Introduction
Global warming, climate change, social degradation, and the economic crisis are posing serious threats to the organizations survival. Day by day, management is striving to be transparent and accountable to various stakeholders of the organization in order to preserve their reputation and brand image. Financial disclosure and good corporate governance are on one side of the coin, but the other side is the sustainable practices of companies. In this context, ESG reporting has become crucial for organizations to survive. In the global arena, there are many ESG reporting frameworks, such as GRI, TCFD, SASB, CDP, etc. In India, the BRSR (Business Responsibility and Sustainability Report) is one such mandate by SEBI, where the top 1000 listed companies based on their market capitalization are required to report on various environmental, social, and governance aspects of the organization. Meanwhile, 96% of industrial units in India comprise MSMEs; hence, it's important for MSMEs to monitor the procedures and integrate their sustainable practices in alignment with BRSR. In this backdrop, let's try to understand the significance of BRSR in Indian MSMEs.
MSMEs in India
The term MSME (micro, small, and medium enterprises) was coined by the Government of India in accordance with the MSME Development Act of 2006 and is considered the backbone of the Indian economy. The projected growth of MSME's in India is expected to grow from 6.3 crores to approximately 7.5 crores in the coming years. They are a vital part of the Indian economic system, contributing to the development of GDP and helping to create employment opportunities. They are considered the most significant segment that will contribute immensely to achieving the 17 Sustainable Development Goals by the United Nations Department of Economic and Social Affairs (UN DESA) Report.
Evolution of BRSR in India
Non-financial reporting in India started in 2009 through voluntary guidelines on CSR by the Ministry of Corporate Affairs. This was the first step in India that was aimed at aligning sustainable practices into the regular business activities of organizations. The improvised version of the CSR report, called the Business Responsibility Report (BRR), was made mandatory for the top 100 listed companies in 2012. In 2021, a more concrete reporting structure by taking ESG aspects into consideration, the Business Responsibility and Sustainability Report (BRSR), was developed and made mandatory from the financial year 2022-23 for the top 1000 listed companies based on their market capitalization. Alongside top-listed companies, SEBI is urging listed SME's (small and medium enterprises) and other unlisted companies to voluntarily report on sustainable practices through BRSR Lite, which is a simpler version compared to BRSR Comprehensive.
Need for MSMEs to align with BRSR
Based on the above discussion, it is evident that MSMEs play a pivotal role in the Indian economy. As per Principle 8—Essential Indicator 4 of BRSR, it calls for details regarding inputs directly sourced from MSME's. This shows how small and medium enterprises are given utmost importance, and the data relating to procurement is captured in BRSR. On the other side, it is also the duty of large organizations to see that the supply chain they are dealing with is also sustainable. Hence, going on, MSME's have to focus on their sustainable practices to be in the race. At present, many MSME's who are dealing in cross-border transactions are complying with the reporting requirements based on the countries they deal with. To ease the process and bring uniformity to the reporting structure, SEBI is promoting reporting BRSR Lite for the companies. Integrating non-financial reporting may pose a huge challenge to small and medium firms due to the high cost and deployment of resources associated with it. But once the system sets in, returns will be higher in the long run. Let's try to analyze how MSME's can report on and benefit from the nine principles of BRSR.
Principle 1: Businesses should conduct and govern themselves with integrity and in a manner that is ethical, transparent, and accountable
This principle speaks about how organizations can plan their activities in the most sustainable and ethical manner. Transparency and accountability in operations will help organizations stand ahead of the crowd and build their unique domain. It highlights the importance of internal control systems and avoiding conflicts of interest in the organization.
Principle 2: Businesses should provide goods and services in a manner that is sustainable and safe
This principle highlights the importance of sustainable and safe production practices for organizations. Cradle to Grave should be replaced with Cradle to Cradle, where the product life cycle will be increased, resulting in less waste and a lower environmental impact. The products manufactured should be safe for consumption as well. Sustainable sourcing, EPR (Extended Producer Responsibility), and life-cycle assessment of products are the important aspects of this principle.
Principle 3: Businesses should respect and promote the well-being of all employees, including those in their value chains
This principle focuses on the well-being and safe working conditions of employees, as well as temporary workers. It speaks about minimum wages, retirement benefits, training and development, and equal opportunities for employees (including disabled employees) and workers. It also emphasizes the involvement of all the members in the value chain, including suppliers, contractors, etc.
Principle 4: Businesses should respect the interests of and be responsive to all their stakeholders
Stakeholder engagement is one of the most important aspects of any sustainable activity in the company. The committee has to see that both internal and external stakeholders are part of the process. They have to be consulted in designing the process, its execution, and also for feedback on the set mechanisms.
Principle 5: Businesses should respect and promote human rights
This principle highlights the importance of human rights protection in organizations. Equal opportunities should be provided to all, irrespective of caste, nationality, or any other status. There has to be freedom of expression without any bias, and for this to happen, a well-defined whistleblower policy has to be in place.
Principle 6: Businesses should respect and make efforts to protect and restore the environment
Businesses don't run in a vacuum; they are part of the ecosystem. Hence, it's the duty of the organization to see that they are not degrading the environment due to their business activities. Organizations should strive continuously to save the environment by reducing the use of natural resources and shifting to renewables. Environmental stewardship is a need of the hour in this dynamic economy.
Principle 7: Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent
Every business should comply with and work within the relevant national and international frameworks that regulate their boundaries. This principle focuses on the importance of organizations getting associated with local authorities and working together for the public good. Organizations should be part of the local authorities and help them in the formulation and regulation of trade policies.
Principle 8: Businesses should promote inclusive growth and equitable development
This principle focuses on the importance of equitable economic growth. It speaks about the importance of community inclusiveness in which the company operates. The organization should see that the whole community, even the marginalized sector, is promoted for development and in alignment with the policies.
Principle 9: Businesses should engage with and provide value to their consumers in a responsible manner
Businesses should provide safe products and services to their consumers. Labeling should list the contents of the product in a transparent manner. Any product recalled should be communicated to customers, and a feedback mechanism should be in place.
Conclusion
It's abundantly clear from the above discussion that MSMEs play a major role in the development of the Indian economy. Climate change is evident, and its protection is inevitable. Organizations that form a major subset of the ecosystem have to start addressing this issue. A great move from SEBI in regard to the BRSR mandate is a welcoming approach. BRSR has costs, time, and resources associated with its execution, monitoring, and reporting processes. MSMEs may face a huge challenge in adapting to this cumbersome process of BRSR reporting. But to get global exposure and to be on the list of sustainable and ethical businesses, adherence to reporting is inevitable. Sustainability reporting for MSME's is in the nascent stage and is on a voluntary basis, but the enterprises that start inculcating sustainable practices at this juncture will surely have a cutting edge in the long run compared to their competitors. Hence, it's the right time for the MSME's to opt for sustainable practices and to be in the race.
The author is a practicing Chartered Accountant with an MBA in Finance and a PhD in the area of sustainability reporting, with 15+ years of work experience in the areas of sustainability, internal audit, statutory audit, income tax, GST, and an inclination towards academics. He handles business practice sessions at Jain University and Manipal University. "ESG GRI 2021 standards" certified professional from KPMG and Pursuing "Sustainable Investing" certification from Harvard Business School. Principal Consultant at BhumiMithr Sustainability Solutions Pvt Ltd, Newtral.io, and Date Your Planet, guiding them in the areas of circular economy, carbon accounting, and sustainability reporting.
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