CHAPTER – 25 RISK MANAGEMENT

INTRODUCTION

MEANING OF RISK
Risk may also be defined as the possibility that an event will occur and
adversely affect the achievement of the Company’s objectives and goals.
A business risk is the threat that an event or action will adversely affect an
organisation’s ability to achieve its business objectives/targets.

The other definitions of risks from various perspectives are as under:

Generic: ‘A probability or threat of damage, injury, liability, loss, or any
other negative occurrence that is caused by external or internal
vulnerabilities, and that may be avoided through pre-emptive action.’
Finance Perspective: ‘The probability that an actual return on an investment will be lower
than the expected return. Financial risk is divided into the following categories: Basic risk,
Capital risk, Country risk, Default risk, Delivery risk, Economic risk, Exchange rate risk,
Interest rate risk, Liquidity risk, Operations risk, Payment system risk, Political risk,
Refinancing risk, Reinvestment risk, Settlement risk, Sovereign risk, and Underwriting risk.’
Food industry: ‘The possibility that due to a certain hazard in food there will be an negative
effect to a certain magnitude.’
Insurance: A situation where the probability of a variable (such as burning down of a building)
is known but when a mode of occurrence or the actual value of the occurrence (whether the fire
will occur at a particular property) is not.
Securities trading: The probability of a loss or drop in value. Trading risk is divided into two
general categories: (1) Systemic risk affects all securities in the same class and is linked to the
overall capital-market system and therefore cannot be eliminated by diversification. Also called
market risk. (2) Non-systematic risk is any risk that isn’t market-related or is not systemic. Also
called non-market risk, extra-market risk, or unsystemic risk.
Classification of risks

Risk may be classified according to controllability, i.e controllable risk and uncontrollable risk.
In other words, the controllable risk is categorised as unsystematic risk and uncontrollable risk
is categorised as systematic risk. The concept of controllable and uncontrollable risk may be
further explained as under:

Systematic risk:
o It is uncontrollable by an organisation.
o It is not predictable.
o It is of macro nature.
o It affects a large number of organisations operating under a similar stream.
o It cannot be assessed in advance.
o It depends on the influence of external factors on an organisation which are normally
uncontrollable by an organisation.
o The example of such type of risk is interest rate risk, market risk, purchasing power
risk.
Unsystematic risk:

o It is controllable by an organisation.
o It is predictable.
o It is micro in nature.
o It affects the individual organisation.
o It can be assessed well in advance and risk mitigation can be made with proper planning
and risk assessment techniques.
o The example of such risk is business risk, liquidity risk, financial risk, credit risk,
operational risk.

Types of risks

The risk may broadly be segregate as financial risk and non-financial risk.

Financial risk: the risk which has some financial impact on the business entity is treated as
financial risk. These risks may be market risk, credit risk liquidity risk, operational risk, legal
risk and country risk. The following chart depicts the various types of financial risks.
 TYPES OF FINANCIAL RISK

Political Risks: Interest rate risk: the financial

assets which are connected with
These risks relate to political uncertainties interest factors such as bonds/
namely: Elections, War risks, Country/Area debentures, faces the interest rate
risks, Insurance risks like fire, strikes, riots risk. Interest rate risk adversely
and civil commotion, marine risks, cargo affects value of fixed income
risks, etc. And Fiscal/Monetary Policy Risks securities. Any increase in the
including Taxation risks.
interest reduces the price of bonds
and debts instruments in debt
market and vice versa. So it can be
Liquidity Risks: said that the changes in the
interested rates have an inverse
These are financial risk factors namely: relationship with the price of bonds.

1. Financial solvency and liquidity risks

2. Borrowing limits, delays
3. Cash/Reserve management risks
4. Tax risks. Currency risk: the volatility in the
currency rates is called the currency
risk. These risks affect the firms
which have international operations
of business and the quantum of the
risk depends on the nature and
extent of transactions with the
Credit Risks:
external market.
These risks relate to commercial operations
namely:
Creditworthiness risks
Equity risk: it means the
Risks in settlement of dues by clients depreciation in one’s investment
due to the change in market index.
Beta (β) of a stock tells us the
market risk of that stock and it is
Legal Risks:
associated with the day-to-day
These risks relate to the following Contract fluctuations in the market.
risks, Contractual Liability, Frauds, Judicial
risks and Insurance risks.

Non-financial risk: this type of risk does not have immediate financial impact on the business,
but its consequence are very serious and later may have the financial impact. This type of risk
may include, business/industry & service risk, strategic risk, compliance risk, fraud risk,
reputation risk,
 TYPES OF NON-FINANCIAL RISK:

Disaster risk: on account of natural Industry & Services Risks:

calamities like floods, fire, earthquake, man-
made risks due to extensive exploitation of These risks can be broadly
land for mines activity, land escalation, risk of categorised as follows, namely:
failure of disaster management plans
Economic risks
formulated by the company etc
Services risks
Market structure
Business dynamics
Competition risks
Customer relations risks
Compliance risk: this risk arises on account Reputational risk
of non-compliance of breaches of laws/
regulations which the entity is supposed to
adhere. It may result to deterioration to public
reputation, penalty and penal provisions

Transaction risk: transaction risk

arises due to the failure or
inadequacy of internal system,
information channels, employees
integrity or operating processes.

Fraud risk: fraud is perpetrated through the

abuse of systems, controls, procedures and
working practices. It may be performed by the
outsider or even from the insider. Often the
most trusted employee attempt to do this.
Fraud may not be detected immediately, but is
still usually discovered by chance, but the Reputation risk: this type of risk
detection should be proactive rather than arises from the negative public
reactive. opinion. Such type of risk may arise
from the failure to assess and
control compliance risk and can
result in harm to existing or
potential business relationships.
Audit Risk
Audit risk is the risk that financial statements are materially incorrect, even though the audit
opinion states that the financial reports are free of any material misstatements. The purpose of an
audit is to reduce the audit risk to an appropriately low level through adequate testing and sufficient
evidence.
Over the course of an audit, an auditor makes inquiries and performs tests on the general ledger
and supporting documentation. If any errors are caught during the testing, the auditor requests that
management propose correcting journal entries. At the conclusion of an audit, after any corrections
are posted, an auditor provides a written opinion as to whether the financial statements are free of
material misstatement. Auditing firms carry malpractice insurance to manage audit risk and the
potential legal liability.
Types of Audit Risks
The two components of audit risk are the risk of material misstatement and detection risk. Assume,
for example, that a large sporting goods store needs an audit performed, and that a CPA firm is
assessing the risk of auditing the store’s inventory.
Risk of Material Misstatement
The risk of material misstatement is the risk that the financial reports are materially incorrect
before the audit is performed. In this case, the word “material” refers to a dollar amount that is
large enough to change the opinion of a financial statement reader, and the percentage or dollar
amount is subjective. If the sporting goods store’s inventory balance of $1 million is incorrect by
$100,000, a stakeholder reading the financial statements may consider that a material amount. The
risk of material misstatement is even higher if there is believed to be insufficient internal controls,
which is also a fraud risk.
Detection Risk
Detection risk is the risk that the auditor’s procedures do not detect a material misstatement. For
example, an auditor needs to perform a physical count of inventory and compare the results to the
accounting records. This work is performed to prove the existence of inventory. If the auditor’s
test sample for the inventory count is insufficient to extrapolate out to the entire inventory, the
detection risk is higher.

RISK MANAGEMENT

Any organization, public or private, large or small, faces internal and external uncertainties that
affect its ability to achieve its objectives. The effect of uncertainty on
an organization’s objectives is “risk.” Risk management, commonly
known in the business community as enterprise risk management
(ERM), can provide for the structured and explicit consideration of all
forms of uncertainty in making any decision.

Risk management can enhance the environment for identifying and

capitalizing on opportunities to create value and protect established
value.
The biggest risk is not taking any risk. (Mark Zuckerberg)
 STEPS IN RISK MANAGEMENT

