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May 23, 2024

Sebi Proposes Measures to Simplify ESG Disclosures for Listed Companies

The Securities and Exchange Board of India (Sebi) has introduced a series of measures aimed at simplifying environmental, social, and governance (ESG) disclosures for listed companies and their value chain partners. These proposals are designed to alleviate compliance burdens, particularly for smaller suppliers, while enhancing transparency and sustainability reporting.

One of the key changes proposed by Sebi involves mandating ESG metric disclosures only for those value chain partners that individually account for 2% or more of a company’s purchases or sales by value. This approach significantly narrows the scope of mandatory disclosures, focusing on major contributors to a company’s supply chain. Additionally, for the first year, these disclosures for value chain partners will be voluntary, rather than on a comply-or-explain basis.

Previously, Sebi’s directive required the top 250 listed companies to disclose ESG metrics for their value chain partners in annual reports starting from the financial year 2024-25. These disclosures were to cover value chain partners cumulatively comprising 75% of purchases or sales. The new proposal aims to make this compliance process more manageable.

The proposed changes align with the Business Responsibility and Sustainability Reporting (BRSR) Core framework, an ESG disclosure mandate for listed companies that emphasizes verifiable data. While BRSR already applies to the top 1000 listed companies, the Core framework is more limited in scope but demands higher data accuracy and reliability.

For environmental disclosures, the new parameters require companies to provide assurances on several critical factors, including greenhouse gas emissions, water consumption and treatment, and waste management. This includes gathering ESG-related information at the level of each sale and purchase order, which is particularly pertinent for manufacturing companies.

Sebi’s proposals are also a response to concerns about the cost burden on smaller suppliers to large listed companies. Smaller firms have highlighted the significant investment required to establish processes and data systems necessary for ESG reporting and verification. To address these concerns, Sebi has suggested shifting from ‘assurance’ to ‘assessment’ of ESG data. This change is expected to reduce both the cost and the challenges associated with auditing ESG data.

Companies have raised concerns that stringent ESG norms for the value chain could impose onerous requirements on thousands of ancillary companies and third parties. By easing these requirements, Sebi aims to create a more feasible pathway for all parties involved to comply with ESG standards.

The increasing focus on ESG metrics is driven by a growing trend towards responsible investing. Investors are increasingly prioritizing companies that demonstrate strong commitments to environmental and social governance.

In addition to the proposed changes in ESG disclosures, Sebi has also floated a recommendation to include green credits as a leadership indicator within the BRSR framework. Green credits are earned by companies that engage in environmentally sustainable activities. This move aligns with recent efforts by the Ministry of Environment, Forest, and Climate Change (MoEFCC), which in February outlined a methodology for calculating green credits for activities like tree plantation.

By incorporating green credits and simplifying ESG reporting requirements, Sebi aims to foster a more sustainable and transparent corporate environment. These measures are expected to not only ease the compliance burden on companies but also promote greater accountability and environmental stewardship in India’s corporate sector.

Jhumpa Lahiri

Jhumpa Lahiri

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