The importance of Environmental, Social, and Governance (ESG) compliance is rapidly increasing for businesses in India, driven by evolving regulations and growing awareness of sustainability. For Micro, Small, and Medium Enterprises (MSMEs), this shift presents both challenges and opportunities. This guest post by experts from King Stubb & Kasiva explores the impact of ESG compliance on MSMEs, the role of the Business Responsibility and Sustainability Reporting (BRSR) framework, and the legal landscape shaping the future of sustainable business practices in India. This discussion provides valuable insights into how MSMEs can adapt to and benefit from the changing regulatory environment.
How important is ESG compliance for businesses in India? Who enforces these regulations?
ESG compliance goes beyond just checking boxes. It is a strategic approach to business that can bring significant benefits. It is crucial for businesses in India broadly for:
- Risk Management and Innovation: ESG practices help in identifying and managing risks such as climate change regulations, supply chain disruptions caused by poor labour practices, and negative publicity from environmental damage. By prioritising clean energy and responsible sourcing, companies become more resilient. Additionally, focusing on social issues like employee well-being and diversity fosters a more productive workforce and sparks innovation in areas like sustainable products and services.
- Reputation and Long-Term Value: Consumers increasingly favour brands that align with their values. Strong ESG practices build a reputation for being a responsible corporate citizen, attracting socially conscious investors and customers. This translates to brand loyalty, higher talent retention, and long-term value creation for all stakeholders.
The regulatory landscape for ESG in India is evolving. The Ministry of Corporate Affairs (MCA) oversees companies and mandates Corporate Social Responsibility (CSR) reporting while overseeing compliance with the National Guidelines on Responsible Business Conduct (NGRBC), 2019.[1] SEBI, the capital markets regulator, plays a major role with its Business Responsibility and Sustainability Reporting (BRSR) framework[2] and BRSR Core[3] for listed companies. Additionally, environmental regulators like the Ministry of Environment, Forest and Climate Change, and pollution control boards enforce environmental regulations.
What improvements can be made to Indian legislation to enhance the quality and transparency of ESG reporting and prevent greenwashing?
The Indian Legal framework for ESG reporting has significant potential for improvement to ensure greater transparency. A crucial step is to bridge the knowledge gap. Initiatives for continuous capacity building are needed to ensure companies have the expertise for accurate and effective ESG reporting. Additionally, the regulatory framework needs to be strengthened to deter greenwashing. This includes stricter penalties for misleading disclosures and the introduction of independent verification processes similar to those in the European Union.[4]
Further, encouraging active stakeholder engagement is vital. Legislation could mandate companies to establish formal channels for communication with employees, investors, and communities. This would foster a collaborative approach where stakeholders can hold companies accountable for their ESG goals.
A one-size-fits-all approach to ESG metrics might not be effective. Legislation can encourage the development of sector-specific ESG metrics that better reflect the unique challenges and opportunities faced by different industries. Finally, fostering a long-term vision for ESG reporting is crucial. Legislation should encourage companies to move beyond simple compliance and focus on integrating ESG principles into their core business strategies.
How does the Business Responsibility and Sustainability Reporting (BRSR) framework impact MSMEs? What specific legal repercussions might companies face for failing to comply with BRSR requirements under Indian law?
The BRSR framework, while currently mandatory only for the top 1000 listed companies in India by market capitalisation, has a significant impact on MSMEs (Micro, Small, and Medium Enterprises) as well.
- Importance of Sustainable Practices for MSME Participation in Large Companies’ Supply Chains: The BRSR framework highlights the need for ethical sourcing throughout the supply chain. As a result, large companies listed under SEBI are now increasingly required to report on the sustainability practices of their suppliers, including MSMEs. This creates an opportunity for MSMEs to showcase their commitment to sustainable practices through BRSR Lite, a simpler version of the BRSR comprehensive framework, for non-obligated entities and become more attractive partners to larger companies. MSMEs that fail to adapt risk being excluded from valuable supply chains.
- Long-Term Benefits Outweigh Initial Challenges: While integrating non-financial reporting like BRSR Lite might seem daunting for MSMEs due to resource constraints, the long-term benefits outweigh the initial challenges. Implementing sustainable practices can save costs through reduced waste and more efficient resource utilis Additionally, a strong reputation for sustainability can attract new customers and investors who are increasingly prioritising ESG factors.
The BRSR framework serves as a nudge for MSMEs to embrace sustainable practices. While not currently mandatory, compliance with BRSR Lite can give MSMEs a significant edge in a competitive market and position them for future regulatory requirements.
Possible Legal Repercussions for Non-Compliance with BRSR
- Although Indian securities laws do not universally require ESG disclosures yet, companies that choose to make them must ensure the accuracy of this information to avoid potential lawsuits and regulatory action by SEBI.
