Businesses around the world are transitioning to long-term sustainability goals focused on environmental, social, and governance (ESG) regulations. India has spent the last year keeping pace with new guidelines that mirror these international standards. These include the Securities and Exchange Board of India’s (SEBI’s) expansion of its ESG reporting framework and the Reserve Bank of India’s (RBI) draft regulations to disclose climate-related risks.
With the country emerging as a favoured destination for its ease of doing business, the improvements in sustainability reporting and regulations merit attention. India attracts significant foreign investment, with several companies competing in global products, services, and capital markets. Therefore, the change in the ESG regulatory scene is a much-needed move that reflects a transition to international best practices.
The Evolving Indian ESG Regulatory Landscape
ESG reporting in India has grown significantly since 2009. The Ministry of Corporate Affairs (MCA) 2011 guidelines on corporate social responsibility set the wheels turning with the National Voluntary Guidelines (NVGs) on environmental, social, and economic responsibility. Since then, the Companies Act of 2013 and SEBI’s Listing Obligations and Disclosure Requirements, 2015, have sought to address ESG-related concerns. However, SEBI’s introduction of the business responsibility reports (BRRs) and the business responsibility and sustainability reports (BRSRs) helped the reporting framework evolve.
The BRSR is India’s most advanced ESG disclosure requirement to date. It requires public and large private sector enterprises to report on their operational stability, growth, and sustainability practices. The reporting is either segregated for upstream and downstream partners or reported on an aggregate basis. Aimed at bringing in a new sense of accountability along the triple bottom line, SEBI anticipates that BRSR will influence even those entities not directly subject to the mandate. Effective 2023, applicable to 250 entities from 2024-’25 and progressively extending to more entities by 2027, SEBI’s guidelines make India one of the first countries introducing reasonable assurance within ESG disclosures with the aim to enhance the credibility of ESG rating agencies and reduce the likelihood of greenwashing.
While the scope of SEBI-directed disclosures is broad, RBI’s draft mandate for regulated entities (REs) is expected to be another first of its kind in India. It requires REs to provide forward-looking information on their financed emissions from 2025. With the REs including a range of banks, non-banking financial companies, and all Indian financial institutions, the regulations will be far-reaching. REs must now report on their climate-conscious practices in governance, risk, strategy, and target-setting. Also needed are details about collecting climate data from clients, managing climate risks in capital buffers, and financing climate-related risks and opportunities.
The ESG Link in the Global Supply Chain
India Inc. sees multiple outsourcing and offshoring interdependencies across geographies. This makes the Indian supply chains highly complex. The changing domestic and global ESG regulatory scene requires that Indian companies fast-track their adoption of sustainability and transparency across their business ecosystem, jurisdiction notwithstanding. Compliance becomes critical in cross-border trade, particularly with upcoming regulations like the European Union’s (EU’s) Corporate Sustainability Due Diligence Directive (CS3D). With the EU being India’s largest trading partner and trade increasing almost 90% in the last decade, 43% of India’s total exports to the EU worth US $37 billion could be impacted by ESG regulations.
ESG regulations in several countries mandate greater scrutiny of sustainable and responsible business practices. Risk assessment, management, and transparency, which were previously not binding, are now essential across the supply chain. For instance, the CS3D places stringent obligations on companies exporting to the EU to monitor and manage ESG risks across their value chain. The German Act on Corporate Due Diligence Obligations in Supply Chains (LkSG) obliges companies to ensure human rights and environmental standards compliance along their supply chains end-to-end. Indian exporters must enhance their ESG commitments to align with international standards, or they risk facing trade barriers in major markets.
Taking responsibility for the entire value chain involves initiating steps to assess and reduce ESG risks as well as understanding and tracking the ESG practices of business partners. With banks and financial institutions integrating ESG into their decision-making processes, ESG reporting could drive investor confidence. REs may reward companies with strong ESG records by offering them higher capital at better rates and friendlier terms.
However, regulatory compliance requires disciplined action. Newer ESG regulations call for reporting along the entire value chains with a higher level of disclosure. It involves a wider area than before, more metrics, and higher targets. Businesses may take some time to align with these requirements. Until the time they do, there could be possible inconsistencies in disclosures. Furthermore, non-compliance could result in fines, barriers to trade, or risk to reputation, potentially affecting market access to the EU, the United Kingdom, and other regions.
ESG Reporting and Compliance Challenges
Companies with global, multi-tiered supplier networks encounter difficulties identifying, tracking, and mitigating ESG risks at different stages. Scope 3 emissions, being large and beyond an anchor’s direct control, can be complex to calculate. While the disclosure of Scope 3 remains voluntary under India’s BRSR, several regulatory commissions worldwide, including the International Sustainability Standards Board (ISSB) direct its quantitative and qualitative reporting.
Barriers from disjointed information, limited data on tier 2+ suppliers, and insufficient interoperability between different reporting approaches can make it challenging to gather relevant ESG information from the network. The accuracy and reliability of ESG data are essential, but the rigours of verification and validation can sometimes be tedious. Besides, enterprises rely on fragmented systems to manage various aspects of partner data, hampering effective consolidation and analysis of ESG metrics.
As banks and financial institutions integrate ESG considerations into their decision-making processes, companies that fail to meet the mark also risk losing access to higher capital at lower rates and favourable terms.
The Case for ESG-embedded Working Capital
Embedding ESG measures within working capital finance and procurement technologies becomes crucial with the evolving regulations around ESG data frameworks. A full spectrum working capital platform that can extract credible ESG ratings becomes a significant link in strengthening and sustainably optimising the supply chain. By integrating ESG scores from established rating providers in their working capital platform, companies can seamlessly track and validate ESG metrics across their business network. Ensuring accurate and timely ESG reporting, such a solution can win investor confidence and facilitate access to ESG-linked financing.
TASConnect is an anchor-led, ESG provider-agnostic, working capital solution that serves as an integrator across the supply chain ecosystem. Our cloud-based platform simplifies the complexities of multi-partner connectivity, acting as a key intermediary between the enterprise, funders, and its extensive network of suppliers, buyers, and distributors. Our seamless integration between enterprise resource planning (ERP) systems and ESG rating providers of choice can help maintain the qualification criteria and preferential rates for ESG-linked financing.
Conclusion
Integrating ESG into supply chains is crucial for sustainable business success. India’s evolving ESG regulations are a step in the right direction. As compliance pressures mount and investor expectations grow, enterprises must build a culture of responsible practices throughout their supply chain. A multi-collaborative effort is required to meet the challenges and create a sustainable, equitable future. We can help you get there.