STEP – 1 RISK IDENTIFICATION

STEP – 2 RISK ANALYSIS

STEP – 3 RISK ASSESMENT

STEP – 4 RISK MITIGATION

STEP-1 PROCESS OF RISK IDENTIFICATION

An effective risk identification process should include the following steps:
1. Creating a systematic process - The risk identification process should begin with project
objectives and success factors.
2. Gathering information from various sources - Reliable and high quality information is
essential for effective risk management.
3. Applying risk identification tools and techniques - The choice of the best suitable techniques
will depend on the types of risks and activities, as well as organizational maturity.
4. Documenting the risks - Identified risks should be documented in a risk register and a risk
breakdown structure, along with its causes and consequences
5. Documenting the risk identification process - To improve and ease the risk identification
process for future projects, the approach, participants, and scope of the process should be
recorded
6. Assessing the process' effectiveness - To improve it for future use, the effectiveness of the
chosen process should be critically assessed after the project is completed.
SEVEN IDENTIFICATION ESSENTIALS
1. Team Participation:
Face-to-face interactions between project managers and the team promise better and more
comprehensive communication. The team must feel comfortable to share and find hidden or
elusive risks.
2. Repetition
Information changes appears as the risk management process proceeds. Keeping identified risks
current and updated means the system is focused on mitigating the most prevalent issues.
3. Approach
Certain objectives require distinct approaches to best combat identification failure. One method is
to identify all root causes, undesirable events and map their potential impacts. Another is to
identify essential performance functions the project must enact, then find possible issues with each
function or goal. Both methods work well, but the latter may be easier due to its defined scope.
4. Documentation
Consistent and exhaustive documentation leads to comprehensive and reliable solutions for a
specific project or future risk management team's analysis. Most communication is recorded by a
project manager and data is copied, stored, and updated for continued risk prevention.
5. Roots and Symptoms
It is essential in the risk identification phase to find the root causes of a risk instead of mistaking
them with the symptoms. A symptom can be confused with the root cause, making it critical to
discover the origin of risks and denote what are their symptoms. Other essentials of risk
identification involve the analysis phase. This is where identified risks are further researched and
understood.
6. Project Definition Rating Index (PDRI)
PDRI is a risk assessment tool that helps develop mitigation programs for high-risk areas. It
facilitates the team's risk assessment within the defined project scope, budget and deadlines. It also
provides further detail of individual risks and their magnitude, represented by a score. The
summation of scores is statistically compared to the project performance as a certainty level for
the entire project
7. Event Trees
Commonly used in reliability studies and probabilistic risk assessments, event trees represent an
event followed by all factors and faults related to it. The top of the tree is the event and it is
supported by any condition that may lead to that event, helping with likelihood visibility.
Risk identification is the first step towards risk minimization and understanding. If a risk isn't
discovered in the first phase, it may be found and included later due to the nature of risk
identification. It is a non-stop process involving teamwork and communication.
SWOT ANALYSIS
A useful tool for systematic risk identification is SWOT analysis. It consisting of four elements:
Strengths - Internal organizational characteristics that can help to achieve project objectives.
Weaknesses - Internal organizational characteristics that can prevent a project from achieving its
objectives
Opportunities - External conditions that can help to achieve project objectives
Threats - External conditions that can prevent a project from achieving its objectives.
STEP-2 RISK ANALYSIS
After identification of the risk parameters, the second stage is of analyzing the risk which helps to
identify and manage potential problems that could undermine key business initiatives or projects.
To carry out a Risk Analysis, first identify the possible threats and then estimate the likelihood
that these threats will materialize. The analysis should be objective and should be industry specific.
Within the industry, the scenario based analysis may be adopted taking into consideration of
possible events that may occur and its alternative ways to achieve the given target. Risk Analysis
can be complex, as it requires to draw on detailed information such as project plans, financial data,
security protocols, marketing forecasts and other relevant information. However, it's an essential
planning tool, and one that could save time, money, and reputations.
Use of Risk Analysis
• Risk analysis is useful in many situations:
• While planning projects, to help in anticipating and neutralizing possible problems.
• While deciding whether or not to move forward with a project.
• While improving safety and managing potential risks in the workplace.
• While preparing for events such as equipment or technology failure, theft, staff sickness, or
natural disasters.
How to Use Risk Analysis
To carry out a risk analysis, follow these steps:
Identify Threats
The first step in Risk Analysis is to identify the existing and possible threats that one might face.
These can come from many different sources.
Estimate Risk
Once the threats are identified, it is required to calculate both the likelihood of these threats being
realized, and their possible impact.
One way of doing this is to make best estimate of the probability of the event occurring, and then
to multiply this by the amount it will cost to set things on the right track. This gives a value for the
risk:
Risk Value = Probability of Event x Cost of Event
As a simple example, imagine that a risk has been identified that your rent may increase
substantially.
You think that there's 80 percent chance of this happening within the next year, because your
landlord has recently increased rents for other businesses. If this happens, it will cost your business
an extra Rs. 500,000 over the next year.
So the risk value of the rent increase is:
0.80 (Probability of Event) x ' 500,000 (Cost of Event) = 400,000 (Risk Value)
You can also use a Risk Impact/Probability Chart to assess risk. This will help you to identify
which risks you need to focus on.
STEP-3 RISK ASSESSMENT
After identifying the risk, the third step is to have an assessment of each of the risk in terms of
quantitatively and qualitatively. In judging the quantitative aspects the tools of the statistical
methods may be used. The management has to take the decision on each of the assessment of the
risk so derived by the various departments of the organisations, since the raw data do not reveal
the clear picture.
STEP-4 RISK MITIGATION
Risk mitigation is defined as taking steps to reduce adverse effects. Risk mitigation is the process
by which an organization introduces specific measures to minimize or eliminate unacceptable risks
associated with its operations. Risk mitigation measures can be directed towards reducing the
severity of risk consequences, reducing the probability of the risk materializing, or reducing the
organizations exposure to the risk.

STRATEGIES FOR RISK MITIGATION

RISKS CAN BE HANDLED BROADLY IN FOUR WAYS:

RISK AVOIDANCE

It is a rare possibility to avoid a risk completely. A riskless situation is rare. Generally risk avoidance
is only feasible at the planning stage of an operation.

RISK REDUCTION

In many ways physical risk reduction (or loss prevention, as it is often called) is the best way of dealing
with any risk situation and usually, it is possible to take steps to reduce the probability of loss. Again, the
ideal time to think of risk reduction measures is at the planning stage of any new project when considerable
improvement can be achieved at little or no extra cost.

RISK TRANSFER

This refers to legal assignment of cost of certain potential losses to another. The insurance of
‘risks’ is to occupy an important place, as it deals with those risks that could be transferred to
an organization that specialises in accepting them, at a price. Usually, there are 3 major means
of loss transfer:

RISK RETENTION
It is also known as risk assumption or risk absorption. It is the most common risk management technique.
This technique is used to take care of losses ranging from minor to major break-down of operation.
There are two types of retention methods for containing losses as under:

1. Risk retained as part of deliberate management strategy after conscious evaluation of possible losses
and causes. This is known as active form of risk retention.
2. Risk retention occurred through negligence. This is known as passive form of risk retention.

ADVANTAGES OF RISK MANAGEMENT

a) Better informed decision making - for example in assessing new opportunities;
b) Less chances of major problems in new and ongoing activities;
and
c) Increased likelihood of achieving corporate objectives.

FRAUD RISKS MANAGEMENT

The term ‘fraud’ is generally defined in the law as an intentional misrepresentation of material
existing fact made by one person to another with knowledge of its falsity and for the purpose of
inducing the other person to act, and upon which the other person relies with resulting injury or
damage.
Section 25 of Indian Penal Code, 1860 defines “Fraudulently”. It says “A person is said to do
a thing fraudulently if he does that thing with intent to defraud but not otherwise.”

For the corporate it becomes more important to proactively incorporate Fraud Management policy
or a plan aligned to its internal control and risk management plan.
The fraud risk management policy will help to strengthen the existing anti-fraud controls by raising
the awareness across the company and:
1. Promote an open and transparent communication culture.
2. Promote zero tolerance to fraud/misconduct.
3. Encourage employees to report suspicious cases of fraud/misconduct.
4. Spread awareness amongst employees and educate them on risks faced by the company.
REPUTATION RISK MANAGEMENT

Reputation is the trust that an organization has gained over the years by the products, services,
brands it has provided to the society. Corporates are at a risk of losing such reputation, reputation
damage are irreparable. It is an intangible asset that is broad and far-reaching and includes image,
goodwill and brand equity. If ruined can devastate the financial health and welfare of an
organization.
REPUTATION LOST WILL DAMAGE:
a) Brand Value
b) Share Price
c) Strategic Relationship
d) Regulatory relationship
e) Recruitment/ Retention

RISK MANAGEMENT AND CORPORATE GOVERNANCE

1. Risk management and corporate governance principles are strongly interrelated. An
organization implements strategies in order to reach their goals. Each strategy has related risks
that must be managed in order to meet these goals. Following strong corporate governance
principles that focus on risk management allows organizations to reach their goals.
2. Risk governance includes the skills, infrastructure (i.e., organization structure, controls and
information systems), and culture deployed as directors exercise their oversight. Good risk
 governance provides clearly defined accountability, authority, and communication/reporting
mechanisms.
3. A process for risk management cannot be initiated unless there is a perception and knowledge
of risk surrounding the business. Businesses evolve and are exposed to change dynamics of
the external environment. Hence it is important to have the risk oversight function, as one of
the areas of responsibility of the board of directors of any enterprise.
4. The Board may form a separate committee to support the board function depending on the
complexities of the business enterprise and the complexities associated with its transactions
and events.
5. It would also depend on the size and extent of delegation of responsibilities by the board of
directors. While everyone understands that risk is all pervasive, risk management must be
voiced from the top and the tone should indicate a serious approach by the top management.
The board shall have to identify the extent and type of risks it faces and the planning necessary
to manage and mitigate the same for ensuring growth for the benefit of all the stakeholders.
Therefore, the Board has to define a risk philosophy and the extent to which it is willing to
accept any consequence of taking of risks by the organization and its functionaries in its day
to day functioning.
6. Board members need to have a good understanding of risk management, even when they lack
expertise in that area. Boards may lean on the expertise of outside consultants to help them
review company risk management systems and analyze business specific risks. Boards should
perform a formal review of risk management systems, at least once in a year.
The ICGN Global Governance Principles which describe the responsibilities of boards and
shareholders respectively and aim to enhance dialogue between the two parties also provides that
it is the responsibility of the board to oversee the implementation of effective risk management
and proactively review the risk management approach and policies annually or with any significant
business change. It provides that one of the major roles of the board is risk oversight.
PRINCIPLES ON RISK OVERSIGHT PROVIDES FOR-
Proactive oversight: The board should proactively oversee, review and approve the approach to
risk management regularly or with any significant business change and satisfy itself that the
approach is functioning effectively. Strategy and risk are inseparable and should permeate all
board discussions and, as such, the board should consider range of plausible outcomes that could
result from its decision-making and actions needed to manage those outcomes.
Comprehensive approach: The board should adopt a comprehensive approach to the oversight
of risk which includes all material aspects of risk including financial, strategic, operational,
environmental, and social risks (including political and legal ramifications of such risks), as well
as any reputational consequences.
Risk culture: The board should lead by example and foster an effective risk culture that
encourages openness and constructive challenge of judgment's and assumptions. The company's
culture with regard to risk and the process by which issues are escalated and de-escalated within
the company should be evaluated at intervals as appropriate to the situation.
Dynamic process: The board should ensure that risk is appropriately reflected in the company's
strategy and capital allocation. Risk should be managed accordingly in a rational, appropriately
independent, dynamic and forward-looking way. This process of managing risks should be
continual and include consideration of a range of plausible impacts.
6
Risk committee: While ultimate responsibility for a company's risk management approach rests
with the full board, having a risk committee(be it a stand-alone risk committee, a combined risk
committee with nomination and governance, strategy, audit or other) can be an effective
mechanism to bring the transparency, focus and independent judgment needed to oversee the
company's risk management approach.
Reporting of fraud by an auditor [Section 143(12) to (15) of the Companies Act, 2013]
Section 143(12) substituted as follows by companies amendment act 2015
Notwithstanding anything contained in this section, if an auditor of a company in the course of the
performance of his duties as auditor, has reason to believe that an offence of fraud involving such
amount or amounts as may be prescribed, is being or has been committed in the company by its
officers or employees, the auditor shall report the matter to the Central Government within such
time and in such manner as may be prescribed:

Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report
the matter to the audit committee constituted under section 177 or to the Board in other cases
within such time and in such manner as may be prescribed:
Provided further that the companies, whose auditors have reported frauds under this sub-section
to the audit committee or the Board but not reported to the Central Government, shall disclose the
details about such frauds in the Board’s reporting such manner as may be prescribed.

