The world over there is a seeming shift in the corporate echelons. With trade barriers being raised, and recessionary forces looming on the horizon. They are trying to discard any obstacles that might encumber the work. And, sustainability reporting is being perceived as one of those — a primary challenge to ease of doing business.
Interestingly, it has only been a few years, since the so-called ESG/sustainability wave, which gained momentum in 2018/19, prompted worldwide regulators to rush into creating sustainability reporting regulations. After drafting the regulations, when it was time to roll the ball, there was a feeling that the ball was too heavy. And that led to the most convenient and effective blackjacking (since mailing has gone out of fashion) – ‘Sustainability Reporting can impact the Ease of Doing Business’.
And if you think I am overstating the fact, let me begin at home. The latest recommendations in the amendments to Business Responsibility and Sustainability Reporting (BRSR) came from the “Expert Committee for Facilitating Ease of Doing Business” [1]. I admit that there were some good changes to bring in clarity, but on many other fronts, it was a dilution from earlier requirements; for example, “Value Chain” reporting, which had earlier coverage of 75%, now refers to only partners individually comprising 2% or more of the purchases or sales. “Reasonable Assurance” suddenly becomes “Assessment”, a term used in the context of sustainability reporting for the first time across the world, for which there are no standards.
The trend is not limited to India alone, something similar happened in the EU with the now-famous Omnibus Package. It is stated that the “EU Simplification Omnibus Package” aims to significantly simplify and reduce sustainability reporting and due diligence burdens to ease the process of doing business. These changes are not small; it is so significant that we can even call it the ‘(E)U-Turn’.
As per the changes, the number of undertakings subject to mandatory sustainability reporting requirements will be reduced by approximately 80%. Along with the scope reduction, the package also significantly reduced the mandatory data points by revising the reporting standards. The scope of value chain reporting was also significantly slashed. The assurance requirements were minimized.
There’s not much to talk about in the US. MAGA was all about ease of doing business, and almost every advancement in sustainability reporting has been stalled (federal) in the wake of the new government.
Let us examine the arguments presented to justify the simplification of sustainability reporting, which aims to facilitate business operations.
- Increased data collection and reporting burden: The process of collecting and analyzing sustainability data can be time-consuming and resource-intensive, especially for companies with complex supply chains or limited internal expertise.
- Potential for increased regulatory compliance: As sustainability reporting becomes mandatory, companies claim increased costs associated with complying with new regulations and reporting standards.
- Perceived lack of immediate return: Some companies view sustainability reporting as a non-core activity with limited immediate financial benefits, leading to a reluctance to invest in the required resources.
- Internal resistance and lack of buy-in: Some companies also encounter resistance from employees, who perceive this as an additional burden.
While I leave you to evaluate the merits of the above reasons for simplifying sustainability reporting, for me, sustainability reporting isn’t a barrier to ease of doing business. On the contrary, recent surveys have shown that the majority of companies are not in favour of the Omnibus proposals[2]. A KPMG survey indicates that 88% of companies will continue with their ESRS implementation. [3]
If most of the companies are ready to go with it, who are these people pitting ease of doing business against sustainability reporting? It also makes an impression that it is only sustainability reporting, which is the stumbling block on ease of doing business.
While I agree that some of the disclosure requirements are not required, for example, in BRSR, the requirement of value chain reporting on all core indicators is one of them. There is no way a company can determine the attribution of indicators like accidents and sexual harassment from their supply chain partners. Think of seeking a supply chain partner on data on related party transactions and then, how you will attribute that to your company. Suppose a company has a client with whom it is doing more than 2% of its business. In that case, the company should report on all the core indicators of the client, which include, apart from the environmental footprint, the above indicators as well. If the client is a private company that is not listed and does not provide any reporting, they are not going to (or not in a position) provide the information. This would mean that the company, which is required to report on BRSR, will be in non-compliance, and the only way to avoid non-compliance will be to reduce the business from that client to below 2%. Such requirements, which are severely impacting the ease of doing business, still remains in BRSR.
The requirement on assurance is an area diluted in BRSR. Even when I was part of the ESG advisory committee set up by SEBI, I presented my views against the introduction of a reasonable level of assurance without any effort to improve the system’s capacity. However, assurance is necessary to enhance data reliability and credibility. I was recommending Limited assurance for 3-5 years and in which time we improve capacities of companies and assurance providers to move to Reasonable Assurance – That was my suggestion. Suddenly Reasonable assurance changes to Assessment. It cannot be substituted with assessment, which lacks a global standard to support it. We need to realize that many Indian companies will have to comply with global regulations directly or indirectly because of supply chain transparency requirement and all these requirements will not accept Assessment.
Many major companies with complex supply chains have opposed the EU’s proposed “Omnibus” package[4]. However, we will not see such a movement in India, as it would appear to be revolting against the market regulator. In India, having the standard setter and the market regulator as the same entity is a challenge. Industry bodies in India should be in a position to push these matters, but will they?
Having been part of the journey of more than 1,000 sustainability reports with nearly 200 companies, I can attest that sustainability reporting is not at odds with the ease of doing business. Yes, while the company is starting out with reporting, there is extra effort, and there will be inertia. But with a couple of cycles, I can vouch that this report will provide more analytical insights into the overall progress of the company against its stated vision and purpose than any other reporting.
I agree that the initial versions of the sustainability reporting regulations went a bit too far. However, a sharp dilution with the aim of ease of doing business is not the correct approach. We need sustainability disclosures, and that should be the way of doing business.
4] https://sustainabilitymag.com/articles/what-is-the-eus-omnibus-why-are-major-companies-against-it
