SEBI’s ESG Disclosure Mandates: Unveiling the Value Chain

In recent years, Environmental, Social and Governance (“ESG”) factors have garnered significant attention from investors, regulators, and stakeholders worldwide due to several reasons. Investors, customers, employees, and other stakeholders are increasingly demanding greater transparency and accountability from companies regarding their ESG performance. ESG factors are being recognised as material risks that can impact a company’s long-term financial performance and sustainability. Companies with strong ESG performance and transparent disclosures differentiate themselves in the market with enhanced reputation, resultantly building stakeholder trust. Comprehensive ESG disclosures are allowing companies to identify and manage risks related to environmental and governance issues and social factors and address them proactively.

Recognising the importance of ESG considerations in corporate governance and sustainable business practices, the Securities and Exchange Board of India (“SEBI”) has mandated listed entities to make certain disclosures.

SEBI’s BRSR framework and its objectives:

In May 2021[1], SEBI introduced Business Responsibility and Sustainability Reporting (“BRSR” format), mandating the top 1,000 listed companies to file BRSR as part of the Annual Report with SEBI from FY22-23 onwards, by amending Regulation 34 (2) (f) of SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 (“LODR Regulations”).

Regulation 34 (2) (f) of LODR Regulations was amended again vide gazette notification no. SEBI/LAD-NRO/GN/2023/131, dated June 14, 2023[2], to introduce reasonable assurance on BRSR Core attributes and value chain disclosure for BRSR Core. Consequently, vide circular No. SEBI/HO/CFD/CFD-SEC-2/P/CIR/2023/122, dated July 12, 2023[3], SEBI introduced the BRSR Core framework for assurance and ESG disclosures for value chain. BRSR Core is a sub-set of the SEBI BRSR format. BRSR Core consists of several additional Key Performance Indicators (“KPIs”) under nine ESG attributes (that are integrated with the original BRSR reporting format)), inter-alia, Green-house gas footprint, Water footprint, Energy footprint, Enabling Gender Diversity in Business, and others[4], and mandates listed companies to disclose them. The requirement to undertake reasonable assurance of BRSR Core applies to the top 150 listed entities (by market capitalisation) for FY23-24, and will gradually extend to the top 1000 listed entities by FY26-27. The circular further requires the top 250 listed companies by market capitalisation to disclose BRSR Core information for their value chain in their Annual Reports for FY24-25 on a comply-or-explain basis. The value chain should include major upstream and downstream partners, accounting for 75% of the entity’s purchases or sales by value. The reporting of KPIs in the BRSR Core by the listed entities, for their value chain, is up to the extent it is attributable to their business.

Value chain integration in BRSR disclosures:

A company’s value chain encompasses the entire lifecycle of its products or services, from the sourcing of raw materials and components to the distribution and end-of-life management of its offerings. A significant portion of a company’s ESG impact occurs beyond its direct operations, across its upstream and downstream value chain. A company’s direct operations represent only a fraction of its overall environmental and social impacts. Further, ESG risks, such as human rights violations, detrimental impact to the environment etc., can occur at various stages of the value chain, including suppliers, contractors, or distribution channels. The inclusion of value chain will provide a more holistic view of a company’s ESG performance and its sustainability footprint.

The disclosure of value chain impacts has indirectly brought unlisted companies, including small and medium enterprises (“SMEs”), into the fold of ESG reporting and accountability. This requirement for listed entities to report on their value chain has created a ripple effect, compelling large companies to leverage their influence and engage with their suppliers, distributors, and other value chain partners. Consequently, this mandate has the potential to create a multiplier effect, driving ESG awareness far beyond listed companies. As large corporations strive to meet the value chain disclosure requirements, they will inevitably exert pressure on their unlisted value chain partners to improve their ESG performance and provide relevant data. This will catalyse the adoption of sustainable practices and reporting among SMEs and other unlisted companies, which are directly not subject to ESG disclosures regulations. By assessing and disclosing value chain impacts, companies along with their suppliers, distributors and partners will help drive sustainable improvements and have competitive advantage in the market in terms of brand reputation and customer loyalty. Companies that effectively manage and disclose their value chain impacts will be able to gain customer trust and establish themselves as responsible and sustainable businesses.

Therefore, by incorporating value chain considerations into their ESG disclosure practices, companies will be able to demonstrate a comprehensive understanding of their sustainability impact, mitigate risks, meet stakeholders’ expectations, and drive positive changes across the value chain.