Rule 13 of Companies (Audit and Auditors) Amendment Rules, 2015 14th December, 2015

Reporting of frauds by auditor and other matters:

1. If an auditor of a company, in the course of the performance of his duties as statutory auditor,
has reason to believe that an offence of fraud, which involves or is expected to involve
individually an amount of rupees one crore or above, is being or has been committed against
the company by its officers or employees, the auditor shall report the matter to the Central
Government.

2. The auditor shall report the matter to the Central Government as under
• The auditor shall report the matter to the Board or the Audit Committee, as the case may
be, immediately but not later than two days of his knowledge of the fraud, seeking their
reply or observations within forty-five days;
• On receipt of such reply or observations, the auditor shall forward his report and the reply
or observations of the Board or the Audit Committee along with his comments (on such
reply or observations of the Board or the Audit Committee) to the Central
Government within fifteen days from the date of receipt of such reply or observations;
• In case the auditor fails to get any reply or observations from the Board or the Audit
Committee within the stipulated period of forty-five days, he shall forward his report to
the Central Government along with a note containing the details of his report that was
earlier forwarded to the Board or the Audit Committee for which he has not received any
reply or observations;
 • The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover
by Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in
confirmation of the same
• The report shall be on the letter-head of the auditor containing postal address, e-mail
address and contact telephone number or mobile number and be signed by the auditor with
his seal and shall indicate his Membership Number; and
• The report shall be in the form of a statement as specified in Form ADT-4.

3. In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor
shall report the matter to Audit Committee constituted under section 177 or to the
Board immediately but not later than two days of his knowledge of the fraud and he shall
report the matter specifying the following

• Nature of Fraud with description;

• Approximate amount involved; and
• Parties involved.

4. The following details of each of the fraud reported to the Audit Committee or the Board under
sub-rule (3) during the year shall be disclosed in the Board’s Report

• Nature of Fraud with description;

• Approximate Amount involved;
• Parties involved, if remedial action not taken; and
• Remedial actions taken.

5. The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial
Auditor during the performance of his duties under section 148 and section 204 respectively.

Punishment for non-compliance

c) Minimum Fine: Rs. 1,00,000
d) Maximum Fine: Rs. 25,00,000
SECTION 204 OF COMPANIES ACT 2013 PROVIDES FOR SECRETARIAL AUDIT
FOR BIGGER COMPANIES.
Rule 9 of Companies (Appointment and Remuneration of Managing Personnel) Rules, 2014
provides that for the purposes of sub-section (1) of section 204, the other class of companies shall
be as under-
• Every listed company
• every public company having a paid-up share capital of fifty crore rupees or more; or
• every public company having a turnover of two hundred fifty crore rupees or more.
• Every company having loans from banks or PFI 100 crore or more
It shall be the duty of the company to give all assistance and facilities to the company secretary in
practice, for auditing the secretarial and related records of the company.

The Board of Directors, in their report made in terms of sub-section (3) of section 134, shall explain
in full any qualification or observation or other remarks made by the company secretary in practice
in his report under sub-section (1).

Every officer of the company or the company secretary in practice, who is in default, shall be liable to a
penalty of two lakh rupees. (COMPANIES AMENDMENT ACT 2020)
RESPONSIBILITY OF RISK MANAGEMENT
Section 134(3) (n) of the Companies Act, 2013 provides that a statement indicating development
and implementation of a risk management policy for the company including identification therein
of elements of risk, if any, which in the opinion of the Board may threaten the existence of the
company.
SEBI (LODR) Regulations, 2015 also provides that company shall lay down procedures to
inform Board members about the risk assessment and minimization procedures. The Board shall
be responsible for framing, implementing and monitoring the risk management plan for the
company.
The Risk Management Plan must include all elements of risks. The traditional elements of potential
likelihood and potential consequences of an event must be combined with other factors like the
timing of the risks, the correlation of the possibility of an event occurring with others, and the
confidence in risk estimates.
Risk management policies should reflect the company's risk profile and should clearly describe all
elements of the risk management and internal control system and any internal audit function. A
company's risk management policies should clearly describe the roles and accountabilities of the
board, audit committee, or other appropriate board committee, management and any internal audit
function.
A company should have identified Chief Risk Officer manned by an individual with the vision and
the diplomatic skills to forge a new approach. He may be supported by “risk groups” to oversee
the initial assessment work and to continue the work till it is completed.
An integrated approach to risk management deals with various risks as they affect organizational
objectives and limitations. The aim must be to develop a culture of risk awareness and
understanding. This helps better decision making in day-to-day work by all employees.
RISK MANAGEMENT COMMITTEE:
Regulation 21 of SEBI (LODR) Regulations, 2015, requires that every listed company should have
a Risk Management Committee. It reads as under:
1. The board of directors shall constitute a Risk Management Committee.
2. The majority of members of Risk Management Committee shall consist of members of the
board of directors.
3. The Chairperson of the Risk management committee shall be a member of the board of
directors and senior executives of the listed entity may be members of the committee.
4. The risk management committee shall meet at least once in a year.
5. The board of directors shall define the role and responsibility of the Risk Management
Committee and may delegate monitoring and reviewing of the risk management plan to the
 committee and such other functions as it may deem fit [such function shall specifically cover
cyber security].
6. The provisions of this regulation shall be applicable to top [500] listed entities, determined on
the basis of market capitalisation, as at the end of the immediate previous financial year.
ROLE OF COMPANY SECRETARIES IN RISK MANAGEMENT
The company secretaries are governance professionals whose role is to enforce a compliance
framework to safeguard the integrity of the organization and to promote high standards of ethical
behavior. He/ she has a significant role in assisting the board of the organization to achieve its
vision and strategy. The activities of the governance professional encompass legal and regulatory
duties and obligations and additional responsibilities assigned by the employer. However, in
essence, the functions of a governance professional include:

• Advising on best practice in governance, risk management and compliance.

• Championing the compliance framework to safeguard organizational integrity.
• Promoting and acting as a ‘sounding board’ on standards of ethical and corporate behavior.
• Balancing the interests of the board or governing body, management and other stakeholders.

RISK GOVERNANCE

1. There is an enhanced realisation that the risk governance demands a holistic approach and that
risk appreciation should start at the top.
2. A strengthened management information system (MIS) supported by robust information
technology platform is a necessary pre-requisite for enhancing Board efficiency in oversight
and decision making. Similarly, augmented skill sets and experience at the level of independent
directors would go a long way in enhancing the Board capacity. Strong MIS facilitates risk
reporting to the boards in an effective and comprehensive manner, which in turn enhances
transparency and causes informed decision taking.
3. Robust information technology systems are a necessary condition for supporting the MIS
framework as the quality of risk information that the Boards and the top management receive
depends largely on the quality and robustness of the information technology systems.
4. In addition to prescribing the risk appetite for the company, the board also needs to lay down
appropriate risk strategy and ensure that this is institutionalised throughout the organization.
5. This would entail, aligning risk management processes with the overall business strategy,
clearly defining the roles and responsibilities down the hierarchy, establishing accountability
and reinforcing change with communication and training.
6. The Board and the senior management oversight must be supplemented with effective
leadership by the Chairman and the chief executive officer (CEO), and informed non-executive
directors. The Boards must get much more intimately involved in risk matters and have a firmer
understanding of the key risks faced by the business.
7. Effective risk governance also demands that each director is aware of the breadth of risks faced
by the company.
8. Directors add value to the Board when they have financial expertise, are aware of risk
fundamentals and techniques, and are able to manage dynamics with executives.
9. Here, the risk management committees have an important role to play in the overall risk
governance framework. Apart from monitoring the company's strategic-risk profile on an on-
going basis, such committees would also be responsible for defining the company's overall risk
appetite; approving major transactions above a company's risk threshold, and; establishing
limit structures and risk policies for use within individual businesses.

What Do We Mean by Risk Management & Internal Control?

Organizations face a wide range of uncertain internal and external factors that may affect
achievement of their objectives—whether they are strategic, operational, or financial. The effect
of this uncertainty on their objectives can be a positive risk (opportunities) or a negative risk
(threats).

RISK MANAGEMENT focuses on identifying threats and opportunities, while INTERNAL

CONTROL helps counter threats and take advantage of opportunities.

Why are Risk Management and Internal Control Important?

Proper risk management and internal control assist organizations in making informed decisions
about the level of risk that they want to take and implementing the necessary controls to effectively
pursue their objectives.

Risk management and internal control are therefore important aspects of an organization’s
governance, management, and operations. Successful organizations integrate effective governance
structures and processes with performance-focused risk management and internal control at every
level of an organization and across all operations.

