Standardisation call for discussions around ESG disclosures are also gathering momentum. An international corporate reporting entity was formed in June 2021 to deliver a coherent corporate reporting system working closely with IFRS and other leading framework setters and standard providers around the world. In August 2019, two international business forums collaborated with the four major accounting firms to develop a set of universal metrices supporting ’stakeholder capitalism’5 .
Standardised reporting on ESG is also gathering momentum in India. In May 2021, the Securities and Exchange Board of India (SEBI) launched the Business Responsibility and Sustainability Reporting (BRSR) format6 . The BRSR will be applicable to the top 1,000 listed entities, as per market capitalisation. It will be voluntary for FY21-22 and will be mandatory from FY22-23. The BRSR framework requires companies to look at an entity’s material ESG risks and opportunities. They will be required to disclose the financial implications as well as the company’s plans to mitigate or adapt to the risks. BRSR also prescribes ESG metrices that companies need to report which will serve as an important step for standardisation and will improve comparability.
While we are seeing some traction around standardisation of ESG disclosures, the variance in ESG ratings is another area of consideration. Since 2020, when several rating agencies made their ESG ratings public for companies, a significant disparity has been seen in the ratings provided to the same company. The growth in the ESG market has also resulted in the emergence of new ESG rating agencies, which has further added to the complexity in decoding these ESG scores. Since June 2021, we have two new ESG rating agencies in India itself. While the divergence in ESG ratings can be largely attributed to the individual methodologies and weightages adopted by different rating agencies, another factor is possibly the lack of data which results in use of proxies. With increasing regulations (current and impending) around disclosures, ideally, this disparity in ratings should get addressed.
The dust must settle and there are several streams of work, both in the regulatory and voluntary mechanisms, which are progressing to ensure this stability. ESG materiality muddle - with heightened discussions around single materiality and double materiality - is another subject that is now taking center stage. Even this disquietude will give way to balance. The positive momentum around addressing the regulatory void and building refinement in topics will help bring more clarity on ESG.
For more information, check out our thought paper named ESG Value Realisation and ESG: The Board’s Perspective