- Considering the global trend towards stricter ESG regulations and the recent actions taken by the US SEC against greenwashing in financial institutions[5], it is likely that SEBI might take similar steps against Indian companies that make misleading ESG disclosures.
What specific legal services can firms provide to support companies in achieving BRSR compliance and reporting?
Companies seeking to achieve proficiency and expertise in BRSR compliance can benefit significantly from the services of legal firms specialising in ESG and sustainability matters. Legal firms’ expertise in navigating regulations, mitigating legal risks, promoting stakeholder engagement, and integrating sustainability reporting into corporate strategy can empower companies to achieve BRSR compliance effectively while building resilience and long-term value.
- Navigating the Regulatory Landscape: The BRSR framework is constantly evolving, and keeping up with the latest regulations and best practices can be challenging. Legal firms can provide in-depth guidance on BRSR requirements[6], including understanding the specific reporting standards applicable to a company’s industry (e.g., GRI, SASB, TCFD). This ensures companies prepare BRSR reports that are accurate, comprehensive, and aligned with regulatory expectations. Additionally, legal expertise can help companies anticipate potential future regulatory changes and adapt their BRSR compliance strategies accordingly.
- Mitigating Legal Risks: Companies that make ESG disclosures open themselves up to potential legal challenges for misrepresentation. Legal firms can help companies mitigate these risks by reviewing and vetting ESG disclosures for accuracy and completeness.
How should companies prepare for potential shifts in the legal landscape concerning ESG and BRSR reporting over the next 5-10 years?
The Indian business landscape is experiencing a paradigm shift towards ESG considerations. As the country’s commitment to sustainability strengthens, companies must be prepared for a sustainability-focused future.
Building Long-Term ESG Integration: While current BRSR mandates apply to the top 1000 companies, future regulations might encompass a wider range of businesses. Companies should proactively integrate ESG principles into their core strategies, not just for compliance but for long-term resilience. This could involve:
- Investing in Sustainable Practices: Reducing energy and water consumption, promoting diversity and inclusion within the workforce, and setting ambitious sustainability goals like achieving net-zero emissions are not just cost centres but opportunities to enhance efficiency, attract talent, and build brand reputation.
- Partnering with ESG Experts: Consulting firms with expertise in ESG compliance can provide valuable guidance on navigating reporting requirements, conducting BRSR audits, and ensuring data accuracy.
Staying Ahead of the Reporting Curve: The BRSR framework is likely to become more comprehensive and standardised. Companies should cultivate a culture of continuous improvement in their ESG reporting practices:
- Monitoring Regulatory Developments: Staying informed about evolving regulations and best practices through industry associations and legal counsel is crucial. Companies should anticipate potential changes in reporting standards like GRI, SASB, and TCFD to ensure their BRSR reports remain aligned with international benchmarks.
- Investing in Data Management Systems: Robust data collection and management systems are essential for accurate and comprehensive ESG reporting. Companies should invest in technology solutions that streamline data collection, analysis, and reporting processes.
By adopting a proactive and forward-looking approach, companies can navigate the evolving legal landscape of ESG and BRSR reporting.
[1] Ministry of Corporate Affairs, National Guidelines on Responsible Business Conduct, Ministry of Corporate Affairs, https://www.mca.gov.in/Ministry/pdf/NationalGuildeline_15032019.pdf.[2] Securities and Exchange Board of India, Business Responsibility and Sustainability Reporting Format – Annexure I, Securities and Exchange Board of India, https://www.sebi.gov.in/sebi_data/commondocs/may-2021/Business%20responsibility%20and%20sustainability%20reporting%20by%20listed%20entitiesAnnexure1_p.PDF.
[3] Securities and Exchange Board of India, BRSR Core – Framework for assurance and ESG disclosures for value chain, Securities and Exchange Board of India (Jul. 12, 2023), https://www.sebi.gov.in/legal/circulars/jul-2023/brsr-core-framework-for-assurance-and-esg-disclosures-for-value-chain_73854.html.
[4] European Securities and Markets Authority, Final Report on Greenwashing, European Securities and Markets Authority (June 4, 2024), https://www.esma.europa.eu/sites/default/files/2024-06/ESMA36-287652198-2699_Final_Report_on_Greenwashing.pdf.
[5] Securities and Exchange Commission, Proposed Rule: Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, Securities and Exchange Commission, https://www.sec.gov/files/rules/proposed/2022/33-11068.pdf.
[6] Securities and Exchange Board of India, Guidance Note for Business Responsibility & Sustainability Reporting Format – Annexure II, Securities and Exchange Board of India, https://www.sebi.gov.in/sebi_data/commondocs/may-2021/Business%20responsibility%20and%20sustainability%20reporting%20by%20listed%20entitiesAnnexure2_p.PDF.
Disclaimer: The opinions expressed in this article are those of the authors and do not purport to reflect the views of AEEE.