However, risk management and internal control are not objectives in themselves. They should
always be considered when setting and achieving organizational objectives and creating,
enhancing, and protecting stakeholder value.

RISK MANAGEMENT FRAMEWORKS AND STANDARDS

The different standards reflect the different motivations and technical focus of their developers,
and are appropriate for different organisations and situations. Standards are normally voluntary,
although adherence to a standard may be required by regulators or by contract.
1. Enterprise Risk Management – Integrated Framework (2004)
In response to a need for principles-based guidance to help entities design and implement effective
enterprise-wide approaches to risk management, Committee of Sponsoring Organizations of the
Treadway Commission (COSO) issued the Enterprise Risk Management Integrated Framework in
2004.
This framework defines essential enterprise risk management components, discusses key ERM
principles and concepts, suggests a common ERM language, and provides clear direction and
guidance for enterprise risk management. The guidance introduces an enterprise-wide approach to
risk management as well as concepts such as: risk appetite, risk tolerance, portfolio view. This
framework is now being used by organizations around the world to design and implement effective
ERM processes.
Enterprise risk management is a process, effected by an entity’s board of directors, management
and other personnel, applied in strategy setting and across the enterprise, designed to identify
potential events that may affect the entity, and manage risk to be within its risk appetite, to provide
reasonable assurance regarding the achievement of entity objectives.
This definition is purposefully broad. It captures key concepts fundamental to how companies and
other organizations manage risk, providing a basis for application across organizations, industries,
and sectors. It focuses directly on achievement of objectives established by a particular entity and
provides a basis for defining enterprise risk management effectiveness.
Value is maximized when management sets strategy and objectives to strike an optimal balance
between growth and return goals and related risks, and efficiently and effectively deploys
resources in pursuit of the entity’s objectives.
Enterprise risk management encompasses:
Aligning risk appetite and strategy – Management considers the entity’s risk appetite in
evaluating strategic alternatives, setting related objectives, and developing mechanisms to manage
related risks.
Enhancing risk response decisions – Enterprise risk management provides the rigor to identify
and select among alternative risk responses – risk avoidance, reduction, sharing, and acceptance.
Reducing operational surprises and losses – Entities gain enhanced capability to identify
potential events and establish responses, reducing surprises and associated costs or losses.
Identifying and managing multiple and cross-enterprise risks – Every enterprise faces a
myriad of risks affecting different parts of the organization, and enterprise risk management
facilitates effective response to the interrelated impacts, and integrated responses to multiple risks.
Seizing opportunities – By considering a full range of potential events, management is positioned
to identify and proactively realize opportunities.
Improving deployment of capital – Obtaining robust risk information allows management to
effectively assess overall capital needs and enhance capital allocation.
COMPONENTS OF ENTERPRISE RISK MANAGEMENT
Internal Environment – The internal environment encompasses the tone of an organization, and
sets the basis for how risk is viewed and addressed by an entity’s people, including risk
management philosophy and risk appetite, integrity and ethical values, and the environment in
which they operate.
Objective Setting – Objectives must exist before management can identify potential events
affecting their achievement. Enterprise risk management ensures that management has in place a
process to set objectives and that the chosen objectives support and align with the entity’s mission
and are consistent with its risk appetite.
Event Identification – Internal and external events affecting achievement of an entity’s objectives
must be identified, distinguishing between risks and opportunities.
Risk Assessment – Risks are analyzed, considering likelihood and impact, as a basis for
determining how they should be managed. Risks are assessed on an inherent and a residual basis.
LIMITATIONS
While enterprise risk management provides important benefits, limitations exist. In addition to
factors discussed above, limitations result from the realities that human judgment in decision
making can be faulty, decisions on responding to risk and establishing controls need to consider
the relative costs and benefits, breakdowns can occur because of human failures such as simple
errors or mistakes, controls can be circumvented by collusion of two or more people, and
management has the ability to override enterprise risk management decisions.
These limitations preclude a board and management from having absolute assurance as to
achievement of the entity’s objectives.
2. ISO 31000: International Standard for Risk Management
ISO 31000 is the international standard for risk management. This standard is published on the
13th of November 2009. By providing comprehensive principles and guidelines, this standard
helps organizations with their risk analysis and risk assessments.
ISO 31000 applies to most business activities including planning, management operations and
communication processes. Whilst all organizations manage risk to some extent, this international
standard’s best-practice recommendations were developed to improve management techniques
and ensure safety and security in the workplace at all times.
By implementing the principles and guidelines of ISO 31000 in organization, the organisation is
able to improve operational efficiency, governance and stakeholder confidence, while minimising
losses. This international standard also helps to boost health and safety performance, establish a
strong foundation for decision making and encourage proactive management in all areas.
BENEFITS OF ISO 31000
ISO 31000 contains 11 key principles that position risk management as a fundamental process in
the success of the organization.
ISO 31000 is designed to help organizations:
• Increase the likelihood of achieving objectives
• Encourage proactive management
• Be aware of the need to identify and treat risk throughout the organization
• Improve the identification of opportunities and threats
• Comply with relevant legal and regulatory requirements and international norms
• Improve financial reporting
• Improve governance
• Improve stakeholder confidence and trust
• Establish a reliable basis for decision making and planning
• Improve controls
STRATEGIC RISK MANAGEMENT
Strategic risk management is a crucial but often overlooked aspect of enterprise risk management
(ERM). While ERM has traditionally focused on financial and, more recently, operational risk, the
fact is that strategic risk is far more consequential.
Studies of the largest public companies indicate that strategic risks account for approximately 60
percent of major declines in market capitalization. Operational risks have just half that impact
(about 30 percent), and financial risks generate about 10 percent.
Why do many ERM programs seem to stand these priorities on their heads? Part of the reason is
ERM’s roots in corporate finance, but it is also true that until recently, strategic risks were difficult
to measure, not to mention evaluate, against one another on an apples-to-apples basis.
Meaning of Strategic Risk
It may be easiest to describe strategic risk by what it is often confused with—operational risk.
Good operations mean doing things right, while good strategy means doing the right things.
Strategic risk arises when a company fails to anticipate the market’s needs in time to meet them.
A company that has unmatched manufacturing processes will still fail if consumers no longer want
its products. That was the lesson even the most efficient buggy whip makers learned once Henry
Ford introduced the Model T in 1908. Cellphone handset makers faced a similar existential crisis
when the Apple® iPhone® arrived on the scene.
Strategic risk management is the process of identifying, quantifying, and mitigating any risk that
affects or is inherent in a company’s business strategy, strategic objectives, and strategy execution.
THESE RISKS MAY INCLUDE:
• Shifts in consumer demand and preferences
• Legal and regulatory change
• Competitive pressure
• Merger integration
• Technological changes
• Senior management turnover
• Stakeholder pressure
MANAGING STRATEGIC RISK INVOLVES FIVE STEPS
1. Define business strategy and objectives. There are several frameworks that companies
commonly use to plan out strategy, from simple SWOT analysis to the more nuanced and
holistic Balanced Scorecard. The one thing that these frameworks have in common, however,
is their failure to address risk. It is crucial, then, that companies take additional steps to
integrate risk at the planning stage.
2. Establish key performance indicators (KPIs) to measure results. The best KPIs offer hints as
to the levers the company can pull to improve them. Thus, overall sales makes a poor KPI,
while sales per customer lets the company drill down for answers.
3. Identify risks that can drive variability in performance. These are the unknowns, such as future
customer demand, that will determine results.
4. Establish key risk indicators (KRIs) and tolerance levels for critical risks. Whereas KPIs
measure historical performance, KRIs are forward-looking leading indicators intended to
anticipate potential roadblocks. Tolerance levels serve as triggers for action.
5. Provide integrated reporting and monitoring. Finally, companies must monitor results and
KRIs on a continuous basis in order to mitigate risks or grasp unexpected opportunities as they
arise.
RISK MATRIX
Risk Matrix is a matrix that is used during Risk & Control Self-Assessment (RCSA) activity to
define the various levels of risk at each stage, activity, process and sub-process. Risk Matrix
comprises of:
• Impact analysis
• Likelihood
• Operating Effectiveness
• Design Effectiveness
Ratings are assigned to all above categories, pre- and post-control environment. Based on the
ratings a Gross/Inherent Risk Level and Residual Risk level is determined
(HIGH/MEDIUM/LOW), respectively.
In the event where Residual Risk level is HIGH and/ or a particular control environment is weak,
these are mitigated with additional controls.
The Inherent and Residual Risks follow the RED-AMBER-GREEN color coding mapped to
HIGH-MEDIUM-LOW Risks, respectively.
INTERNAL CONTROL

Internal control is essential to the smooth operation and daily operations of a firm and it helps the
organisation accomplish its corporate goals. The range of internal control is extensive. It includes
all controls included into the strategy, governance, and management processes, including the full
spectrum of activities and operations carried out by the organisation and not simply those directly
associated with financial operations and reporting. Its scope encompasses all facets of a business,
including those that could be broadly categorised as compliance matters as well as aspects related
to performance.

Control must not be viewed as a burden on business but rather as a tool for maximising business
prospects and minimising possible losses brought on by unfavourable circumstances. Successful
businesses should also avoid being complacent or oblivious to their own success. There are many
instances of businesses whose success has been at risk due to a lack of or flaws in internal controls.
 Scope of risk management and internal control

1. It is the responsibility of each business to put in place risk management and internal control
systems that are suitable for the circumstances.
2. In a group, the parent company must make sure that each of its subsidiaries has internal control
and risk management procedures in place. These systems must be modified to account for the
unique traits of the subsidiaries and their interactions with the parent company.
3. A parent company should take care to consider the possibility of familiarising itself with and
reviewing its affiliate’s measures regarding risk management and internal control when it has a
sizable equity interest and significant influence over an affiliate.
4. Risk management focuses on identifying threats and opportunities, while internal control helps
counter threats and take advantage of opportunities. Proper risk management and internal control
assist organizations in making informed decisions about the level of risk that they want to take and
implementing the necessary controls to effectively pursue their objectives. Successful
organizations integrate effective governance structures and processes with performance-focused
risk management and internal control at every level of an organization and across all operations.

