Auditors Need To Up Their Ante, As Climate Change, Sustainability Norms Take Centrestage

Last week, SEBI proposed amendments to the existing Business Responsibility and Sustainability Reporting (BRSR) framework. Among the several recommendations, the markets regulator proposed disclosure of “green credits” that the top listed companies along with their value chain partners generate.

Even as SEBI's mandate on ESG reporting is not new, the ever-increasing and rapidly changing global challenges pertaining to climate norms and disclosures would have implications on the auditing landscape, requiring auditors to broaden their expertise, develop new methodologies for non-financial data verification and ensure compliance with enhanced disclosure requirements.

Are the country’s auditors prepared for the fast-changing norms?

Auditors, including the Big Four  will need to continuously develop new methodologies for verifying non-financial data, which may involve cross-functional teams with expertise in environmental science, social impact, and governance.

Though globally, the Big Four accounting firms—EY, Deloitte, KPMG and PwC have already unveiled a reporting framework ESG disclosures, the fine prints on disclosure and accounting could vary from country to country and change rapidly. Auditors need to be prepared for the ever-changing dynamics of ESG reporting and accounting.

K Raghu, former President of the Institute of Chartered Accountants of India (ICAI) told The Secretariat that auditors would need to ensure that BRSR disclosures are consistent with global best practices and comparable across companies.

“Ensuring the reliability of data on carbon emissions, water usage, labour practices, and community impact will be critical. They must also ensure that companies adhere to the prescribed format and guidelines set by SEBI,” Raghu said.

Meanwhile, SEBI, which aims to redefine the concept of value chain partners, has also proposed some relaxation pertaining to their disclosures on ESG performance. Disclosure on ESG performance will be voluntary for the initial year for value chain partners for the initial reporting year -- which is 2024-25.

As per the regulators’ proposed framework, value chain partners would include both upstream and downstream entities of listed companies. The value chain partners would be individually required to account for 2 per cent or more of the company's purchases or sales by value.

“This recommendation, if approved, not only reflects a strategic move to align Indian organisations with their global counterparts, but also effectively demonstrates their commitment to sustainability while remaining committed to their business goals, thereby ensuring the credibility and relevance of the recommendations in the global context,” Smitha Shetty, Regional Director, APAC – Achilles Information Ltd said.

Raghu also added that clear and accurate reporting can help in better communication with investors, regulators, and other stakeholders.

Finance Minister Nirmala Sitharaman in her interim budget speech in February had underlined the need to simplify compliance procedures which would help in reduction of costs for businesses.

The recommendations made by an Expert Committee headed by SK Mohanty, ex-Whole Time Member of SEBI, would further push India Inc to prioritise their ESG goals. SEBI has asked stakeholders to submit their comments and feedback on the proposed amendments by June 12.

“With the ESG landscape changing globally, the Indian regulators and businesses are also realising the need for a balance between the stakeholder concerns vis a vis profitability. Pursuant to India’s commitment to the UN’s Sustainability Development Goals, the BRSR is a step further towards involving the businesses in combating climate change and sustainability,” Shweta Bharti, legal expert and managing director of corporate law firm Hammurabi and Solomon said.

Bharti added that the initiative promotes responsible business conduct and transparent disclosure of non-financial parameters and sustainability goals for companies operating in the country.

SEBI’s ESG reporting norms

SEBI first introduced norms on ESG reporting in 2012 -- Business Responsibility Report (BRR). Under the framework, the regulator mandated the top 100 listed companies to comply with BRR reporting.

Three years back, in  2021, SEBI introduced BRSR – which is seen as a more comprehensive guideline compared to the earlier BRR, expanding the scope to the top 1000 listed companies and then followed it up with a framework for assurance and ESG disclosures for value chain in 2023.

Besides SEBI, other financial regulators including the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority of India (IRDAI) have also taken steps to boost ESG framework. The Secretariat has earlier  reported on the need to have synergy between Corporate Social Responsibility and SEG goals.

Measures taken by other financial regulators

The RBI has already published a  draft disclosure framework for banks and other regulated entities (RE) on climate-related financial risks, sustainable and green deposits reporting. The RBI in a press statement said that there is a need for a better, consistent and comparable disclosure framework for REs, as inadequate information about climate-related financial risks can lead to mispricing of assets and misallocation of capital by them.

“The current disclosure framework is a step towards bringing the climate risk assessment, measurement and reporting requirements under mainstream compliance framework for financial sector entities in India. This move will help incorporate climate-related issues in the overall organisational culture, policies and operations,” PwC in a note said. The IRDAI is also aggressively promoting sustainability and ESG principles among the insurers.

Globally it is believed that the ESG assets are expected to exceed $ 53 trillion.

The multipronged approach taken by the country’s regulators along with the government bodies is the need of the hour given the rising climate risks. The purpose of these regulations is to motivate companies to adopt sustainable measures and practices that will ultimately result in a sustainable and ethical impact and will also protect their investors from ‘greenwashing’- when companies mislead the public about their steps taken to protect the environment.