Future-proofing your business: Analysing the MCA’s Recommendations on Business Responsibility Reporting

Global trends towards a stakeholder-centric governance model have resulted in a structured movement towards responsible business conduct. Companies are expected to be driven not only by profitability but also the increasingly relevant non-financial parameters measured through impact on society and the environment, popularly referred to as the ‘triple bottom line’.

ESG (environment, social and governance) related risks are being factored in by “socially-conscious” investors. Large institutional investors that had previously taken passive stances on ESG-related issues have become more assertive. Reports suggest that ESG-mandated assets could grow almost three times as fast as non-ESG-mandated assets to comprise half of all professionally managed investments in the United States by 2025.[1]  The business case for ESG-based performance includes better risk management which in turn creates long term value by providing access to capital, operational benefits and goodwill.

Business Responsibility Reporting in India

Market demand and regulatory developments have been the two key drivers for development of ESG-based performance metrics in India. Over the past decade, India has developed its very own business responsibility reporting framework enabling disclosures on key non-financial parameters in line with global commitments and legislative advancements.[2] The timeline below sets out the implementation of this reporting framework:

MCA Committee Recommendations for an enhanced BRR framework

Simultaneous to the adoption of the more refined NGRBC vis-à-vis NVGs, the MCA constituted a Committee on Business Responsibility Reporting (Committee) in 2018 to review the existing BRR framework and to formulate a tech-integrated, user-friendly, single and comprehensive reporting framework to measure non-financial parameters. Basis this review, the Committee published its report on 11 August 2020 (Report) with a recommendation that the revamped formats be formally adopted by regulators in a phased manner beginning 2021-22.

Key changes recommended by the Committee are as follows:

Conclusion

The goal of the NGRBC and the BRSR framework is a lofty one that needs concerted government and industry participation for its success. In a business environment affected by COVID, ESG considerations would continue to be at the forefront with Boards likely to focus on long-term value creation. In this context, the MCA’s recommendations on the BRSR framework is timely and will allow for standardisation of ESG-factors as well as bring greater quality and accuracy to such non-financial reporting.

While the BRSR Lite is a welcome step towards wider implementation, the preparedness of each company to adapt and align itself (sometimes, at quick notice) and ability to take on the added compliance will need to be kept in mind by SEBI and other regulators before formally adopting the recommendations in the Report.

The Report also states that a Business Responsibility-Sustainability Index is in the pipeline. If implemented well, this index could set the stage for greater ESG-based investments in India.

As first step towards implementation, SEBI has, on 18 August 2020, released a consultation paper seeking stakeholder comments on the adoption of the BRSR format proposed by the Committee. Also, with the MCA steering the process of formulating a National Action Plan on Business and Human Rights (NAP), it is evident that themes around being socially responsible coupled with an enhanced focus on corporate governance are here to stay. Demonstrating leadership in ESG may well become a differentiating factor for companies and Boards will have to stay ahead of the game and re-design strategy to push this agenda forward.

-       Suhana Islam Murshedd (Partner) and Riya Dutta (Senior Associate)

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