The risk profile of a company may be represented through a Risk Register, a suggestive template
of which is illustrated below:

S. No. Risk Area Key Risks Root Cause Mitigation Measures

1 Business Risk Decreasing Lack of Keeping a vigil on latest
market share innovation, developments and
market survey, continuous monitoring
etc.
2 Financial Leveraging Inability to assess Adopting Resource planning
Risk capital structure the appropriate policy
and the cash funding
flows requirements
3 Regulatory Non-compliance Not keeping Knowledge updation and
and of applicable abreast of the maintenance of a robust
Compliance laws latest changes in compliance check list
Risk the Regulatory
environment
INTERNAL AUDIT

Applicability of Provisions of Internal Audit

SECTION 138 (COMPANES ACT 2013) : INTERNAL AUDIT

INTERNAL AUDIT

APPLICABILITY ON COMPANIES Who can be an Internal Auditor

a. Every listed company

a. A Chartered Accountant or
b. Every unlisted public company having b. A Cost Accountant or
1. Paid up share capital of fifty crore rupees or more c. Such other professional as may be
during the preceding financial year; or decided by the Board to conduct
internal audit of the functions and
2. Turnover of two hundred crore rupees or more during activities of the Company.
the preceding financial year; or
SPECIAL NOTE:
3. Outstanding loans or borrowings from banks or public
financial institutions exceeding one hundred crore An existing company covered under any
rupees or more at any point of time during the of the above criteria shall comply with the
preceding financial year; or
requirements of section 138 and this rule
4. Outstanding deposits of twenty five crore rupees or within six months of commencement of
more at any point of time during the preceding financial such section.
year; and

c. Every private company having

1. Turnover of two hundred crore rupees or more during
the preceding financial year; or
2.
Outstanding loans or borrowings from banks or public
financial institutions exceeding one hundred crore
rupees or more at any point of time during the
Importance of financial
preceding Internal yearAudit
.

1. Increase productivity: Internal audit is an objective assurance and consulting activity designed
for add value and improve business operation. Internal audit can help an organization accomplish
its strategic objectives by bringing a systematic, discipline approach to evaluating and improving
the effectiveness of risk management, control and governance process. By continuously
monitoring and reviewing the organization processes, internal auditor can identify the control
recommendation to improve the efficiency and effectiveness of these processes and they also help
to an organization to dependent on processes rather than on people.

2. Evaluate Risk and protect the assets: A regular internal audit assess a company control and
help to uncover evidence of frauds, help to identify any gaps in the environment and allow for a
remediation plan to take place. Internal audit program will help to an organization to track and
document any changes that have been made to environment and ensure the mitigation of any found
risks.

3. Quality Control: Internal auditor help the organization how well system and process are
designed and keep the company goals on track and also provide the consulting on how to improve
those system and processes if and when necessary.

4. Independent and unbiased insight: Internal audit provides unbiased view into how effective
internal controls of your business. If an organization has limited resources and they are unable to
setup an independent audit team, they could cross-train employees to audit each other’s
departments.

5. Good Corporate Governance: Internal audits evaluate a company’s internal controls,

including its corporate governance and accounting processes. They ensure compliance with laws
and regulations, accurate and timely financial reporting and data collection. They also help
maintain operational efficiency by identifying problems and correcting lapses before they are
discovered in an external audit.

ROLE OF INTERNAL AUDITOR IN STRENGTHENING INTERNAL AUDIT

i. Evaluating risk management activities within the organization.

ii. Determining the organization’s compliance with relevant laws and regulations.

iii. Evaluating and making recommendations that can assist in improving internal control.

iv. Investigating fraud via a fraud risk assessment that uses fraud deterrence principles.

v. Offering an objective source of independent advice to help reach the goal and achieve legality
and validity.

vi. Performing audit assignments assigned to them

vii. Learning and studying the organization’s policy and guidelines. viii. Identifying audit scope
and developing annual plans within the organization.

ix. Gathering, analyzing, evaluating, and presenting accounting documentation, reports, data, and
flowcharts.

x. Following up the audits to monitor the managements’ intervention.

xi. Promoting ethics and identifying improper conduct within the company.
CRISIS MANAGEMENT

Crisis Management is an organization’s process- and strategy-based approach for identifying and
responding to a threat, an unanticipated event, or any negative disruption with the potential to harm
people, property, or business processes.

Dealing with crises in a way that limits harm and helps the impacted business to recover swiftly is
the goal of crisis management. Public relations for a corporation may benefit greatly from handling
a crisis effectively. There are many different types of crises, hence it is advised that a corporation
develop a crisis management plan in advance.

Types of Crisis

There are several different types of crises that can be faced by a firm. Analyzing the different
scenarios has led to some of the companies’ most frequently occurring mishaps. Few of them have
been listed below:

Natural Disasters

These kinds of mishaps fall under the category of “acts of God” and take place spontaneously
without any human interference. A broad geographic area can be impacted by floods, earthquakes,
tsunamis, storms, droughts, or any other circumstance, endangering the enterprise based there.

Technological Crisis

Every human’s life includes technology in some way. However, if technology is used improperly,
the negative effects it can have can sometimes outweigh the positive ones. Data breaches, malware,
spyware, and other problems can hinder a company’s growth. Managers must be well informed of
what transpires in these circumstances and take strong action to limit damage.

Organizational Misdeeds

Sometimes, a crisis can be caused by the wrong steps taken by a firm. The manager devising the
crisis management strategy should know about all the decisions taken by the firm. They must
ensure every company’s action is legally and ethically correct to avoid any mishap in the future.

Confrontational Crisis

Different departments might be found within a single corporation. They might even have various
governments in the case of any kind of multinational enterprise. These groups could clash due to
differences in beliefs, ideologies, and requirements. So that no party is favoured and the situation
does not worsen, the company must have preparations for how to address the problem. These crises
can include blockades, sit-ins, union boycotts, etc.
Rumours
When the competition between rival businesses heats up, some competitors may try to win by
making false accusations against the opposition. This starts to damage the company’s reputation
and causes losses for it. The crisis management plan must quickly compile the appropriate
certificates and other supporting evidence to demonstrate to the public how untrue the rumours
are.

Crisis Management Plan

The following guidelines are recommended for establishing good crisis management plans:

• Identify an individual from your workforce to take over the crisis management role as a
manager. Or a firm can employ a professional crisis manager who can help you in planning
crisis management processes.
• Initiate frequent training and refresher courses on handling crises. Drills and practice
operations must frequently take place to keep refreshing stakeholders on emergency responses
to crises.
• Form a crisis team to work under the leadership of a crisis manager. When a crisis occurs, this
is the team that should be able to respond quickly. A veteran of several training sessions and
drills for such occurrences, it is expected to be on the frontline in directing other stakeholders
on what to do and where to assemble to avoid further damage.
• Planning responses and crisis management processes for various potential crises is highly
recommended. It takes several approaches and processes to address different crises.
• Initiate systems that can effectively monitor or detect foreseeable crises signals early enough
in order to tackle the situation before it gets out of hand. Examples of such systems are smoke
detectors that can detect potential fire long before it gets out of hand.
• Provide a list of key persons in case of a crisis and their contact information. The contact
information must be displayed where anyone can see it and easily access them.
• Identify the ground person to be notified immediately when a crisis occurs. Apart from a crisis
manager, there must be a coordinating person among employees who possesses first-hand news
on a looming crisis. This should be a person who can be trusted by his colleagues with vital
information during any suspected crisis.
• Identify a central point where employees can assemble and the exit points to use in case of a
crisis. Emergency exit doors with ease of opening them must be labeled well and an emergency
central gathering place identified and properly labeled as well.
• Regular testing of the crisis management process and emergency equipment and updating
them frequently or as needed.
Need for Crisis Management

• Crisis Management prepares the individuals to face unexpected developments and adverse
conditions in the organization with courage and determination.
• Employees adjust well to the sudden changes in the organization.
• Employees can understand and analyze the causes of crisis and cope with it in the best possible
way.
• Crisis Management helps the managers to devise strategies to come out of uncertain conditions
and also decide on the future course of action.
• Crisis Management helps the managers to feel the early signs of crisis, warn the employees
against the aftermaths and take necessary precautions for the same.

Essential Features of Crisis Management

• Crisis Management includes activities and processes which help the managers as well as
employees to analyze and understand events which might lead to crisis and uncertainty in the
organization.
• Crisis Management enables the managers and employees to respond effectively to changes in
the organization culture.
• It consists of effective coordination amongst the departments to overcome emergency
situations.
• Employees at the time of crisis must communicate effectively with each other and try their
level best to overcome tough times.

ESG RISK ASSESSMENT

ESG is an acronym for environmental, social, and governance. Investors are increasingly using
these nonfinancial factors as part of their analytical process to identify significant risks and growth
opportunities. ESG metrics are not typically included in mandatory financial reporting, despite the
fact that businesses are increasingly revealing information in their annual report or a separate
sustainability report. To make it simpler to incorporate these factors into the investment process,
many organizations—including the Sustainability Accounting Standards Board (SASB), the
Global Reporting Initiative (GRI), and the Task Force on Climate-related Financial Disclosures –
are working to develop standards and define materiality (TCFD).

1. Environmental Risks

These risks include environment-related issues such as Greenhouse gas emissions (GHG),
deforestation, pollution, water usage, biodiversity, waste, etc.
2. Social Risks

These include factors such as customer relations, human rights, labor rights, employee relations,
occupational safety and health, supply chains, diversity, inclusion, etc.

