Sustainability Reporting and Assurance: The Evolving Landscape

Businesses today face not only physical risks from extreme weather events, but also transition risks such as changing policies, stakeholder expectations, and the introduction of carbon pricing mechanisms. Additionally, there is growing consensus that business viability increasingly depends on the health of natural ecosystems and the resilience of inclusive societies.

In response, the sustainability reporting landscape is undergoing a significant transformation. While the push for greater transparency and disclosures initially came from investors, a number of regulators across the globe have rolled out their prescriptions for sustainability reporting to support informed decision-making and the efficient functioning of capital markets.

Sustainability Reporting in India: From BRR to BRSR

India was one of the early adopters of mandatory sustainability reporting. The journey began in 2012, when SEBI introduced the Business Responsibility Report (BRR) for the top 100 listed entities. This progressively extended to the top 500 listed entities in 2015 and to the top 1000 in 2019. The BRR required a description of the initiatives taken by companies from an ESG perspective in a prescribed format. It was largely qualitative and light-touch in nature.

In view of global developments such as the adoption of the Paris Agreement on Climate Change and UN Sustainable Development Goals, and as investor interest in sustainability-related information intensified, there was a clear need to demonstrate outcomes. Driven by these developments, in 2021, SEBI introduced the Business Responsibility and Sustainability Report (BRSR).

The BRSR is a granular, quantitative, and outcome-oriented reporting framework. It is home-grown, tailored to our unique domestic requirements and aligned with our national priorities. While developing the framework, we were cognizant that emerging markets have a different set of environmental & social challenges. Therefore, we have consciously followed a climate plus approach covering both environmental and quantitative social metrics. At the same time, we had also conducted a benchmarking exercise with the then available international frameworks, such as TCFD (Task Force on Climate-Related Financial Disclosures) and GRI (Global Reporting Initiative), and there are a number of commonalities between these frameworks and the BRSR. The BRSR is applicable to the top 1000 listed entities (by market capitalisation) on a mandatory basis. Over 1,200 listed entities filed the BRSR for FY 2023-24.

The BRSR also seeks disclosures towards ascertaining the role played by and oversight of the Company Boards on sustainability-related issues. For instance, the BRSR seeks a statement by the director responsible highlighting the vision and strategy, sustainability priorities, challenges and outlook on targets. Disclosure is also sought on whether sustainability-related policies are approved by the Board and the frequency of review of performance against policies.

"The BRSR is a granular, quantitative, and outcome-oriented reporting framework. It is home-grown, tailored to our unique domestic requirements and aligned with our national priorities."

BRSR Core - Raising the Bar on Assurance and Transparency in Value Chain

Transparency without credibility can be counterproductive. With a number of stakeholders, such as investors and ESG Rating Providers, placing reliance on the disclosures in the BRSR, and concerns around greenwashing being raised globally, in July 2023, SEBI introduced the BRSR Core containing a select set of critical metrics, which would need to be assured by an independent third-party assurance provider. A glide path, in terms of timelines and applicability to listed entities, has been prescribed for implementation of assurance requirements, with coverage extending to the top 1000 listed entities by FY 2026-27.

Given that a number of companies have significant sustainability footprints, such as the use of natural resources, employment practices, emissions and wastages in their value chain, disclosures as per the BRSR Core were also extended to the value chain of listed companies. With a view to facilitate ease of doing business for listed entities and their value chain partners, these disclosure requirements have been recently relaxed. Value chain disclosures are now "voluntary", instead of the earlier requirement of 'comply-and-explain.' The scope of value chain disclosures has been reduced to cover the top upstream and downstream partners of a listed entity, individually comprising 2% or more of the listed entity's purchases and sales (by value), respectively, while retaining the requirement that the listed entity may limit disclosure of value chain to cover 75% of its purchases and sales (by value), respectively.

Global Developments: Convergence of the Alphabet Soup of Reporting Frameworks

Globally, the sustainability reporting landscape is converging. The issuance of the IFRS Sustainability Disclosure Standards (ISSB Standards) by the International Sustainability Standards Board (ISSB) has resulted in the consolidation of multiple reporting frameworks and reduced the fragmentation in this space. As per ISSB, 36 jurisdictions have adopted or otherwise used the ISSB Standards or are in the process of finalizing steps towards introducing them into their regulatory frameworks.

