Disclosure norms for ESG funds, a step forward

There is a growing awareness that the planet’s future and the time-honoured socio-ecological systems are at risk. We can modify our lifestyles to minimise excesses and use cleaner energy sources, but is that enough? Should our investments too be in accordance with a better planned, healthier, and sustainable future? This belief has given rise to many Socially Responsible Investment (SRI) portfolios.

While investors use the terms SRI or Environmental Social and Governance (ESG) funds interchangeably, these financial instruments are broadly linked to principled business practices. In its essence, ESG funds combine long-term profitability with environmental protection, social equity, and ethical governance.

Profits are of course why businesses exist, but they aren’t always at odds with purpose. “Purpose,” it’s famously said, “is not the sole pursuit of profits but the animating force for achieving them.”

Both individual and institutional investors believe ESG funds have minimal tail-risk and are more resilient to market downturns. Understandably, they want to be part of businesses’ growth journey and seek transparency in their practices.

As these enlightened stakeholders mounted pressure on companies to measure and report ESG information, regulations had to undergo a sea-change, the most recent being SEBI’s new disclosure norm, the Business Responsibility and Sustainability Report (BRSR).

Market analysts believe the BRSR, which applies to the top 1,000 listed companies by market capitalisation, is granular and takes in its broad sweep the key elements of ESG risks.

How different is the BRSR compared to the erstwhile Business Responsibility Report (BRR)? Based on the National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business (NVGs), the BRR had a standard format to report actions initiated by companies towards the adoption of sustainable business practices.

The BRSR, in contrast, is holistic as it’s expected to provide quantifiable ESG data. Investors can now compare and measure risks across organisations, sectors, and time. Asset managers will be able to do exclusionary screening of companies that don’t deliver on ESG metrics.

Moreover, the BRSR will allow broking houses to have leadership indicators across industries besides offering deep insights into various business structures, policies, and processes.

In a way, BRSR is in sync with the changing topography of ESG reporting worldwide. International bodies such as the World Bank, European Union, and International Monetary Fund too are insisting on strong ESG disclosures.

There have been reports on how corporates in foreign markets are disclosing ESG risks in globally accepted reporting frameworks. It’s believed Indian companies listed in international stock exchanges may have to comply with reporting frameworks like CDP (Carbon Disclosure Project) or Global Reporting Initiative (GRI) in the future. The BRSR should only make India future-ready.

Aborted projects

India has had a history of aborted projects on account of ESG issues. An automobile titan’s stand-off with villagers, who refused to part with their land, compelled the company to pull the plug on a car project there.

A beverage firm terminated operations at its bottling plant at Plachimada, Kerala, following charges of the release of toxic waste and hazardous effects on groundwater. The Church of England withdrew from a mining project in Odisha over concerns of human rights.

A screeching halt to projects of this scale impacts both the stakeholders and the organisations. Not to forget the humongous cost involved by way of labour, construction materials, and the intangible stakes that can’t be computed. These are material-risk events that investors are wary of. Disclosure of such significant ESG-related information, courtesy BRSR, should enable market participants to identify sustainability-related risks and opportunities.

Finally, in India’s context, sustainability is no more about having a passing mention in annual reports. In 2019, only two ESG funds were operating in India — that number has risen to 10, thanks partly to a strong performance of this instrument last year.

Sustainability not only aids companies in strategic decision-making, it also emboldens them to do businesses differently if required. And BRSR should only shore up that confidence. Instead of inhibiting organisations, the new disclosure norm should set them free. It’s undeniable that what gets measured gets managed.

The writer, a former RBI deputy governor, is non-executive chairman of Acuité Ratings & Research Ltd