3. Governance Risks
These risks include issues such as succession planning, board management practices, executive
compensation diversity among board and management, corruption, fraud, data hygiene, security,
equity, etc.

Significance of ESG Risk Assessment

1. Enhanced Sustainability

With a better understanding of ESG risks, companies can effectively utilize their resources, tackle
rising operation costs, make safe investments, improve employee retention and adhere to
regulations easily.

Recognizing these potential risks and effectively managing them not only makes the organization
resilient to future challenges but also provides a competitive advantage.

2. Improved Regulatory Compliance

With the growing stakeholder demands for accountability, there is also an increase in the
regulatory obligations for ESG. Integrating ESG factors as a part of the risk management structure
makes communicating effectively with governing authorities easier thereby, minimizing the
resource burden and requirement for legal intervention.

3. Increased Investment Potential

Socially aware investors are now seeking the integration of ESG values into their portfolios to
ensure sustainable investments. Those organizations that have well-established ESG risk
management systems fare better in attracting investors.

4. Better Employee Productivity

Organizations with the highest employee satisfaction had ESG scores 14% higher than the global
average, likely due to their strong environmental performance [Marsh & McLennan].

An ESG-conscious organization can enhance employee productivity, motivation, and retention by

inculcating a sense of purpose among the workforce.

Additionally, organized ESG risk management promotes employee well-being through

considerations such as health & safety, work schedules, diversity, and inclusion. This not only
enhances employee experience but also stimulates better performance.
5. Greater Profitability

Mitigating ESG risks not only makes a company favorable for investments but also enhances its
profitability.

According to McKinsey research, ESG strategies can affect operating profits by as much as 60%.
ESG responsive organizations are more likely to attract customers and top talent thereby,
promoting their top-line growth.

ESG RISK MANAGEMENT

Like other risk forms, ESG risk management also involves the same three steps – Identify the risk,
quantify the risk, and manage it for better organizational sustainability.

With this new focus on ESG factors in risk analysis, decision-makers need to quantify the ESG
risks for effective risk management.

ESG risks are quantified and reported in the form of a company’s ESG risk score or rating. A low-
risk rating indicates effective risk management and a high-risk score signifies inconsistencies in
ESG risk management.

Every company is vulnerable to ESG risks and requires ESG risk management to avoid financial
or reputational damage. Irrespective of the size of the company or organization, incorporating ESG
risk factors in the decision making process amounts to effective risk management.

ENVIRONMENTAL RISKS

The risks with which this report is concerned are all in some way ‘environmental. They arise in,
or are transmitted through, the air, water, soil or biological food chains, to man. Their causes and
characteristics are, however, very diverse. Some are created by man through the introduction of a
new technology, product or chemical, while others, such as natural hazards, result from natural
processes which happen to interact with human activities and settlements. Some can be reasonably
well anticipated, such as flooding in a valley or pollution from an industrial smelter. Others are
wholly unsuspected effects at the time the technology or activity was developed, such as the
possible effects on the earth’s ozone layer of fluorocarbon sprays or nitrogen fertilizers

The followings are the few of the example of the environmental risks:

• Impact of climate change on GHG emissions

• Security and use of water
• Reducing waste and recycling
• Pollution control and prevention
• Deforestation
• Safeguarding thriving ecosystems
• The effect on biodiversity
• Safeguarding maritime resources
• Making the switch to a circular economy
• Techniques for environmental management
SOCIAL RISK
The following are some instances of social risks: product recalls, labour violations, boycotts, and
treatment of employees. All parties involved in the firm, from suppliers and local communities to
employees and customers, may be affected at once by these difficulties since they are numerous,
complicated, and pervasive. Maintaining positive relationships with these stakeholders is essential
to a company’s long-term success, especially if that business depends on the confidence of the
general public.

Examples of societal risks are:

• Inclusion, equity, and diversity

• Workplace and safety circumstances
• Observing human rights
• Development of the workforce and training
• Data security
• Community participation
• Fair labour standards for vendors and suppliers
All parties involved in a firm are typically impacted by social issues. For a business to maintain
long-term competitive advantages, it can be crucial to be able to prevent tarnishing its reputation
and relationships.

ESG Risk Management

ESG is a specialised aspect of risk management, although having a broad range of potential
applications. ESG assurance is less intimidating than you may think if you take a sound strategy
and use the right tools, just as in every other area of risk management. ESG risk management is
essential for identifying, managing, and reducing all associated risks. Be on the lookout for ESG
software that can automate some of the steps necessary to evaluate your business or your clients’
degree of ESG practise.

When evaluating ESG risks, there is no one universal strategy. Global regulators have not yet
established a single standard that would apply to all countries or harmonise all ESG components.
A corporation should be able to define ESG and the specific risks to which they may be exposed
through data gathering and analysis. To review the business processes and determine whether they
are in line with ESG objectives, a thorough risk assessment must be completed, just like for any
other form of risk.
Climate Risk

Globally, weather and climate-related risks, which potentially cause loss and damage, have
increased dramatically over the past few decades. The most recent climate projections indicate a
significant increase in the frequency, duration and intensity of extreme weather events as well as
severe slow-onset climate related changes. These pose a growing risk to sustainable development
of communities and countries. Internationally there is an increasing recognition that adaptation
and mitigation may not be enough to manage the impacts of climate change and both climate
science and the international climate negotiations stress the urgent need to develop and implement
effective climate risk assessment and management approaches in order to avert, minimize and
address losses and damages.

Climate Risk Management Process

The six step climate risk management (CRM) process operationalises climate risk management at
scale (see Figure 1).

1. Assess and match information needs with risk management objectives.

2. Define System of Interest.

3. Develop context-specific methodology.

4. Risk identification to identify low and high-levels of climate-related risk.

5. Risk evaluation to identify acceptable, tolerable and intolerable risks.

6. Assessment of risk management options.

Need for a CRM Framework in India

According to India’s 2nd National Communication to the UNFCCC, a majority of its population
is vulnerable to climate change and its impacts.

The economy is closely tied to climate sensitive sectors such as agriculture, forestry and water
among others, as well as to its natural resource base, thereby increasing its exposure and sensitivity
to changes in existing climatic conditions.

Exposure and sensitivity to climate change is exasperated by the fact that nearly 18% of the world’s
population is occupying only 2.3% of the world’s land area.

Thus, there is an immense stress to harness indigenous resources efficiently while ensuring a
sustainable development pathway.
Business Continuity Plan (BCP):
A business continuity plan (BCP) is a document that outlines how a business will continue
operating during an unplanned disruption in service. It is a system of prevention and recovery from
potential threats to a company.

A business continuity plan (BCP) can be tailored to specific departments such as finance, HR, and
marketing operations.

With respect to finance operations, a BCP would focus on maintaining financial systems and
processes, ensuring that the company has access to sufficient financial resources, and maintaining
financial reporting and regulatory compliance. The plan would outline procedures for securing
financial data, restoring critical financial systems, and ensuring that key financial personnel are
available to respond to the crisis.

Features of an effective business continuity plan (BCP)

• Strategy: Objects that are related to the strategies used by the business to complete day-to day
activities while ensuring continuous operations
• Organization: Objects that are related to the structure, skills, communications and
responsibilities of its employees
• Applications and data: Objects that are related to the software necessary to enable business
operations, as well as the method to provide high availability that is used to implement that
software
• Processes: Objects that are related to the critical business process necessary to run the
business, as well as the IT processes used to ensure smooth operations
• Technology: Objects that are related to the systems, network and industry-specific technology
necessary to enable continuous operations and backups for applications and data
• Facilities: Objects that are related to providing a disaster recovery site if the primary site is
destroyed

Steps to Creating a Business Continuity Plan

Step 1: Assemble a Business Continuity Management Team

Step 2: Ensure the Safety and Wellbeing of Your Employees

Step 3: Understand the Risks to Your Company.

Step 4: Implement Recovery Strategies

Step 5: Test, Test Again and Make Improvements

How can such conflicts between Management and Board be avoided?

The global best practice recommends that at least three-quarters of board members should be
independent, the board should have an independent chairman and not an individual who serve the
role of both CEO & Chairman of the board, annual board elections should be conducted as this
forces directors to make more careful decisions and be more attentive to shareholders because they
can cast the vote to keep or eliminate a director each year.

Also, every year board self-assessment practices should be conducted, independent directors
should annually/ quarterly meet and openly discuss various policies, management, and
compensation without concerns about management influence.

Also cover a case study of any listed company in BSE /NSE.

Disaster Recovery Plan (DRP)

1. A disaster recovery plan (DRP) is a comprehensive plan that outlines the procedures and
strategies that a corporation will use to restore its critical operations and services in the event
of a disaster.
2. The goal of a DRP is to ensure that the corporation can quickly and effectively recover from a
disaster and return to normal operations.
3. In the corporate world, disaster recovery planning is a critical component of risk management
and business continuity planning.
4. Companies invest in DRPs to minimize the impact of disasters on their operations, protect their
assets and data, and ensure that they can continue to serve their customers and stakeholders.

Relationship between Business Continuity Plan, Crisis management and Disaster recovery
plan in corporate world

In the field of risk management and organizational resilience, business continuity planning and
crisis management are two ideas that are closely related. A business’ key operations will be
maintained during and after a disruptive event, such as a natural disaster, cyberattack, or pandemic,
according to a thorough document called a business continuity plan (BCP). BCP’s goal is to
guarantee that crucial operations and services can continue with the least amount of disruption
possible and that the business can quickly recover from the incident.

