Analysing the System of Sustainability Business Reporting in the light of MCA’s Proposed Framework
For the sustenance of any venture, a system of Business Reporting is extremely essential. It enables the business to assess its performance in different aspects. Business Reporting is of two types - financial reporting, which reflects on the financial health of the businesses and non-financial reporting or sustainability reporting (SR), which is the practice of reporting the economic, environmental and social impacts of the businesses. SR enables the businesses to assess, measure and alter their approach so as to fulfil their commitment towards the environment, its sustainable development, and their own corporate accountability.
Recognising the importance of SR in developing countries such as India, on August 11, 2020, the Ministry of Corporate Affairs (MCA) released the Report of the Committee on Business Responsibility Reporting chaired by Mr. Gyaneshwar Kumar Singh. On similar lines, the Securities and Exchange Board of India (SEBI) released a Consultation Paper on the format for Business Responsibility and Sustainability Reporting in India on August 18, 2020. Both these reports lay down a SR framework for Indian businesses. In this article, the author discusses the key features of the MCA report and comments on the need for such a centralised reporting standard. She also discusses new challenges that could crop up even after the MCA’s new framework.
Key Features of the MCA Report
Following are the key features of the proposed MCA report:
Providing a Comprehensive Centralised Standard of SR – The MCA report has proposed two standards of SR aim to provide a single window for non-financial disclosures. Currently, due to the absence of a standardised format for SR, businesses have adopted their own set of disclosures. They tend to cherry-pick reportable criteria and green wash their information before disclosure, thus, giving rise to the credibility of the final report. In light of this, the MCA Report aims to fulfil the pressing need of a centralised system.
Two formats of reporting – The Committee on Business Responsibility Reporting has proposed two formats for reporting – a ‘comprehensive format’ and a ‘lite version’ along with guidance notes. The comprehensive format is meant to gather details on the businesses’ employee strength, CSR activities, product range, the exact location of the company and its close proximity with water bodies and an environmentally sensitive and protected area. The format also concerns itself with leadership and governance polices of the business along with a ‘Principle-Wise Performance’ criteria. The ‘lite version’, on the other hand is a simpler format for new companies. This shorter format will act as a helping hand for those companies who are new entrants in SR. Further, the guidance notes provide clarity and keep companies from wrongfully interpreting the reporting criteria.
Addressing the challenges of compliance with international standards – The Global Reporting Initiative (GRI) framework is considered as a standard form of SR all around the globe. Though this standard format has been successful in a large number of countries, it still contains some major shortcomings. Since the GRI aims to create a common language for organisations all over the word, it gives rise to complex and lengthy procedures. The GRI is also susceptible to wide range of interpretations of the reporting criteria. So, the primary challenge with SR is the compliance with international standards resulting in production of long and inaccessible reports due to the huge organisational commitments of big corporate houses. So, the formats, both the comprehensive and the ‘lite version’, which is proposed by the MCA make the reporting procedure easy yet comprehensive.
Principle-Wise Performance – The Principle-Wise Performance rests on nine thematic pillars of business responsibility. A set of quantitative variables have been chosen for seeking disclosures from the businesses. In the case of subjective issues, qualitative responses have been asked for. It is through these principles that adequate human rights disclosures have also been added. Principle 3, for instance, aims to foster the respect and welfare of all employees. It covers all policies and practices related to the well-being of employees engaged in businesses. Therefore, SR also aims to ensure corporate respect to human rights by attempting to break down barriers to sustainable development and lift people out of poverty, discrimination, abuse and ultimately transform their lives. Principle 5 is yet another mandate that demands businesses to respect and promote human rights. This very well establishes the point that economic growth and increased business activity cannot be at the expense of social and human development.
Consumer Complaints Data – A new section that has been added is with respect to the consumer complaints data. The proposed format asks for the number of consumer complaints received at the beginning and towards the end of the year. It also seeks granular details on the pending complaints as well as the company’s plan for their resolution. In this way the new framework ensures efficiency of businesses in addressing consumer disputes. The framework helps businesses in maintain a steady and loyal consumer base.
E-filling of the reports – With the growing digitization and electronic mode of transactions all over the word, the online system of SR, as proposed in the format is a positive step. Along with that the proposed formats will have an integration with the MCA21 portal which will result in the automatic filling of the data that is already present in the database. Thus, the MCA framework establishes a mechanism to ease the filing of reports.
Challenges which continue to be unaddressed
Who is the Reporting Authority? – The current MCA Report raises the primary question on the reporting authority. SEBI via the Regulation 34 (2) of the SEBI (LODR) Regulations, 2015 provides for business reporting for 1000 listed entities. So, until now, the reporting authority which monitored the non-financial reporting was SEBI. But the recommended report by MCA mandates the filing of the SR in the MCA21 portal so there is likely to be an uncertainty on who is the reporting authority. Additionally apart from section 135 of the Companies Act, 2013, there is no other provision that explicitly deals with environmental and social concerns. Therefore, a need arises for an amendment in either the Act or in the Rules for incorporation of a specific provision to address the issue.
Lack of Uniformity across different Jurisdictions – One of the concerns of SR is the lack of uniformity in the accounting standards across the globe. It means that a company’s information asked in one jurisdiction might be considered as confidential and unavailable to the public at large in another jurisdiction. This uncertainty has not been addressed by the MCA report.
Tussle between Voluntary and Mandatory Reporting – The issue of voluntary and mandatory reporting still remains a challenge even after the MCA report. Although the report aims to extend the applicability of SR to all companies and LLPs, a mandatory compliance clause has still not been proposed. A mandatory requirement for some top companies while a voluntary approach for the rest does not fulfil the purpose of SR since it is a collective endeavor which is extremely important for developing countries like India.
The growing importance of SR ensures that businesses recognise their environmental and social responsibilities. Not only does SR help business to sustain, it also helps banks, credit rating agencies and other financial institutions to check the performance of the companies they would be dealing with.
The MCA Report, in spite of certain shortcomings, highlights the importance of SR in the Indian Economy. This report is a major milestone that will align the country’s sustainable development goals. It will provide the much desired accuracy and quality to SR. This simple yet comprehensive source of SR will indeed lessen the reporting burden and the cost of compliance that is generally borne by the businesses. It would thus make India an attractive destination for investors and will lead to inclusive development of the companies.
[] Priyanka Jaiswal is a Final year law student at National University of Study and Research in Law, Ranchi. Her interest lies in Corporate Law.
Preferred Citation – Priyanka Jaiswal, “Analyzing the System of Sustainability Business Reporting in the light of MCA’s Proposed Framework”, Arbitration & Corporate Law Review, Published on 3rd November, 2020.
This article was reviewed by Snehal Dhote and Yagnesh Sharma