In the past few years, companies’ disclosure of environmental, social, and governance (ESG) policies have received substantial attention from global investors, regulators, and stakeholders - specifically relating to reputation, trust, and risk management. Recently, an argument has emerged as to whether such disclosures should be restricted to the firm itself, or whether they should extend to the company's entire value chain? In this regard, the Securities and Exchange Board of India (SEBI) issued a consultation paper in May 2024, in which an expert committee recommended redefining value chain partners as well as some relaxations in disclosure requirements in the Business Responsibility and Sustainability Report (BRSR) to facilitate Ease of Doing Business (EODB). As such, this article provides a review of these proposals and provides additional suggestions for best practice.
The BRSR’s incorporation of the value chain into company disclosures
The value chain of a company encompasses all the different stages involved in adding value to its products or services, ranging from the sourcing of raw materials and services all the way up to the distribution and selling of a company’s final offerings. It goes beyond a given company's direct operations to include upstream (purchase) and downstream (sale) activities and related areas. Thus, the value chain plays an inextricably central role in companies’ overall sustainability and ESG initiatives.
In May 2021, the Securities and Exchange Board of India (SEBI) made changes to regulation 34(2)(f) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. These changes introduced the Business Responsibility and Sustainability Reporting (BRSR) Framework, which requires the top 1,000 listed companies by market value to include BRSR as a component of their annual reports. The introduction of BRSR aims to provide quantitative and standardized disclosures on ESG parameters across the market, enabling ease of comparability across industries, companies, and time. In June 2023, the regulation was amended to include a guarantee of reliability for the BRSR’s core attributes and a disclosure of the value chain for these core qualities. The BRSR’s core comprises Key Performance Indicators (KPIs) that are derived from the ESG factors specified in the original BRSR reporting format.
These traits encompass a variety of factors, including greenhouse gas emissions, water and energy usage, circularity, and staff well-being. In July 2023, SEBI announced the BRSR Core framework to provide a comprehensive assessment of a company's ESG performance and sustainability impact, ensuring transparency and accountability in ESG disclosures throughout the value chain. The aforementioned criteria pertain to the 250 highest-ranked corporations based on market capitalization as of the fiscal year of 2024-2025. According to the amendment, the listed entities are required to disclose BRSR core assurance and ESG disclosures for the value chain. This value chain includes the top upstream and downstream partners, which together make up 75% of the total purchases and sales value related to the business. The disclosure should be done on a "comply or explain" basis.
Opinions of the Expert Committee on the Matter of Value Chain Partner Definition and Disclosure in the BRSR
The panel in charge of the SEBI consultation paper on BRSR noted that in the Fast-moving consumer goods (FMCG), Tech, Chemicals, and Industrial Machinery sectors, the total number of value chain partners covering 75% of purchases and sales (by value) numbered in the hundreds, if not thousands. This meant that listed firms had to execute capacity development and training, enhanced monitoring, mapping, and data collection of all its value chain partners, all of which had a negative effect on cost burden and likelihood of compliance viability. To simplify matters , the committee proposed redefining “value chain partners” to include upstream and downstream partners that account for two percent or more of the listed entity's purchases/sales (by value) correspondingly. The committee also advocated a "voluntary" disclosures strategy rather than a "comply or explain" approach for the value chain disclosures in the BRSR, effectively weakening the demands on corporations.
Perspectives from Different Jurisdictions on Value Chain Disclosure for Sustainable Reporting
European Union: The Corporate Sustainability Reporting Directive (CSRD) is the primary regulation for monitoring corporate sustainability and was implemented by the European Union on 5 January 2023, aiming to update and enhance the reporting obligations on ESG (Environmental, Social, and Governance) information. These guidelines specifically call upon both EU and non-EU companies that generate over EUR 150 million in the EU market to disclose sustainability and ESG information about importance of the value chain partner’s sustainability and ESG practices in relation to the company’s overall ESG performance and the interests of stakeholders.