The relationship between business continuity planning and crisis management is that a BCP
provides the overarching framework for maintaining business operations during and after a
disruptive event, while a CMP provides specific guidance for managing a crisis. Both BCP and
CMP are essential components of a comprehensive risk management program, and they work
together to ensure that an organization can continue to operate and recover from a disruptive event.
After the above para, please provide a table here to elaborate the relationship between Business
Continuity Plan, Crisis Management and Disaster Recovery plan for ease of learning for the
students. This table may be inserted after the example given below to understand the relation

CYBER RISK MANAGEMENT

We have a responsibility to better understand the vulnerability and threat landscape given the rise
in infections and attack scenarios. An active risk assessment method should be designed to help in
the determination of how to best deploy security measures, according to risk management
protocols to safeguard financial assets, information databases, and intellectual property resources.
A number of methods are also available for setting up risk reduction procedures. In order to
develop an effective and tenable plan for the short- and long-term protection of assets, it is
necessary to consult with legal and insurance carriers.

In the modern landscape of cybersecurity risk management, one uncomfortable truth is clear—
managing cyber risk across the enterprise is harder than ever.

Cyber Security Risk Management Process

Provide genesis of Cyber Risk Management and then cover the points mentioned below

1. Identify the risks that might compromise your cyber security. This usually involves identifying
cyber security vulnerabilities in your system and the threats that might exploit them.

2. Analyse the severity of each risk by assessing how likely it is to occur and how significant the
impact might be if it does.

3. Evaluate how each risk fits within your risk appetite (your predetermined level of acceptable
risk).

4. Prioritise the risks.

5. Decide how to respond to each risk.

6. Since cyber risk management is a continual process, monitor your risks to ensure they are still
acceptable, review your controls to ensure they are still fit for purpose, and make changes as
required. Remember that your risks continually change as the cyber threat landscape evolves, and
your systems and activities change.

Cyber security measures

As defined by the International Telecommunication Union Cyber security measures are classified
as: legal, technical, organizational, capacity building, and cooperation aspects.
 • Legal measures aim to provide legislations and an implementable regulatory framework
to protect the cyber space.
• Technical measures consider the technological tools (software and hardware) to prevent,
detect, mitigate, and respond to cyber-attacks.
• Organizational measures are important for the proper implementation of any type of
national initiative or policy.
• Capacity building measures aim to enhance knowledge and know-how in order to promote
cyber security.
• Cooperation measures aim to establish partnership between different stakeholders to
increase cyber resilience of the organizations against cyber threats.
Financial risk
Financial risk is the possibility of losing money on an investment or business venture. Some more
common and distinct financial risks include credit risk, liquidity risk, and operational risk.
Financial risk is a type of danger that can result in the loss of capital to interested parties.

Pros and Cons of Financial Risk

S.No. Pros Cons

1 Encourages more Encourages more informed decisions
informed decisions.
2 Helps assess value (risk- Risks can be difficult to overcome.
reward ratio).
3 Can be identified using Ability to spread and affect entire sectors or markets
analysis tools.

Operational risk
Operational risk is the risk of losses caused by flawed or failed processes, policies, systems or
events that disrupt business operations. Employee errors, criminal activity such as fraud, and
physical events are among the factors that can trigger operational risk.

Most organizations accept that their people and processes will inherently incur errors and
contribute to ineffective operations. In evaluating operational risk, practical remedial steps should
be emphasized to eliminate exposures and ensure successful responses.

If left unaddressed, the incurrence of operational risk can cause monetary loss, competitive
disadvantage, employee- or customer-related problems, and business failure.

The challenges witnessed in mitigating operational risks are as under:

1. The data required is not readily available.

2. Operational complexity is growing in enterprises.

3. The universe of operational risk types expands.

4. Operational risk oversteps with other risk functions.

5. Other risk functions feel threatened by what seems like duplicative risk function and don’t
cooperate.
6. Operations staff complain that monitoring and reporting take time away from their other
responsibilities.

Compliance and Governance risks

Compliance risk is an organization’s potential exposure to legal penalties, financial forfeiture and
material loss, resulting from its failure to act in accordance with industry laws and regulations,
internal policies or prescribed best practices. Compliance risk is also known as integrity risk.

Governance risk includes the risks related to an organization’s ethical and legal management, the
transparency and accuracy of company performance, and involvement in other ESG initiatives
important to stakeholders.

Risk type Description Mitigation Stakeholders Capitals

strategy impacted impacted
Non- Inadequate • Invest in IT- • Government • Financial •
compliance compliance enabled body • Members Social and
with systems and compliance Relationship
regulatory processes can pose systems and
requirements reputation risk for processes •
the Company. This Ensure all
could expose the functions and
Company to legal units are aware of
consequences, the laws and
resulting in regulations to
financial losses and comply with •
penalties. Ensure adequate
monitoring
mechanism
towards
compliance •
Communicate
periodically to
reiterate the
importance of
compliance
Violation of Failure to act with • Code of Conduct • Members • • Financial •
ethics and integrity or behave (CoC) and Marico Value-chain Human • Social
in a manner Code of Business partners and Relationship
 business inconsistent with Ethics (MCoBE)
integrity the Marico purpose outlines the
statement and Company’s
values defined, can commitment to
damage corporate ethics and
reputation and integrity • Robust
business results. vigil mechanism,
which enables the
stakeholders to
report concerns
about unethical
behaviour, fraud
or violation of
code • Detailed
personal
orientation and
mandatory
certification on
CoC for all
employees •
Effective
oversight by the
Board of
Directors
Environmental risk

Environmental risk is the probability and consequence of an unwanted accident. Because of

deficiencies in waste management, waste transport, and waste treatment and disposal, several
pollutants are released into the environment, which cause serious threats to human health along
their way.

Examples of environmental hazards include:

• Air contaminants.
• Toxic waste.
• Radiation.
• Disease-causing microorganisms and plants.
• Pesticides.
• Heavy metals.
• Chemicals in consumer products.
• Extreme temperatures and weather events.
Social risks

Social risk comes from activities that affect the communities around the business. Things like labor
issues, human rights issues, public health issues, and political uncertainty qualify as social risk.

Risk type Description Mitigation Stakeholders Capitals

strategy impacted impacted
Talent Mismatch in hiring • Marico’s culture • Employees • Human •
acquisition and attrition of of openness, Manufactured
and retention skilled talent the transparency and
Company’s ability meritocracy
to pursue its growth coupled with its
growth
orientation helps
attract top talent •
Marico’s talent
value proposition
of building
challenging,
enriching and
retaining top
talent • Invest in
‘hiring right’ and
‘talent
development and
engagement’ best
practices
Community Social licence to • Commitment to • Community • Manufactured
distress in operate refers to the sustainable and • Social and
operating level of acceptance inclusive growth Relationship
locations by local in all social
communities in outreach
proximity to our programmes and
operations. The initiatives with an
absence of aim to augment
understanding and social
inability to infrastructure •
maintain a Constant
harmonious engagement
relationship with channels with the
communities could local community
stakeholders to
result in damage to understand their
our brand, needs
reputation and pose
 risk to our
operations.
Failure to The quality and • Robust system • Government • Financial
meet product safety of our to ensure • Consumers • Manufactured
quality and products are of compliance to • Value-chain • Intellectual
safety paramount regulatory partners • Social and
requirements importance for our requirements • Relationship
brands and our Assessment of
reputation. Any quality and safety
failure to meet the aspects of
product quality and products at each
safety requirements stage in the value
reputational risk, chain • Stringent
loss of consumer quality and safety
trust and potential compliance check
exposure to for suppliers
regulatory actions. before inducting
in the system •
Ingredients
assessment in line
with the
requirements set
for its usage
according to the
law of the land •
Facilitate
consumer
feedback on
product safety
and quality
through dedicated
Consumer
Service Cell
(CSC) • Robust
crisis
management
framework
Infosys: Mitigating water risk at India-based hubs
For over 15 years, Infosys - provider of business consulting, IT and outsourcing services - has
maintained a plan to mitigate its operational risks related to water supply. Collaboration between
the enterprise risk management (ERM) and sustainability functions enables Infosys to address risks
at the facility-level while conducting overall monitoring activities at the enterprise level.
Implementing measures to save and monitor water availability makes Infosys a steward of its
environment while also delivering value to its business and its stakeholders.

Risk of water scarcity

Infosys employs more than 200,000 people at 116 global development centers, with 40 of its
largest in India. The rapidly growing Indian population and increased demand for water resources
has created a growing concern over water availability in the country. Because of its large campuses
in major Indian cities, Infosys considers water stress and scarcity a significant near-term risk to its
business operations India.

Water supports the company’s human capital (i.e., cooking, cleaning, bathrooms and drinking) at
their campuses and is also necessary for landscaping and cooling towers.2 Water shortages during
dry periods have the potential to halt operations at affected campuses, which would negatively
impact the company’s ability to fulfill contractual obligations with customers and achieve
performance goals.

Response to water risks

To address water risks, Infosys encourages collaboration between ERM and sustainability
functions. The Infosys sustainability team conducts detailed risk assessments at individual facility
locations while ERM conducts assessments at the corporate level. The company undertakes an
iterative process: first assessing inherent risk and subsequently applying control measures and
assessing residual risk.

Infosys chooses among five risk response types in line with COSO’s ERM framework: accept,
avoid, pursue, reduce, escalate and share. In locations where water scarcity risk is high, avoiding
or accepting the risk is not an option. In these cases, the company chooses to “reduce” the risk.
Infosys uses site-based water risk assessments and root cause analyses to develop action plans for
reducing risks to “low” or “moderate” levels. If actions taken do not fully mitigate the risks, Infosys
may decide to reduce the impact by temporarily moving business operations or by reducing their
footprint in the affected development center.

Infosys emphasizes the use of root cause analysis so that action plans focus on the underlying
problem rather than symptoms. In the case of water scarcity, this approach has helped them
determine what is influencing the water shortages: water access, lack of water storage or other
issues. Following this analysis, the company implements mitigation measures to address the root
cause and reduce risks to acceptable levels. These measures have included:

• Water conservation through reduce, recycle and reuse measures (e.g., water efficient
fixtures, wastewater treatment)
• Aquifer recharge through injection wells
• Rainwater harvesting and reuse
• Construction of underground reservoirs that hold water to last for at least five days across
locations
• Efficiency programs led by smart water metering program that monitors water
consumption and encourages water use reduction
These measures are designed so that Indian campuses can sustain themselves for seven days using
stored rainwater and potable water in the case of extreme water shortages. The sustainability team
monitors water resources at all campuses and develops tailored responses at each campus.