Implications for Listed Companies:

Under the SEBI framework, listed companies are mandated to include ESG disclosures of their value chain on a “comply-or-explain” basis. While listed companies have the option to explain non-disclosure of inclusion of value chain partners, they will be expected to demonstrate progress over time rather than relying on the explanation perpetually. The framework will place significant pressure on listed companies to include ESG disclosures of value chain partners over time.

Whilst the implications of non-compliance are not clear, there will be potential challenges that listed companies may face when it comes to disclosing value chain information and ensuring compliance with sustainable practices across their suppliers, distributors, and other partners.

  1. Indirect mandate, direct enforcement
    • Since the mandate of ESG disclosure is indirect on value chain partners, reporting entities will have to take measures to enforce this, by entering into a contractual obligation through the supplier code of conduct or clauses within the supplier contract.
  2. Resistance from value chain partners
    • Suppliers, distributors, and other value chain partners may be reluctant to share sensitive information or disclose figures related to ESG performance. This could be due to concerns related to confidentiality, competitive advantages, or lack of understanding of such disclosures.
    • Companies may face pushback or resistance when attempting to impose new agreements, obligations or audits related to sustainable practices.
  3. Complexity of Value Chain Mapping and Data Collection
    • Mapping and assessing the ESG impact across the value chain will be complex and resource-intensive, particularly for companies with extensive global supply chains.
    • Collecting accurate and reliable data from multiple tiers of suppliers and partners will be challenging and may also lead to inconsistent, incomplete, or inaccurate disclosures.
  4. Capacity Building and Training Needs
    • Value chain partners may lack the necessary expertise, resources, funds, or systems to measure, manage and report on ESG performance.
    • Significant investments may be required in capacity building, training, and implementing robust data management systems to meet the disclosure requirements.
  5. Increased Compliance and Monitoring Cost
    • Ensuring compliance across the value chain may require additional audits, certifications, or third-party verifications.
    • Companies may have to allocate resources to monitor and enforce compliance with sustainability standards among their suppliers and partners.
    • These additional costs may prove to be a burden and impact profitability and competitiveness, especially for smaller value chain partners.
  6. Legal and contractual implications
    • Incorporating ESG requirements into suppliers’ contracts or distribution agreements may necessitate legal reviews and revisions, which could be a time consuming and complex exercise.
    • There is a risk of suppliers providing false declarations or inaccurate disclosures.
    • There may be an uptick in litigation if suppliers or partners fail to comply with new sustainability obligations or if disclosures are found to be inaccurate or misleading. There may also be potential conflict, leading to disruption of services between the value chain partners and companies. As a result, some value chain partners may choose to exit from the company’s ecosystem due to disclosure requirements, which may prove cumbersome for them.
  7. Reputational and operational risks
    • If a company’s value chain partners are found to be engaging in unsustainable or unethical practices, it could have reputational consequences for the listed company, leading to consumer backlash, loss of investor confidence or regulatory scrutiny. This can limit the number of value chain partners reporting entities can do business with, leading to cost implications.
    • Disruptions in the supply chain due to non-compliance with sustainability standards could also impact operational continuity and financial performances.

Managing challenges:

To mitigate these challenges, listed companies should adopt a collaborative approach with their value chain partners, providing clear guidance and support and consider incentives or capacity- building initiatives to encourage compliance with sustainable practices. Additionally, robust due diligence, risk assessment, and continuous monitoring mechanisms should be established to ensure accurate and transparent value chain disclosures. Listed entities may also consider offering various incentives and value propositions to their value chain partners to mitigate the challenges associated with ESG disclosures. Preferential pricing, discounts and favourable terms may be offered to value chain partners to motivate them to invest in sustainable practices. Listed entities can also ensure awarding larger business volumes or longer-term contracts to companies that meet specific ESG criteria or have achieved predetermined sustainability targets. Companies can also facilitate access to financing or preferential credit facilities for value chain partners that actively engage in ESG reporting and implement sustainable initiatives. Assistance by listed entities may also be offered through capacity building programmes, training, technical support to value chain partners, thus fostering a shared understanding of ESG requirements. Lastly, public acknowledgment and recognition can also enhance partners’ reputation and provide a competitive advantage to value chain partners who excel in ESG performance.