The draft ESRS-1 (European Sustainability Reporting Guidelines), in regard to CSRD, adopts the principle of double materiality, which encompasses: financial and impact materiality. The ESRS focuses on the disclosure of ESG issues related to workers (social) and climate change & pollution (environment) along the value chain. Within the ESRS-1, a sustainability feature is considered financially important if it has the potential to impact the future cash flows and overall value of a company, either by creating opportunities or posing threats.
On the other hand, impact materiality refers to the real or potential positive or negative effects that an enterprise has on its operations, products, and services throughout its value chain. The impact in question must pertain to the environment or individuals in connection to ESG criteria, either in a negative or positive manner, over a long-term or short-term timeframe. The formation of negative impact is derived from the sustainability due diligence procedure outlined in the United Nations (UN) Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. The magnitude of detrimental effects and the significance of a beneficial effect are determined by the scale, extent, probability, and irreparable nature of the influence. Further, it is important to mention that the implementation of CSRD is being done gradually, taking into account the size of the undertakings. However, the ESRS-1 (standard of materiality) has not been implemented yet.
United States: The Securities Exchange Commission (SEC) proposed climate-related disclosure rules for SEC registrants in the United States in March 2022. These requirements align with the double materiality approach supported by the CSRD and specifically focus on the Value Chain. The aforementioned idea necessitated comprehensive disclosure of climate-related financial consequences throughout the value chain.
Analysis of the BRSR and its future prospects
It is important to mention that the activities carried out by the impacted businesses, both upstream and downstream, constitute significant volumes of money and typically consist of high-value transactions. Thus, the advice about BRSR assurance and ESG disclosures for value chain partners that individually contribute two percent or more to the corresponding value chain activity is a positive development, particularly in the early stages. This is because financially important stakeholders in the value chain are now included in sustainability reporting. Such a step enables greater collaboration between listed firms, their supply chain partners, and their distributors, producing a ripple effect throughout the value chain.
Further, like the CSRD and ESRS-1 as being adopted by the EU, the assurance framework and ESG disclosures under the BRSR in due course of time must be extended to such value chain partners causing material impacts on the ESG aspects of such listed entities. This would further add to sustainability reporting as there may be value chain partners who may not have a significant financial impact but may significantly affect ESG aspects in the value chain of such listed entities. Since the scale of materiality is based on factors like severity, scope, likelihood, and irremediable character of its impact on ESG, such a requirement would act as a mechanism to decipher the key value chain participants with respect to the overall ESG aspects of such listed entities. Such a requirement would also facilitate access to capital from global investors. Further, it will aid listed entities that have an international presence, by ensuring that India’s ESG requirements are consistent with the regulatory requirements abroad.
Additionally, the committee's proposals, which are conveyed in general terms, recommend that the value of each participant in the value chain be assessed separately. It is advisable to incorporate the holding company, associate companies, and subsidiary companies of the value chain partner when determining the value associated with the pertinent activity. This is because group structures can be exploited as a means to circumvent assurance and ESG disclosures.
Also, the committee's recommendation to implement a "voluntary disclosure" strategy may result in adverse consequences, as authorities worldwide are currently engaged in the pursuit of mandated ESG disclosures in a variety of formats. This may give the impression that India is lagging behind in the implementation of ESG laws, thereby discouraging international investment. Furthermore, businesses are permitted to withhold information, which is inconsistent with the fundamental principles of transparency and disclosure that are delineated in the listing regulations (LODR). Therefore, it is essential to preserve the "comply or explain" strategy in order to establish a suitable equilibrium between ESG disclosures and EODB.
Conclusion
By including financially significant value chain partners, the goal is to normalize ESG disclosures across the industry. However, the regulations must consider not only the individual companies involved but also the broader group structure of these companies, including their parent companies, subsidiaries, and affiliates. This means that ESG disclosures should account for the entire network of related entities within the value chain, rather than focusing solely on each company's standalone operations. Furthermore, disclosure requirements should extend beyond financial metrics to encompass broader environmental, social, and governance (ESG) impacts. Future updates to disclosure requirements should adhere to the "comply or explain" approach to align with global market standards and ensure comprehensive and transparent sustainability reporting.