At a time when green washing is rampant throughout the world, mandatory ESG disclosure and third-party assurance of disclosures are the primary weapons that regulators deploy against green washing
Sustainability reporting and third-party assurance of the report are not new to Indian companies.A large number of top Indian companies have been getting third-party assurance on their sustainability reports both under the voluntary reporting regime and the SEBI-mandated Business Responsibility Report (BRR) regime. Such assurance in the past was voluntary and under a fly-weight category called ‘limited assurance’. But things are about to change; SEBI has mandated'reasonable assurance’, a heavy-weight category, for FY’24 ESG disclosure for the top 150 companies.
At a time when green washing is rampant throughout the world, mandatory ESG disclosure and third-party assurance of disclosures are the primary weapons that regulators deploy against green washing. The response from the Indian market regulator, SEBI, is the most robust ESG disclosure assurance mandate anywhere in the world today. In its July 2023 circular, SEBI has mandated'reasonable assurance’ of a set of parameters set out under ‘BRSR Core’ within the annual Business Responsibility and Sustainability Report (BRSR).
BRSR Core is a considerably small subset of ESG KPIs, representing nine core ESG aspects: 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.By choosing to impose reasonable assurance on BRSR Core and not the entire BRSR, SEBI has been mindful of the cost of compliance on the reporting companies.
The difference between a limited assurance and a reasonable assurance lies in the extent of verification, level of confidence in the assurance outcome, and the language of the assurance opinion itself. A limited assurance is a sample-based verification, and, as the name suggests,only a limited number of locations, facilities, and KPIs are put to test. The assurance opinionof reasonable assurance is stated using a double-negative structure, reflecting a low level of confidence in the outcome.
It is obvious that a limited assurance may induce a false sense of safety against green washing, but it offers no real comfort or protection against green washing. Areasonable assurance, on the other hand, conducts sufficient tests towards obtaining a positive conclusion and assurance opinion. Therefore, a reasonable assurance offers protection against green washing.
Companies that are mandated to obtain reasonable assurance on BRSR Core in FY’24 will face multiple challenges. A look at the list of parameters covered under BRSR Core would tell you that it would take a team of ESG experts or individuals with knowledge and experience in various aspects of ESG to successfully complete the assurance.
The Big4 audit firms and some of the global players in management system certification have been traditionally providing assurance for sustainability disclosures. However, the independence clause barring assurance providers from any kind of advisory services to the client or any of its subsidiaries or associates will significantly curtail the ability of these companies to undertake BRSR Core assurance work.
Considering the substantial number of audit professionals required to be simultaneously deployed at year-end to complete reasonable assurance for the top 150 companies, the first challenge will be to find a competent and eligible assurance provider.
The second challenge is the cost of assurance. With the auditor-liabilities associated with statutory assurance, a serious shortage of audit professionals, and the sacrificing of non-assurance services (as part of independence), this will invariably lead to excessive costs of assurance and, possibly, an exploitative pricing regime in FY’24.
Company secretaries are likely to be a worried lot this year with the new assurance requirement potentially pushing back the release date of annual reports and, therefore, AGMs. This is a bigger concern for companies that are not used to ESG assurance in the past. Early planning, engaging with a potential auditor early on, and good audit preparation can make the year-end audit less disruptive.
(Bose K. Varghese is Senior Director, ESG, Cyril Amarchand Mangaldas.)