Penal provisions applicable if companies provide inaccurate or misleading disclosures:

Under LODR Regulations

While there are no penalties specified for listed companies specifically for inaccurate ESG disclosures, Regulation 98 of LODR Regulations deals with liability for contravention of the Act, rules or the regulations. Regulation 98 is reproduced below:

“Liability for contravention of the Act, rules or the regulations.

98. (1) The listed entity or any other person thereof who contravenes any of the provisions of these regulations, shall, in addition to liability for action in terms of the securities laws, be liable for the following actions by the respective stock exchange(s), in the manner specified in circulars or guidelines issued by the Board:

(a) imposition of fines;

(b) suspension of trading;

(c) freezing of promoter/promoter group holding of designated securities, as may be applicable, in coordination with depositories.

(d) any other action as may be specified by the Board from time to time

(2) The manner of revocation of actions specified in clauses (b) and (c) of sub-regulation (1), shall be as specified in circulars or guidelines issued by the Board.”

The potential consequences under the LODR Regulationsinclude liability under securities law and actions by the respective stock exchanges, which can result in significant monetary fines, trading suspensions, freezing of promoter/ promoter group’s holding of securities and such other actions as may be notified by the SEBI from time to time.

Under FUTP Regulation

    In addition to facing liability under LODR Regulations, listed companies may also face repercussions under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (“FUTP Regulation”), ifthe ESG disclosures influence investor decisions (in securities of the listed company[5]) and the disclosure constitutes as “fraud”, as defined under the FUTP Regulation. “Fraud” under the FUTP includes a representation made in a reckless and careless manner, whether true or false[6], and any act or omission declared specifically fraudulent by any other law.[7]

    • Regulation 3(d) of FUTP Regulation bars any person from engaging in any act, practice, course of business, which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognised stock exchange in contravention of the provisions of the Act[8] or the rules and the regulations made thereunder;
    • Regulation 4(2)(a) deals with knowingly indulging in an act which creates false or misleading appearance of trading in the securities market;
    • Regulation 4(2)(f) deals with knowingly publishing or causing to publish or reporting or causing to report by a person dealing in securities any information relating to securities, including financial results, financial statements, mergers and acquisitions, regulatory approvals, which is not true or which he does not believe to be true prior to or in the course of dealing in securities;
    • Regulation 4(2)(k) deals with disseminating information or advice through any media, whether physical or digital, which the disseminator knows to be false or misleading in a reckless or careless manner and which is designed to, or likely to influence the decision of investors dealing in securities;
    • Regulation 4(2)(s) deals with mis-selling of securities or services relating to securities market respectively; and
    • Regulation 11 provides for penalties that listed companies may face if found to have violated the provisions of the FUTP Regulation, which inter-alia includes impounding and retaining the proceeds or securities in respect of any transaction that is in violation or prima facie in violation of the Regulation, suspending the trading of the security found to be or prima facie found to be involved in fraudulent and unfair trade practices in a recognised stock exchange, restraining persons from accessing the securities market and prohibiting any person associated with the securities market to buy, sell or deal in securities, etc.  

    Under Indian Contract Act, 1872, and Companies Act, 2013

    Moreover, value chain partners and others involved in the reporting process may be exposed to liability for fraud as defined under the Indian Contract Act, 1872, and/ or the Companies Act, 2013, if they knowingly provided false information with an intent to deceive. Listed companies could potentially terminate contracts and take legal action against such partners for losses stemming from fraudulent ESG disclosures.

    Conclusion:

    The BRSR framework provides for a standardised reporting format, which will facilitate comparability of ESG disclosures across companies and industries, which will equip stakeholders to make informed decisions based on a company’s ESG performance. Beginning FY25, the top 250 Indian companies will integrate an extensive list of KPIs (grouped under BRSR Core), related to their value chain into their annual BRSR disclosures.

    The inclusion of value chains can help companies identify hotspots and potential risks related to environmental, social or governance issues within their supply chains or distribution networks. This awareness may also prompt companies to take corrective actions and collaborate with value chain partners in addressing issues. To meet the value chain requirements, companies may also have to engage with their suppliers and provide them with guidance, training, and support to improve their ESG performance, which will drive positive change across the entire ecosystem. The requirement to disclose value chain impact can incentivise companies to adopt more sustainable practices and implement responsible sourcing strategies.

