Is SEBI’s BRSR Core Utilitarian Or Distractive? 

The Indian market regulator, SEBI, has just released a circular on the framework for assurance and ESG disclosures for value chain based on BRSR Core. The circular dated 12 July 2023 is a follow up to the decisions taken, inter alia, on the treatment and use of BRSR Core by SEBI during its March 2023 board meeting.

BRSR Core is a limited set of nine ESG parameters: GHG emissions, water consumption and discharge, R&D and capital expenditure on technologies to improve environmental and social impacts, circularity and waste management, employee wellbeing and safety, gender diversity, inclusive development, fairness in engaging with customers and suppliers, and openness in business dealings with trading houses, dealers, and related parties.

The SEBI board decisions covered three use cases for BRSR Core – one, reporting entities will get it third party certified under a ‘reasonable assurance’ scope; two, it will be extended to supply chain disclosures; and three, ESG rating providers will issue a separate rating based on it. Is BRSR Core fit for these purposes?

The SEBI board decision says that ‘in order to enhance the reliability of ESG disclosures, the BRSR Core shall be introduced, for which listed entities shall need to obtain reasonable assurance.’ From a practitioner’s point of view, BRSR Core is not a subset of the BRSR main format; it has KPIs that are not covered in the main BRSR format. SEBI has addressed this and included an updated Reporting Format as a part of the circular.

Also, obtaining reasonable assurance on BRSR Core will not make the entire BRSR disclosure reliable; it can only make BRSR Core parameters more reliable. In fact, this approach is likely to make internal ESG processes heavily biased toward BRSR Core, with reporting entities making extra efforts to align BRSR Core with reasonable assurance requirements at the cost of the rest of the disclosures. Therefore, the introduction of BRSR Core with the intent of enhancing reliability of ESG disclosures may end up as a distraction leading to just the opposite.

The SEBI board used a similar argument in its decision on creating a Core ESG Rating: ‘in order to facilitate the credibility of ESG Ratings, ERPs shall offer a separate category of ESG Rating called as ‘Core ESG Rating.’ BRSR Core, by no means, is a proxy for ESG. In fact, there cannot be a proxy for ESG. BRSR Core leads to numerical disclosures that are irrelevant for rating purposes unless they are viewed through the lens of corporate goals, targets, and trends. Also, it does not cover the governance, management vision, policy framework, risk management, and the overall organisational direction of an entity’s ESG transition. Therefore, any rating based on BRSR Core will hardly be an ESG rating. 

For investors, Core ESG Rating is likely to be a distraction, especially when they will have access to two comprehensive ESG ratings – one based on existing global rating schemes and the other, an India-nuanced rating that weighs in India-specific factors as per SEBI board’s decision. Interestingly, the regulator has not called out any particular use case for Core ESG Rating. Another SEBI mandated use of BRSR Core is in value chain ESG disclosures: “A number of companies have significant ESG footprints in their value chain. In order to increase transparency, ESG disclosures and assurance (BRSR Core only) shall be introduced for the value chain of listed entities.” 

The inclusion of value chain ESG disclosure is a timely and welcome move by SEBI considering the global focus on and the need for value chain sustainability. By adding value chain disclosure mandate, SEBI has ensured a pathway for ESG to reach unlisted companies, including the vast MSME sector. While the decision to include only a limited number of parameters (BRSR Core) for value chain disclosures is appreciated, the utility and practicability of BRSR Core for the purpose may be worth revisiting. Considering the number of BRSR Core parameters and the complexity of some of the parameters along with the limited or non-existent ESG coping capacity of smaller unlisted companies, an even smaller group of more fundamental parameters may be more appropriate in the first cut. SEBI may then look at gradually expending the set of ESG parameters as reporting companies and their MSME suppliers gain more experience and confidence in the process. 

It is hard to miss SEBI’s intention to bring reliability to ESG disclosures and ratings and reduce cost of compliance in defining BRSR Core. However, BRSR Core may not fully deliver on these goals.