As the deadline for the Business Responsibility and Sustainability Reporting (BRSR) for FY 2022-23 approaches, the integration of environmental, social, and governance (ESG) factors into the strategy and business practices of companies is gaining the utmost importance. However, despite the increasing awareness of the significance of ESG, many companies implementing BRSR for the first time still face challenges in envisioning, integrating, and reporting their corporate ESG practices. In this article, we take a closer look at the evolution of ESG integrationin India, including the obstacles that companies face, the opportunities for improvement, and the best practices that can be adopted to achieve sustainable growth.

Regulatory Landscape of ESG: The ESG regulatory landscape in India is evolving fast to create a level playing field for Indian companies in the global markets. The National Voluntary Guidelines (NVGs) on Social, Environmental, and Economic Responsibilities of Business, issued originally by the Ministry of Corporate Affairs (MCA) in 2011, paved the way for a series of progressive initiatives and related reporting such as Business Responsibility Reporting (issued by SEBI), National Guidelines on Responsible Business Conduct (NGRBC), etc. In 2021, SEBI rolled out a Business Responsibility and Sustainability Reporting (BRSR) framework, which requires the top 1,000 companies by market capitalization to disclose their ESG initiatives based on the nine principles of the National Guidelines on Responsible Business Conduct (NGRBCs).

More recently, SEBI also sought a comprehensive review of the ESG ecosystem and, as a part of that, requested public comments on the regulatory framework for ESG disclosures (including assurance) by listed entities, ESG ratings in the securities market, and ESG investing by mutual funds. These regulatory initiatives are crucial in creating an ecosystem for businesses and ensuring that they take their environmental, social, and governance responsibilities seriously.

Business Case for ESG Integration: Incorporating ESG practices into business operations can yield significant benefits for companies. ESG integration can improve risk management, enhance reputation, increase stakeholder engagement, and provide better access to capital. Notably, nearly 100 of the top 1000 companies in India are already integrating and reporting on global ESG frameworks such as Integrated Reporting, GRI, and SASB, while also undertaking supplementary environmental or social sustainability disclosures through frameworks such as Task Force on Climate-related Financial Disclosures (TCFD) or United Nations Guiding Principles on Human Rights (UNGP), respectively. Some companies have gone further by setting credible net-zero targets aligned with the Paris Agreement using the Science Based Targets Initiative (SBTi).

The (ESG) agenda is not a priority advocated only for large companies or matured firms. Even SMEs and startups can greatly benefit from ESG integration and related disclosures. Such practices help build confidence in stakeholders by demonstrating the long-term viability and sustainability of the business. In fact, incorporating sustainability into the core values of a business can set the foundation for sustained success in the long run. It is, therefore, essential for companies of all sizes and stages to prioritize ESG practices and embed them into their core operations. However, our interactions and experience with several companies in the bottom 500 have thrown light on some of the challenges in ESG integration and communication.

The Challenges of ESG Integration in India: Effective integration of ESG practices in India is not without challenges. The Board's commitment is crucial to ensure that sustainability integration is not just a compliance exercise but rather an integral part of the company's operations. Recently, companies have realized the importance of sustainability integration due to stakeholders' increasing demand for ESG disclosures. However, achieving comprehensive ESG disclosures requires collaboration among various departments, including strategy, finance, HR, research & development, production, EHS, sales, and marketing, to create an enterprise-level sustainability strategy and program management. Therefore, unless Boards prioritize ESG among competing priorities, it is difficult to implement it at the ground level successfully.

The BRSR framework also requires comprehensive disclosures on the nine NVGRC principles, ranging from Business Ethics, Product Sustainability, Employee well-being, Stakeholder Engagement, Human Rights, Environment, Policy Advocacy, Inclusive Growth, and Customer Value. Our review shows that out of 142 questions in the BRSR questionnaire, nearly half require a comprehensive and quantitative response. The companies are facing challenges in building effective systems to track and report these metrics effectively.

Further, it is crucial to note that even if the regulator mandates a framework, it requires collaboration with other protocols or frameworks to provide meaningful disclosures. The carbon emission disclosures, for instance, require computations based on GHG or an equivalent protocol. This exercise of carbon foot printing requires expertise in GHG protocols and carbon accounting mechanisms.

Companies can often struggle with the required expertise and capacity, which can lead to reporting fatigue. Nonetheless, innovative thinking and the right partnerships can help achieve sustainability integration, which can enhance growth prospects in the long run.

Best Practices for ESG Integration: Integrating ESGfactors into a company's vision, strategy, and processes is a critical aspect of sustainable development and long-term success.It requires carefully crafting vision, policies, procedures, and evaluation mechanisms.

Our experience suggests that setting the right vision and the right level of ambition is crucial to the success of an ESG program. The sustainability ambition – too high or low – should not expose the company to the risk of being seen as a green washer. Identifying and engaging stakeholders is also essential. This process involves identifying key stakeholders, understanding their perspectives and expectations, and involving them in the decision-making process.

Another important aspect is identifying material sustainability risks in the context of business priorities and stakeholders’ expectations. It involves understanding the sustainability risks that are significant to the industry in which the company operates and its business exposure. These risks should be evaluated based on the impact on stakeholders, as they can expose the company to significant economic and reputational risks.

Effective communication is another crucial element of ESG integration. Companies must select the right reporting framework and metrics to address the common needs of multiple stakeholders. Effective ESG disclosures can provide a good perspective on the sustainability risks and opportunities in the business, going beyond just satisfying regulatory or stakeholder reporting needs.

ESG integration does not have to be an overwhelming process. By engaging internal and external stakeholders, including experts in this field, and working diligently towards the goals, companies can transform into truly sustainable enterprises.