BRSR Core – Framework for assurance and ESG disclosures for value chain

Qualifications for Assurance Provider

In order to discharge the responsibilities of an assurance provider in an appropriate manner, the circular requires that the assurance provider has the necessary expertise and is independent of the listed company seeking an assurance. When evaluating ESG consulting firms for related support, companies should distinguish advisory services from independent assurance engagements.

In our view, to evaluate an assurance provider, companies should carefully examine the following attributes

Expertise:

• Skills and training
• Experience in practical application of requirements and disclosures
• Deep understanding of laws and regulations
• Knowledge of global developments in the area of sustainability
• Teams backed by specialists in areas such as climate change.
•  High standards of ethics

Independence:

•  No conflict of interest
• Independence (e.g. not selling its products or providing any non-audit/ non-assurance related consulting services)
• Companies seeking to engage their statutory auditors to provide assurance on
• BRSR Core should evaluate whether the auditor is providing any non-audit service.

Independence and eligibility of assurance provider:

The SEBI issued Frequent Asked Questions (FAQs) providing clarification on assurance requirements.

The SEBI clarified that the assurance provider need not be a Chartered Accountant and that assurance of BRSR Core is profession agnostic.

The SEBI reiterated its over-arching principles on conflict of interest by the assurance provider but has clarified that if an assurance provider provides activities that are in the nature of audit/ assurance such as certification, tax audit, system audit and tax filings then, it may not result in breach of independence. The SEBI has stated that the listed entity and its audit committee would need to verify the independence rules closely.

The SEBI maintained that activities such as risk management, project management, consulting services, investment banking services, internal audit services, management services etc cannot be provided by the assurance provider. In our view, the SEBI has broadly aligned the independence requirements under the circular to the requirements of Section 144 of the Companies Act, 2013 which provides a proscribed list of services that a statutory auditor cannot undertake. For several companies, this clarification could enable their statutory auditors to be appointed as assurance providers

Reasonable assurance Vs Limited assurance:

The Institute of Chartered Accountants of India (ICAI) has issued a Standard on Sustainability Assurance Engagements (SSAE) 3000, Assurance Engagements on Sustainability Information and another on SSAE 3410, Assurance Engagements on Greenhouse Gas Statements which deal with assurance engagements on an entity’s sustainability information including assurance of the BRSR. SSAE 3000 deals with both limited and reasonable assurance engagements.

Further, the SEBI has clarified that the assurance provider may use any globally accepted assurance standard on sustainability I non-financial reporting such as the International Standard on Assurance Engagements (/SAE) 3000 as tong as a disclosure to this effect is made in the report of the assurance.

Limited assurance is a form of negative assurance which states that the assurance provider is not aware of any material modifications that should be made to the underlying ESG disclosures. Reasonable assurance, on the other hand requires the assurance provider to opine on the outcome of the testing of processes and controls and the underlying ESG disclosures. Reasonable assurance is similar to assurance that the statutory auditors provide on year-end financial statements of companies. In fact, in the IFAC, AICPA and CIMA study it was observed that 70% of the time, companies that obtained sustainability assurance from a professional accountant engaged their statutory auditor to also review their ESG disclosures. In India, this is subject to the independence requirements stated above which companies and the audit committees will have to assess.

Way forward:

Companies in India will have to prepare their disclosures in a way which enables the assurance provider to provide reasonable assurance. This will require ahead of time planning of resources, establishing processes and controls and strong governance to enable reasonable assurance on the BRSR Core. The focus would also be on use of technology to generate and collect information in a robust and consistent manner. There will be a need to build capability and capacity organisation wide.

Value Chain

The circular establishes the requirement of ESG disclosures for the value chain of the listed entities. The entities are now required to report relevant KPls from the BRSR Core for their value chain, encompassing the top upstream and downstream partners cumulatively comprising 75% of their purchases/ sales (by value) respectively. The scope of reporting and any assumptions or estimates made by the entities shall also be clearly disclosed. The implementation of the requirement is illustrated below –

The value chain of any entity is the key driver of the enterprise wide ESG agenda. The companies are thinking beyond risk prevention and compliance to
create long-term value by integrating the ESG aspects into the entire value chain.

Current challenges in value chain integration:

With regulators increasingly emphasizing on value chain, it is imperative for companies to measure their ESG impact across the broader ecosystem. However, integrating company’s own ESG targets and commitments in the value chain can be a monumental task. While Tier I supply chain partners maybe better equipped to adopt ESG, the Tier II suppliers carry different challenges, notably –

1. Understanding the concept and importance of ESG integration
2. Availability of the ESG related quantitative information and its reliability
3. Willingness to adopt their customer’s ESG objectives & periodic sharing of the required information

Value chain in large companies will extend to several thousands of entities. The possibility of several supply chain partners being unlisted and operationally small is high and monitoring & reporting of ESG data may be challenging. The listed entities will need to hand-hold their supply chain partners to build their capacities, develop processes and controls to monitor and periodically disclose their ESG related data.

The supply chain partners could also be overseas companies who may not follow the same requirements on ESG disclosures or may not be forthcoming in sharing information at the reporting period ends of companies in India.

Wayforward:

As the requirement of the SEBI on value chain disclosures by the top 250 listed entities comes into force from financial year 2024 – 25, companies are provided with sufficient timeframe to identify their upstream and downstream value chain partners and support them in establishing the required ESG related processes and controls.

Summary

In summary, by means of this circular the SEBI has taken a giant leap ahead of its regulatory peers internationally. The need for assurance on ESG disclosures cannot be overemphasized.

It is now incumbent upon companies to put in place processes and control to be assurance-ready. They need to be deliberate about the skills of the assurance provider and considerate about the independence requirements.

Companies should also, look to get alignment on the KPls and disclosures relating to value chain from their suppliers and customers and forthwith put in place systems to educate them on the need for robust information and perform diligence on the information received from these value chain partners.