Why it can be challenging to meet ESG requirements

In May 2021, the Securities Exchange Board of India (SEBI) issued a circular that introduced the Business Responsibility and Sustainability Report (BRSR). This circular highlighted new mandatory requirements for ESG reporting for the top 1000 listed companies in the country. This new framework represents a paradigm shift from the previous Business Responsibility Reporting(BRR) guidelines, which relied on a traditional finance-based model.

While the BRSR framework is a vital initiative undertaken by the Government of India only recently, ESG measures were first introduced in 2004 in a report titled “Who Cares Wins,” an initiative undertaken by a group of financial institutions and facilitated by the United Nations. In India, ESG reporting started in 2009 when the Ministry of Corporate Affairs (MCA) introduced the Voluntary Guidelines on Corporate Social Responsibility. Since then, the ESG reporting framework has undergone fundamental changes.

The journey to achieve ESG compliance involves a few challenges for both the government and businesses. What challenges do they face to walk the talk? Even though the organisations claim to provide complete ESG reports, is it really transparent? Addressing these issues is extremely paramount.

Identifying material issues

One of the significant challenges businesses face is identifying material issues pertinent to the communities they serve as well as regulatory authorities, such as issues pertaining to data privacy and responsible sourcing of raw materials. Engaging them and identifying problems can be challenging if not done in an organised manner. The organisational leaders must ensure that the assessment of material issues is well-integrated into the day-to-day activities. Once the material issues are identified, the organizations must develop a comprehensive strategy to address these issues to achieve organisational goals in a responsible way.

Collecting and managing data

Effective data collection and management is a significant obstacle to appropriate ESG reporting. Businesses need help to collect, assess and organise ESG data in their areas of operations. For example, collecting accurate and numerical data on carbon emissions requires acquiring information from upstream and downstream sources that are beyond the control of the organisations.

Allocating resources for ESG

The COVID-19 pandemic and the conflict in Ukraine had devastating consequences for industrial sectors across the globe. But the worst affected were the Small and Medium Enterprises(SMEs). They are still reeling from business disruptions and cost issues triggered by these global events. Hence, compliance with the ESG requirements may strain their resources. For example, since the ESG criteria for small and medium enterprises as well as large corporations are the same, we often fail to acknowledge that SMEs have time constraints and they cannot afford to hire a consulting firm or a team of data analysts for ESG reporting and analysis. In case of manufacturing, it may be expensive for business owners to source eco-friendly materials or assure 100% recycling of byproducts.

Training and recruiting ESG professionals

All-round ESG compliance requires experts from finance, technology as well as significant investments in human capital. Hiring a pool of trained professionals in every sphere of business will foster the development of organisational goals that are in sync with the ESG guidelines. These experts will drive innovation, accountability, transparency as well as inspire the human resources to align their goals to support the society and communities at large.

For now at least, BRSR reporting is mandatory for top 1000 listed companies in India. However, that does not mean that businesses that do not fall under this classification can put their ESG efforts on the backburner. Businesses that aim to grow must take proactive steps, most of which can be easily achieved, as we will outline in our next article. One of the simplest steps they can take right now is partnering with ESG-compliant upstream and downstream businesses. Being a part of an ESG compliant supply chain will give a competitive edge to businesses while also helping them make a positive impact on their environment and the communities they serve.