Parallelly, two new pillars are shaping the credibility of sustainability reporting. At the beginning of this year, the International Auditing and Assurance Standards Board (IAASB) and the International Ethics Standards Board for Accountants (IESBA) jointly launched the International Standard on Sustainability Assurance (ISSA) 5000 and the International Ethics Standards for Sustainability Assurance (IESSA), respectively. These standards were developed in response to market demand and calls from stakeholders for reliable sustainability information.

The ISSA 5000 contains principle-based requirements that support limited or reasonable assurance engagements of sustainability information reported by entities. The IESSA provides a framework for ethics and independence requirements, for sustainability assurance engagements with the objective of mitigating unethical conduct including green-washing risks. The ISSA 5000 and IESSA, provide a cohesive package of global standards for sustainability assurance. The standards are profession agnostic, and framework neutral i.e. they can be applied in relation to sustainability information prepared under any suitable reporting framework.

There is interconnectedness between the sustainability reporting, assurance, and ethics (including independence) standards. Together these standards form a powerful trinity, that promotes public trust in sustainability information.

"The IESSA provides a framework for ethics and independence requirements, for sustainability assurance engagements with the objective of mitigating unethical conduct including green-washing risks."

The Road Ahead

While progress is evident, the headwinds are real. The political climate has shifted in parts of the world, from the withdrawal from the Paris Climate Accord to the rollback of climate mitigation measures. We have seen investors exit net-zero alliances and a growing sense of compliance fatigue. Yet, the science is irrefutable; 2024 was the warmest year on record, surpassing 2023. It is therefore important for companies to recognize that short-term political shifts do not change the existence of sustainability-related risks. Investor led pressure will therefore continue to sustain the momentum for voluntary sustainability disclosures, even in the roll-back or relaxation of regulatory mandates.

As we look to the future, several themes are likely to shape the sustainability landscape:

• First, is the path towards convergence with international disclosure standards. At present, we are in a good spot with our indigenous framework, BRSR, which is calibrated to the needs of our economy, has given an impetus to sustainability disclosures and has prepared our companies to confidently deal with challenges in the evolving sustainability disclosure landscape. As recognized in the G20 New Delhi Leaders' Declaration (2023), while common global language is welcome, it is important that flexibility, to take into account country-specific circumstances, is preserved in the implementation of standards. Therefore, flexibility, proportionality, and a just transition supported by appropriate glide paths will remain critical.
• Second, we can expect an increasing connectivity between financial and sustainability reporting. This shift recognizes the inter-linkage between the financial risks a company faces from climate change, the environment and society and the impact that it creates for the planet. Integration of these perspectives, will enable a better understanding of the risks and opportunities faced by a company.
• Third, credible transition planning will become essential. Companies will need to go beyond intent and articulate practical, and time-bound pathways, backed by clear metrics and financial implications.
• Fourth, the challenge of greenwashing will become more pronounced. As sustainability claims proliferate, regulators will need to scale up their oversight capabilities. The assurance ecosystem including standards and a regulatory framework for oversight, will need to evolve to ensure credibility, consistency and independence, in reporting and assurance.

The journey will not be without its challenges, in particular, the fundamental tension between profitability and sustainability. There is a trade-off between short-term gains over long-term survival and resilience. The short-term gains rewarded by the market are more visible. The market's emphasis on short-term gains must give way to a more nuanced understanding of value.

Conclusion

We do not inherit the Earth from our ancestors; we borrow it from our children. The costs of inaction on sustainability, are real and rising. The businesses that integrate sustainability as part of their core strategy rather than treating it as a compliance obligation will be best positioned to thrive in a changing world.

Chartered Accountants, have an important role to play in the transition. Long regarded as custodians of financial integrity, they are well placed to contribute to an ecosystem where sustainability disclosures are comparable, consistent and trust-worthy. The opportunity for the profession is clear: to evolve beyond accounting for economic progress, and help shape a more inclusive, transparent, and sustainable future.