Sebi’s Roles As Guardian Of Investors And Environment, Sustainability

The Securities and Exchange Board of India (SEBI) is the securities market regulator whose main objective is to protect the interests of investors and to ensure fair market practices in stock markets and allied markets. It regulates the stakeholders of securities ecosystem – stock exchanges, stock brokers, merchant bankers, etc. It ensures that listed companies comply with its rules, regulations and guidelines. SEBI’s ‘comply-or-explain’ policy has mandated corporates to keep a check on their compliance calendars.  

ESG is a well known acronym in corporate governance. Environmental, Social and Corporate governance are 3 important pillars of corporate functioning. The EU’s European Green Deal, the USA's Inflation Reduction Act and the United Nations’ Sustainable Development Goals, and India’s Mission LiFe which aims at creating sustainable lifestyle are among the major international initiatives that are helping to drive the transformation of the global economy.  

ESG Compliance for a company  

A strong and meaningful ESG program can set a vision for a company’s environmental and societal influence, providing value both internally and externally. Establishing environmental goals can help reduce our carbon footprint, determine our sourcing strategy, and set a foundation for eliminating unnecessary waste. From a social impact lens, we can build a meaningful diversity program, enhance employee health and make lasting changes in our community. And by building a strong governance foundation, we can diversify our board, enhance business ethics, increase stakeholder transparency and protect privacy.
To ensure the adoption and success of an ESG program, it’s critical to align an ESG vision to our organization’s existing strategy and purpose. Establishing and communicating this foundation will allow our organization to be authentic in its actions, avoid “greenwashing,” and align the roadmap to core business objectives. As such, ESG has emerged as an opportunity (rather than just a responsibility) to build a more sustainable business and a key differentiator to enhance relevancy and trust with the organisation’s stakeholders, now and in the future.

As Indian companies continue to look for investments, and also conduct business abroad, including in Europe, their sustainability quotient plays a key role. The European Corporate Governance Conference 2022 explored the role of boards in driving the transition to a sustainable economy.  The Conference proposed Corporate Sustainability Due Diligence Directive (CSDDD). The CSDDD will apply to all EU companies with more than 500 employees and global turnover over €150 million, as well as smaller companies in specific sectors and non-EU companies active in the EU that meet the same criteria, based on their EU turnover. Under the CSDDD, companies will be required to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights and the environment for continuing to do business. This corporate due diligence duty applies to companies’ own operations, their subsidiaries, and their value chains.

ESG-BRSR Norms  

SEBI's new  Environmental, Social, and Governance (ESG) norms, introduced in response to the global focus on sustainability and responsible business practices, have significantly altered the reporting landscape for Indian companies. These regulations, which mandate Business Responsibility and Sustainability Reports (BRSR) for the top 1,000 listed companies, aim to enhance transparency, accountability, and curb the practice of "greenwashing."

Under the new rules, the top 1,000 listed entities are required to report on nine key indicators of the BRSR Core framework, a framework devised by SEBI's ESG Advisory Committee. The phased implementation of these regulations is a practical approach, commencing with the top 150 companies before 31st March 2024 and extending to the top 1,000 subsequently. 

Today these regulations are business imperatives. Investors look at firms through prism of sustainability. For Indian companies to attract investments, and plug in with the global investment network, as also for exporters who are part of global supply chain, it has become critical to accelerate on the net zero pathway. 

There is also a concern that their shares will be delisted if they do not comply with BRSR disclosure, also creating problems in raising investments and doing business where ESG reporting is mandatory. EU has rolled out a Carbon Border Adjustment Mechanism ( CBAM) from October 1, 2023, to achieve a 55% reduction in emissions by 2030. This involves reporting direct and indirect emissions embedded in imported goods. If Indian exporters donot have processes in place, they cannot report this data and may lose business. Likewise, for companies who are looking to diversify under China +1 policy, they also look at these matters.

A significant challenge arises in data harmonisation, particularly for companies operating in multiple geographies. Converting measurements, such as from liters to gallons, when subsidiaries span different countries, adds a layer of complexity to the reporting process. Companies must not only collect data but also ensure their supply chains are aligned with the audit requirements.

Auditors, too, are facing adjustments. The time between data collection and the final report submission, encompassing supply chain data, is constrained, requiring auditors to gear up for a more extensive audit process. They must work closely with companies to ensure that ESG data is accurately captured and reported in compliance with the new regulations.
While SEBI's regulations have been perceived as somewhat stringent, they reflect India's commitment to meeting global ESG standards. Companies that have voluntarily adopted sustainability practices in the past decade are better positioned to navigate these new requirements. For example, corporations like ITC, which established key performance indicators for sustainability nearly 20 years ago, find it easier to meet SEBI's standards.

The new regulations are expected to bring uniformity to ESG disclosures and improve transparency. They promote the adoption of science-based targets, which not only signal an organization's dedication to transparency but also align with the expectations of international investorsinvestors. These measures are anticipated to enhance India's position in the global ESG landscape and attract responsible investment.

Resultantly, SEBI's ESG norms represent a significant shift in India's approach and urgency to sustainability reporting. While they may appear daunting, they align with global trends and promote responsible business practices. Companies, auditors, and regulatory bodies will need to collaborate closely to ensure the successful implementation of these regulations and foster transparency and accountability in ESG reporting. These regulations mark a pivotal moment in India's journey toward sustainability and responsible corporate governance.

Way Forward  

SEBI's proactive stance on distancing regulated intermediaries from unregistered "finfluencers" and lodging complaints against those misusing SEBI-registered entity names underscores its commitment to safeguarding investors from financial misinformation and potential losses. The launch of a dedicated investor protection website, projecting SEBI as 'Har Investor ki Taaqat,' reinforces the regulator's focus on enhancing investor awareness and financial education. Additionally, the Ministry of Corporate Affairs' mandate for private firms to dematerialize their securities by September 30, 2024, not only promotes transparency and growth in financial markets but also bolsters investor protection. These initiatives collectively contribute to a sustainable investment environment with responsibility to climate preservation.

(Dhanendra Kumar is formerly Executive Director at the World Bank for India, Sri Lanka, Bangladesh and Bhutan, First Chairman Competition Commission of India. He is currently Chairman of Competition Advisory Services LLP with inputs from Aditya Trivedi, Associate)