The Securities and Exchange Board of India is set to widen its ESG disclosure requirements to the top 1,000 listed companies by market capitalisation in India.
The regulator has released a consultation paper on its new Business Responsibility and Sustainability Report (BRSR), which improves on the Business Responsibility Report (BRR) framework that applied until now to the top 500 Indian companies by market capitalisation.
BRSR will be part of the MCA21 disclosures of India’s Ministry of Corporate Affairs, which means the preferred format would be XBRL or Extensible Business Reporting Language. The BRSR report could also apply to unlisted firms if they meet certain thresholds of turnover and/or paid up capital.
It may help to recall that the Indian market regulator’s ESG journey started in 2005 with the top 100 listed companies by market capitalisation. For the uninitiated, ESG stands for the Environmental, Social and Corporate Governance impacts of business activity.
SEBI’s move comes against the backdrop of the Covid-19 pandemic, which has brought a new sense of urgency to the idea of socially responsible investing. It is apparent now more than ever that humankind will end up paying a steep price if exploitation of natural resources and of wildlife continues.
A ripple has been caused. Factor this: Fund houses built around Environmental, Social and Corporate Governance issues received inflows of $45.6 bln in the first quarter of 2020, compared with outflows of $384.7 bln from the entire fund universe, according to Morningstar. Analysts around the globe believe 2020 is a watershed year for ESG investing. And that by extension should include ESG disclosures by companies. From an accounting perspective, ESG disclosures can be referred to as Non-financial Information or NFI reporting, which is the subject of a parallel discussion around sustainability. According to Accountancy Europe, a grouping of 51 professional organisations, NFI reporting is geared towards addressing “climate change, environmental degradation, social unrest and internally generated intangibles”.
A January 2020 thought leadership paper by Accountancy Europe talked about consolidating “the many non-financial reporting initiatives” across the world and creating a “core system of global metrics”.The big idea in the paper is the creation of a global corporate reporting structure that unifies both financial and non-financial reporting.
A follow-up paper by the body in July 2020 talked about building on the best of existing NFI reporting standards and frameworks to achieve faster progress towards a unified system. The paper also suggested a single taxonomy for NFI reporting for easy comparability.
Accountancy Europe’s vision of a global corporate reporting structure includes a Monitoring Board that provides broader public oversight and is linked to public authorities. At the next level is a Corporate Reporting Foundation that is “responsible for financial and nonfinancial reporting oversight”. Next in line are an International Non-financial Reporting Standards Board on the lines of the International Accounting Standards Board, and International Non-financial Reporting Standards on the lines of the International Financial Reporting Standards.
What Accountancy Europe seems to be aiming at is one global body for XBRL-based reporting of all business activity. That would be a good way for the whole effort on responsible commerce to culminate. But until the time there are frameworks in place for entities to effectively give account of every resource that goes into their product or service, the world will have to make do with incremental moves such as the one by the Indian markets regulator.
The SEBI move has set a green benchmark for any Indian entity aspiring to be among the top 1,000 by market cap. Moreover, it has signalled upfront a preference for the data to be in XBRL– a standardized and readily-discoverable format that aligns with what the corporate affairs ministry already requires company reports to use. Given the crisis the world is facing, seeking ESG impact disclosures in a format that helps easy decision-making clearly shows that SEBI’s heart is in the right place.