The Securities and Exchange Board of India (SEBI), on 15th May 2021, introduced the Business Responsibility and Sustainability Report (BRSR). This has replaced the previously existing Business Responsibility Report (BRR). The focus on sustainability is a welcome addition as it nurtures improved environmental, social, and governance (ESG) disclosures. It aims to establish links between listed companies’ financial results and their respective non-financial ESG performances. This report emphasizes quantifiable metrics, which will make it easier to compare results across periods and sectors. More transparent disclosures could potentially boost the social responsibility of companies, as well as help them better assess ESG-related risks and opportunities.
BRSR will apply to the top 1,000 listed entities (by market cap). Implementation of this report was voluntary as of FY2021-2022. However, starting April 2022, implementation is mandatory.
A Business Case on Sustainability Reporting
Several studies have examined the relationship between the ESG practices of companies and their financial performance. Most of these studies find that companies with a strong focus on corporate governance’s environmental and social aspects also exhibit better financial results. Some of the results from these studies are elaborated below:
Return on Equity (ROE) and Return on Assets (ROA)
In examining the performance of 656 companies in their portfolio, the International Finance Corporation (IFC) came upon an interesting finding. Companies that exhibit good environmental and social (E&S) performances outperform clients with worse E&S performances by 110 and 210 base points (bps), respectively on ROA and ROE.
Equity Market Performance
Clients with high E&S scores outperformed those with lower scores by 10 bps in the MSCI emerging market index.
The IFC also found that apart from the E&S performance, the act of reporting itself is beneficial to corporations.Companies with a well-established practice of reporting material sustainability indicators outperform firms with a weak reporting culture.
Why Does E&S Performance Affect Financial Outcomes?
- Stakeholder Perceptions
A good E&S performance indicates to stakeholders that the company is dedicated to the fair treatment of its surrounding resources, and is secure enough to focus on societal growth. Well-established sustainability reporting practices also communicate to stakeholder that the company is forthcoming and transparent about its activities. This can foster a sense of trust and consequently increase the company’s average stock price.
- Employee Welfare
Reporting and implementation of social responsibility also improves employee loyalty. This translates to greater employee productivity and lower employee turnover, both of which contribute to the financial growth of a company.
- Resource Saving
Responsible reporting of a company’s environmental performance helps to enhance the company’s awareness of its environmental responsibilities. This subsequently allows them to keep a check on expenditure of resources such as energy, materials, and water.
Conclusion In conclusion, the new BRSR reporting structure can not only pose as a tool for enhanced ESG but could also potentially improve the financial outcomes of the company.