    By undertaking to disclose ESG data of value chain partners in their own ESG disclosures, the anticipated risks and challenges that listed companies will be incurring cannot be ignored. If a supplier or value chain partner provides misleading/ false information, it could constitute a breach of contract, potentially leading to disputes where listed entities may seek damages. Incorrect information may also compromise the listed company’s overall ESG rating and could expose the entity to regulatory scrutiny, fines, penalties, and reputational damage. Depending on the severity of the false declarations, listed entities may face the risk of legal actions from investors/ stakeholders. To mitigate these risks, there is a need to incorporate specific clauses in supplier contracts that outline the obligations related to accurate and transparent ESG disclosure, as well as penalties or termination provisions for non-compliance/ default or false declaration. Value chain partners must be encouraged to establish robust whistleblowing and grievance mechanisms that allow for reporting of any suspected false declarations or unethical practices.

    As companies strive to comply with these requirements, legal professionals will play a crucial role in navigating the complex landscape of ESG disclosures. Contract review and drafting to incorporate ESG disclosure requirements and penalties for non-compliance; conducting due diligence and risk assessments of value chain partners will become imperative. In the event of disputes or legal actions arising from false declarations, breach of contracts or inaccurate ESG disclosures involving value chain partners, lawyers will play an important role in litigation proceedings and alternate dispute resolution mechanisms.

    As the importance of ESG disclosures continues to grow, regulatory bodies worldwide may introduce more stringent and harmonised reporting requirements. The adoption of advanced technologies, such as artificial intelligence, blockchain and data analytics is expected to enhance the accuracy, transparency, and efficiency of ESG data collection and reporting. Robust data management systems will become crucial for companies to effectively manage and disclose their ESG performance.

    Overall, SEBI’s BRSR framework and value chain disclosure mandate are significant steps towards promoting transparency and driving a positive change within the value chain. As ESG reporting continues to evolve, companies should proactively adopt best practices, leverage technological advancements, and engage with stakeholders to meet the growing expectations of transparent and impactful ESG disclosures.


    [1] SEBI | Business responsibility and sustainability reporting by listed entities

    [2] SEBI | Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023.

    [3] SEBI | BRSR Core – Framework for assurance and ESG disclosures for value chain

    [4] Annexure_I-Format-of-BRSR-Core_p.pdf (sebi.gov.in)

    [5] Regulation 2(1)(b)(ii) of FUTP regulation

    [6] Regulation 2(1)(c)(5) of FUTP regulation

    [7] Regulation 2(1)(c)(6) of FUTP regulation

    [8]  Securities and Exchange Board of India Act, 1992

    Photo of Bose Varghese Bose Varghese

    Mr. Varghese heads the Firm’s ESG Practice. Leading an integrated team of lawyers and ESG experts. Mr. Varghese advises and helps clients navigate the ESG space that is rapidly transforming under new regulations. He can be reached at bose.varghese@cyrilshroff.com.

    Photo of Faraz Alam Sagar Faraz Alam Sagar

    Partner in the Disputes, Regulatory, Advocacy and Policy Practice at the Mumbai office of Cyril Amarchand Mangaldas. Faraz has significant experience in the areas of commercial litigation and investment dispute arbitrations. He regularly advises multinational corporations and financial institutions in a wide range…

    Partner in the Disputes, Regulatory, Advocacy and Policy Practice at the Mumbai office of Cyril Amarchand Mangaldas. Faraz has significant experience in the areas of commercial litigation and investment dispute arbitrations. He regularly advises multinational corporations and financial institutions in a wide range of contentious disputes including investigations, litigation and regulatory enforcement proceedings in India. Faraz also has considerable expertise in telecom disputes, white-collar, forensic and corporate espionage investigations. He can be reached at faraz.sagar@cyrilshroff.com

    Photo of Pallavi Choudhary Pallavi Choudhary

    Principal Associate designate in the Dispute Resolution & White Collar Crimes practice at the Mumbai office of Cyril Amarchand Mangaldas. Pallavi focuses on cross border issues and litigation, involving enforcement of petitions and advisory pertaining to Hague Evidence Convention, regulatory compliance, and international…

    Principal Associate designate in the Dispute Resolution & White Collar Crimes practice at the Mumbai office of Cyril Amarchand Mangaldas. Pallavi focuses on cross border issues and litigation, involving enforcement of petitions and advisory pertaining to Hague Evidence Convention, regulatory compliance, and international enforcement proceedings in India. She can be reached at pallavi.choudhary@cyrilshroff.com.