GENTRIFYING INDIA INC
New mandatory standards notified by Sebi signal that good governance is no longer just an option, setting the stage for a makeover of India Inc. EPISODE #66
Dear Reader,
A very Happy Monday to you.
Later this week new rules on corporate governance notified by the Securities and Exchange Board of India (Sebi) will get operational.
From the next fiscal, the top 1,000 listed companies will be mandatorily required to publicly share information about their Business Responsibility and Sustainability Report (BRSR)—entailing disclosures relating to the new investment mantra, Environment Social and Governance (ESG).
This is a big shift. Something that will force a makeover of India Inc.
It is not just about how they run their business and its imminent gentrification. The BRSR is also a masterclass on what it means to walk the talk of a rules-based regime. So this week I explore this development and the attendant implications. It may sound geeky to you, but please stay the course and do share your comments.
The cover picture this week is from a recent visit to Connaught Place, New Delhi. I was struck by how rapidly the older generation shops were bowing out, even while new entrants, mostly bars and eateries, replaced them.
A big shoutout to Ranjini, Gautam, Vandana, Rajit, Premasundaran, Aashish and Rahul for your informed responses, kind appreciation and amplification for last week’s column. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
ESG GOES MAINSTREAM
Later this week (1 April), new rules for corporate governance will be operative. Accordingly, the top 1,000 companies ranked by market capitalisation will be mandatorily required to disclose information about their Business Responsibility and Sustainability Report (BRSR)—metrics relating to the new investment mantra, Environment Social and Governance (ESG)—in their annual report for next year.
It may be news to us, but Sebi had given the current fiscal year as the period within which the companies could ready for the transition; adopt these norms voluntarily and thereby tune their internal systems to the new rules.
For several reasons this move is welcome.
Firstly, it aligns India’s regulatory and disclosure regime to global standards. If nothing it brings them closer.
Second, this is a tacit recognition that challenges like climate change cannot be overcome without the active participation of a key stake holders like the corporates. Especially given that some global firms have a balance sheet that can rival or top the gross domestic product of some nation states.
Thirdly, it is time India Inc embraced a rules-based regime in full measure. The extended phase of crony capitalism has not only eroded their trust quotient with other stake holders in the Indian economy, but it has also undermined the disclosure regimes. BRSR is, as I said in my introduction, a masterclass on the imperatives of a rules-based regime.
The Disclosures
Implicitly this move to implement BRSR by the stock market regulator Securities and Exchange Board of India (Sebi) links a company’s financials with their adoption of ESG. The BRSR will be the single source for all non-financial information. Consequently the performance of a company will be measured in the future as much on the basis of the returns it provides its shareholders as the firm’s ability to walk the talk on ESG metrics. If you wish to read the press release issued by Sebi please click this link.
This shift has gained urgency in the post-covid world. The severe disruption in global supply chains served as a wake-up call. Increasingly companies are coming under closer scrutiny on their ESG choices. It is not just investors, regulators too are pushing the envelope on compliance.
While the BRSR will be viewed as an imposition, India Inc, especially those with a global footprint, will be better off by going the full distance and embracing the new disclosure regime. Upholding standards will actually be rewarded and in future the scrutiny will only increase.
Coincidentally, last week the Securities and Exchange Commission (SEC), the stock market regulator for the United States, proposed new rules to enhance and standardize climate-related disclosures by companies.
Going forward companies will be required to include:
Certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are likely to have a material impact on their business;
Results of operations, or financial condition, and certain climate-related financial statement metrics in their audited financial statements;
Required information about climate-related risks would include disclosure of greenhouse gas emissions.
The rationale of the SECs decision mirrors Sebi’s motivation in launching BRSR. Explaining the logic, SEC Chairman Gary Gensler said:
“Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures.
Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.
Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed.
The SEC chairman has succinctly summed up the reasons by linking it to the risks disclosed by a company. The chances of an investor getting blindsided are mitigated to that degree. A similar logic underlies BRSR.
The BRSR Framework
I had pointed out earlier that the BRSR regime has been in the making for some time. To the credit of the government and Sebi, the idea of sustainability reporting is being pushed for over a decade. In fact I remember anchoring an event around this subject in my previous organisation when the idea first took flight in 2009-10.
Its first avatar was the Business Responsibility Report format based on the National Voluntary Guidelines laid down by the Ministry of Corporate Affairs (MCA). Subsequent iterations (as set out in the timeline below) to improve the standards enabled BRSR.
Significantly the BRSR is based on the National Guidelines on Responsible Business Conduct (NGRBC), which in turn is based on the Sustainable Development Goals laid down by the United Nations. This ensues that the BRSR format is aligned with the prevailing global standards.
The Rewards
The biggest stumbling block to adopting such disclosure standards is the cost of compliance. Of course it entails a cost. But then there are gains too. As they say no gain without pain.
The proxy advisory firm Institutional Investor Advisory Services India Limited (IiAS) has been tracking the gains of good governance. Its report on corporate governance scores in 2021 for 100 BSE-companies captures the developments in the post-covid world.
At one level it shows that companies are voluntarily implementing good corporate governance behaviour. Secondly, it points to a strong correlation between the quality of the board and the increase in governance scores.
“While this has been the case in most years, the difference has never been as stark as it is now.
The median (governance) score for the S&P BSE Sensex companies, with strong, largely independent and diverse boards, has surged to 68 from 63 in 2020. The median scores for the rest of the S&P BSE 100 (excluding Sensex companies) dropped marginally to 59 in 2021 from 60 in 2020.”
And now comes the proof of concept. Companies with good governance scores are sought after—resulting in a higher stock valuation.
“Our analysis showing a strong correlation of the governance scores with stock price performance and lower volatility also holds—well-governed companies with higher governance scores outperform those with lower scores and exhibit lower volatility.
The outcome is clear: in the midst of the pandemic related uncertainty, companies with stronger boards will thrive, prosper and create the largest shareholder value.
Thoughtful, forward-looking boards with independent thinking, diversity of thought and agility are the ones that will propel their companies ahead of the rest.”
If you wish to read the 2021 report of IiAS please click this link.
Hopefully my quick run-down of the BRSR guidelines has served as a teaser for you to explore further. I would recommend, whether you are an investor, shareholder or a company executive, please take a deeper dive into the links I have enclosed.
As India gradually becomes part of the global supply chain adherence to good governance will be a necessary condition. Think of it like stopping at a red light. The price of non-compliance is no longer negligible. But by voluntarily embracing the rule, one would embrace a rules-based regime and also be claiming the mantle of a good citizen.
Recommended Viewing
Last week the Public Affairs Forum of India (PAFI) hosted a conversation with Arun Singh, the career diplomat who has served in both Moscow and Washington, on the Ukraine conflict. He retired as Ambassador to the United States.
In a nearly hour long conversation, Singh walked us through the various nuances of the confrontation and what it means for the world and India—who has been caught in the crosshairs of the self-appointed moral crusaders in Western nations for refusing to call out Russia for its actions.
If you wish to watch please click the link below.
Till we meet again next week. Stay safe.
Dear Anil,
A very comprehensive article on this important topic. ESG norms are much needed for corporate India.
Enjoyed the video of Conversation with Mr.Arun Singh. PAFI programs are very interesting and enlightening.
Insightful take Anil. I believe, companies which adhere to the norms laid, prosper and send a green signal to investors. They not only are rewarded by investors, but also by consumers and their customers. As India takes the lead in making India Inc. compliant with ESG norms, lets hope it brings the ensuing benefits.