from www.lexology.com); and Frank Pan, “ESG Disclosure and Performance in Southeast Asia”, May 2021 (accessed from www.sustainalytics.com).
 Joseph Chun, Joseph Tay and Tan Wei Shyan, “A closer look at Singapore’s mandatory corporate ESG disclosures and associated legal risks”, IFLR, June 2021, (accessed from www.iflr.com); Mark Uhrynuk and Alexander W. Burdulia, “Singapore regulator prioritises TFCD, diversity and ESG metrics in new disclosure rules and guidance”, Mayer Brown, December 2021, (accessed from www.eyeonesg.com); and Gilly Hutchinson and Sarah Martin, “Japanese Financial Services Agency looking to introduce mandatory ESG disclosure”, Linklaters, November 2021, (accessed from www.sustainablefutures.linklaters.com).
 Robert Ashworth and Chris Mo, “The Corporate Governance Review: Hong Kong”, The Law Reviews, March 2021, (accessed from www.thelawreviews.co.uk).
 Frank Pan, Supra note 19 and Fund Selector Asia, “Thailand leads ESG disclosure in Southeast Asia”, May 2021, (accessed from www.fundselectorasia.com).
 Mark Uhrynuk and Alexander W. Burdulia, Supra note 20.
 CFA Institute, “ESG disclosures in Asia Pacific”, September 2018, (accessed from www.cfainstitute.org).
 Singapore Exchange Limited, Sustainability Reporting (accessed from www.sgx.com).
 Chia Kim Huat, Abdul Jabbar, Evelyn Wee, Cynthia Goh, Ng Sey Ming, Lee Weilin, “Requirements on Climate-Related Disclosures and Board Diversity Policy Proposed for SGX-Listed Companies”, Rajah & Tann, September 2021 (accessed from www.lexology.com); and The Hong Kong Institute of Certified Public Accountants, “Environmental, Social and Governance (ESG) Assurance Reporting”, December 2020, (accessed from www.hkicpa.org.hk).
 Natasha Doff, Selcuk Gokoluk, “Top performing fund avoids investments in emerging markets low on ESG score” October 2020, (accessed from Business-Standard.com).
 Responsible Investor, “European Investors push US regulator to use ‘double materiality’ in climate disclosure rules” June 2021, (accessed from www.responsibleinvestor.com) and ESG Investor, “The ESG Interview: Doubling down on Double Materiality”, August 2021, (accessed from www.esginvestor.net).
 Under India’s listing rules (regulation 17(1B) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015), only the top 500 companies (by market capitalisation), with effect from April 01, 2022, are required to separate the chairperson and CEO roles.
 The Board of the International Organization of Securities Commissions, “Environmental, Social and Governance (ESG) Ratings and Data Products Providers”, November 2021, (accessed from www.iosco.org).
 Securities and Exchange Board of India, “Consultation Paper on Environment, Social and Governance (ESG) Rating Providers for Securities Market”, January 2022, (accessed from www.sebi.gov.in).