India’s ESG disclosure regime under scrutiny as investors demand alignment

Norway’s Norges Bank Investment Management recently made a bold move. 

The fund giant penned a letter to financial authorities in India, urging them to align the country's national framework with international standards on Environmental Social and Governance (ESG) disclosures.

It is a letter any financial watchdog in India would pay attention to because the firm's opinion carries some weight: NBIM holds equity in 416 companies, reflecting a total INR 1.4bn in invested capital. 

The write-up, jointly written by NBIM’s chief governance and compliance officer, Carine Smith Ihenacho and senior ESG policy advisor Elisa Cencig, speaks to a wider reality: fragmented ESG disclosure regimes in emerging markets are something investors want to avoid.

India’s critical moment

The Indian securities regulator has invited industry opinions, hoping to make advances in the country’s much anticipated disclosure reforms. 

The Securities and Exchange Board’s (SEBI) says that the consultation is part of its efforts to strike a “balance between transparency, simplification and ease of doing business in an evolving domain”. The domain is referring to ESG investing.

In a way, this is a critical moment for India. 

The country is recovering from the Adani’s group’s credibility crisis, a debacle that has cast a bad shadow over India’s transition story. 

The Adani group is a key piece of India’s renewable energy production puzzle: the conglomerate had bet heavily on transition projects including a green hydrogen venture with TotalEnergies. 

So any reforms to the country's disclosure regime come at a particularly sensitive time, particularly since SEBI is not the only player in this green adventure. 

Several components of India’s policy machinery have been focusing on ESG regulation in the recent past. The finance ministry has gone back to the whiteboard to draw out a taxonomy. 

Moreover, the central bank has undertaken banking sector surveys to assess how banks are dealing with climate risks and the corporate affairs ministry has been trying to implement a voluntary disclosure framework for unlisted companies.

The alignment demand

The challenge with disclosure regimes in many developing and emerging markets is that they are notoriously fragmented. Taxonomies tend to vary, policymakers develop the rules in close consultation with the domestic corporate sector and international standards might struggle to percolate into domestic legal realities.

In its letter, NBIM argues that enhancing India’s existing disclosure regime is a good first step. The existing rules are packed under the Business Responsibility and Sustainability Reporting (BRSR) regime. 

In 2021, SEBI asked 1000 of India’s largest listed companies to publish BRSR disclosures on a voluntary basis. In 2022, it was made mandatory.

Yet, NBIM suggests alignment is key. The fund points out that in its engagement, it pushes companies to implement the GRI reporting framework and is an ardent supporter of the international sustainability standards board.

For NGIM’s top brass, alignment is the bridge between global capital and domestic corporates. In the letter, they argue that “this would facilitate comparability of disclosures used by global investors like NBIM, and in turn enhance the access of Indian companies to global capital markets”.

Assurance

Step one of SEBI’s plan is the reform the assurance of disclosures. The Indian securities regulator has suggested a preference for “reasonable assurance”, even though the “limited assurance” choice is globally more prevalent.

The SEBI says “limited assurance is being adopted globally by jurisdictions as it is relatively easy to implement. 

However, due to its inherent nature, limited assurance draws relatively low confidence, while reasonable assurance despite being relatively more expensive, draws more confidence”.

NGIM expressed support towards SEBI’s choice. However, the letter makes a case for starting out with limited assurance and gradually progressing towards limited assurance of ESG disclosures.

In addition, here too, investors seem to push for global alignment. 

“Assurance providers should be subject to independence and quality management standards set by the relevant international standard setters, notably the General Requirements for Sustainability Assurance Engagements under development by the International Auditing and Assurance Standards Board (IAASB)”, write Ihenacho and Cencig.

Supply chains

The second part of the reforms is expected to address the issue of supply chain disclosures. In its paper, SEBI accepts the grounds on which investors demand supply chain disclosures. 

Supply chains account for an increasingly vital chunk of a company’s ESG footprint and house a range of sustainability risks which investors want to assess.

However, as SEBI notes, the process is complex: “considering that a number of supply chain partners may be small, unlisted firms, it may be difficult for such companies to track and report on a large number of ESG metrics”.

SEBI’s plan is to ask for disclosures by the top 250 companies on a “comply or explain” basis in the 2024-25 financial year, before moving into mandatory assurance of these disclosures in the following year.

NGIM points out that this could increase the risk of duplicative disclosure: “We suggest SEBI consider the alternative approach of directly expanding the scope of the BRSR requirements rather than mandating indirect disclosure through the largest listed entities, as this latter approach could result in duplicative disclosures for supply-chain entities who have a relationship with multiple reporting entities”.

Infusing credibility, comparability and confidence in India’s ESG disclosure regime is set to dominate the sustainable finance regulation agenda in the subcontinent. With institutional investors such as NGIM, willing to invest long term capital in the country’s transition project, SEBI’s response will find an eager audience.