Monitoring water scarcity

Sustainability and ERM work together to monitor water scarcity across the enterprise.
Sustainability teams collect and use the following types of data to monitor and assess water risk at
its campuses:

• Rainfall data over a 10-year period for each geographic area;

• Water table data for each geographic area;
• Storage capacity of rainwater on each campus;
• Availability and cost of water via water tankers for delivery;
• Freshwater usage from municipalities, private providers, ground water and rainwater.
Corporate ERM monitors water scarcity as an emerging risk. It tracks an enterprise-wide metric
of “per capita water consumption” using information provided by sustainability teams. Per capita
water consumption is calculated by dividing the average monthly water consumption at Infosys
locations by the average employee count per month, which is the sum of the swipe counts for
employees and support staff in the Infosys offices. Corporate ERM actively tracks this metric to
determine if water risk will become a higher corporate level priority in future years.

Business outcomes of managing water risk

Infosys’ risk management approach to water scarcity at the site and regional levels has been critical
for realizing value for its customers, employees and communities. The company’s water risk
management strategy in India enables the company to

• Open new campuses in locations where competitors may not be able to operate due to water
shortages.
 • Maintain continuity in operations using stored water in times of scarcity, which helps
maintain customer confidence and profitability.
The outcomes stem from Infosys’ organizational structure, which encourages sustainability to
assess and mitigate risk at the local level while ERM maintains an enterprise wide view. Further,
root cause analysis of local water issues empowered Infosys to develop effective responses and
mitigation approaches at individual campuses.

Enterprise Risk Management in Banking

A risk management framework and a risk appetite statement serve as the two pillars around which
Torontobased TD Bank structures its risk management. The enterprise risk framework outlines
risk management procedures for identifying, evaluating, and controlling risk as well as defining
the risks the bank must manage. The bank’s readiness to accept risk in order to achieve its growth
goals is described in the risk appetite statement. The risk committee of the company’s board of
directors is in charge of both pillars.

The International Organization for Standardization’s (31000) standard, which has subsequently
been modified, included risk management frameworks as a significant component. The standards
offer general recommendations for risk management initiatives.

Also, the Committee of Sponsoring Organizations of the Treadway Commission’s efforts led to
the creation of risk management frameworks (COSO). The organisation was formed to combat
corporate fraud, and one of its focuses was risk management.

TD moves on to the risk appetite statement after finishing the ERM framework.

The bank, which established a sizable foothold in the United States through significant
acquisitions, decided that it will only take on risks that satisfy the following three requirements:

• The risk is appropriate for the company’s plan, and TD can recognise and control it.
• The risk does not expose the bank to a high danger of suffering a sizable loss.
• The danger does not put the business at risk of damage to its reputation and brand.
Strategic risk, credit risk, market risk, liquidity risk, operational risk, insurance risk, capital
adequacy risk, regulator risk, and reputation risk are a few of the significant hazards the bank faces.
These categories are described by managers in a risk inventory.

Annual reviews are conducted of the risk framework and appetite statement, which are monitored
on a dashboard against indicators including capital adequacy and credit risk.

To mitigate risk, TD employs a three lines of defence (3LOD) strategy, a technique that is well
regarded by ERM professionals. These are the three lines:
• A business unit and corporate policies that implement controls, manage risk, and keep
track of it.
• Rules and oversight that ensure risk monitoring, evaluation, and adherence to the risk
appetite and framework.
• Internal reviews that independently confirm the effectiveness of risk-management
practises.
Page 546 of 587

PART-C ENVIORMENT
& SUSTAINABILITY
REPORTING
(15 MARKS)

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CHAPTER–26 Integrated Reporting Framework; Global

Reporting Initiative Framework; Business Responsibility &
Sustainability Reporting
INTEGRATED REPORTING FRAMEWORK

INTRODUCTION

1. Integrated reporting is part of an evolving corporate reporting system. This system is enabled
by comprehensive frameworks and standards, addressing measurement and disclosure in
relation to all capitals, appropriate regulation and effective assurance.
2. The Integrated Reporting Framework defines integrated reporting as ‘a process founded on
integrated thinking that results in a periodic integrated report by an organization about
value creation over time and related communications regarding aspects of value creation.
3. Integrated reporting brings together material information about an organization’s strategy,
governance, performance and prospects in a way that reflects the commercial, social and
environmental context within which it operates. It provides a clear and concise representation
of how the organization demonstrates stewardship and how it creates value, now and in the
future
4. But integrated reporting isn’t just a reporting process. It’s founded on integrated thinking, or
systems thinking. Integrated thinking drives an improved understanding of how value is
created and enhances decision-making by boards and management. The more integrated
thinking is embedded in daily operations, the more naturally this information will be expressed
in internal and external communications. On this basis, integrated thinking and integrated
reporting are mutually reinforcing.
5. An integrated report is a concise communication about an organisation’s strategy, governance,
performance and prospects. Presenting each topic in the context of the organisation’s external
environment, the report summarises how the organisation creates value in the short, medium
and long term. The integrated report is the most visible and tangible product of integrated
reporting. It is a concise communication about how an organization’s strategy, governance,
performance and prospects, in the context of its external environment, lead to value creation
over time.

STRUCTURE OF THE INTEGRTED REPORTING FRAMEWORK

“We’ve overspent our financial, environmental, social and governance “capital” and now the
debt’s come due. Integrated Reporting is the starting point to help us repay that debt.”

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Page 548 of 587

Brad J. Monterio
The IR Framework is principles-based. The intent of the principles-based approach is to strike an
appropriate balance between flexibility and prescription that recognizes the wide variation in
individual circumstances of different organizations while enabling a sufficient degree of
comparability across organizations to meet relevant information needs.

The IR Framework does not prescribe specific key performance indicators, measurement methods
or the disclosure of individual matters. Those responsible for the preparation and presentation of
the integrated report therefore need to exercise judgement, given the specific circumstances of the
organization, to determine:

• Which matters are material

• How they are disclosed, including the application of generally accepted measurement and
disclosure methods as appropriate. When information in an integrated report is similar to, or
based on other information published by the organization, it is prepared on the same basis as,
or is easily reconcilable with, that other information
GUIDING PRINCIPLES

Seven Guiding Principles underpin the preparation and presentation of an integrated report,
informing the content of the report and how information is presented:

Strategic focus and future orientation

An integrated report should provide insight into the organization’s strategy, and how it relates to
the organization’s ability to create value in the short, medium and long term, and to its use of and
effects on the capitals.

Connectivity of information

An integrated report should show a holistic picture of the combination, interrelatedness and
dependencies between the factors that affect the organization’s ability to create value over time.

Stakeholder relationships
An integrated report should provide insight into the nature and quality of the organization’s
relationships with its key stakeholders, including how and to what extent the organization
understands, takes into account and responds to their legitimate needs and interests.

Materiality

An integrated report should disclose information about matters that substantively affect the
organization’s ability to create value over the short, medium and long term.

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Conciseness

An integrated report should be concise

Reliability and completeness

An integrated report should include all material matters, both positive and negative, in a balanced
way and without material error.

Consistency and comparability

The information in an integrated report should be presented:.

(a) on a basis that is consistent over time; and

(b) in a way that enables comparison with other organizations to the extent it is material to the
organization’s own ability to create value over time.

These Guiding Principles are applied individually and collectively for the purpose of preparing
and presenting an integrated report; accordingly, judgement is needed in applying them,
particularly when there is an apparent tension between them (e.g. between conciseness and
completeness).

CONTENT ELEMENTS
An integrated report includes eight Content Elements that are fundamentally linked to each other
and are not mutually exclusive, posed in the form of questions to be answered. The Content
Elements are not intended to serve as a standard structure for an integrated report with information
about them appearing in a set sequence or as isolated, standalone sections. Rather, information in
an integrated report is presented in a way that makes the connections between the Content
Elements apparent.

The content of an organization’s integrated report will depend on the individual circumstances of
the organization. The Content Elements are therefore stated in the form of questions rather than as
checklists of specific disclosures. Accordingly, judgement needs to be exercised in applying the
Guiding Principles to determine what information is reported, as well as how it is reported.

Organizational overview and external environment

What does the organization do and what are the circumstances under which it operates?

Governance

How does the organization’s governance structure support its ability to create value in the short,
medium and long term?

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Business model

What is the organization’s business model?

Risks and opportunities

What are the specific risks and opportunities that affect the organization’s ability to create value
over the short, medium and long term, and how is the organization dealing with them?

Strategy and resource allocation

Where does the organization want to go and how does it intend to get there?

Performance

To what extent has the organization achieved its strategic objectives for the period and what are
its outcomes in terms of effects on the capitals?

Outlook
What challenges and uncertainties is the organization likely to encounter in pursuing its strategy,
and what are the potential implications for its business model and future performance?

Basis of presentation

How does the organization determine what matters to include in the integrated report and how are
such matters quantified or evaluated?

BENEFITS OF INTEGRATED REPORTING

• Encouraging your organisation to think in an integrated way

• Clearer articulation of strategy and business model
• A single report that is easy to access, clear and concise
• Creating value for stakeholders through identification and measurement of non-financial
factors
• Linking of non-financial performance more directly to the business
• Better identification of risk and opportunities
• Improved internal processes leading to a better understanding of the business and improved
decision making process.

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CHALLENGES IN IMPLEMENTING INTEGRATED REPORTING FRAMEWORK

1. It requires high expertise for understanding this report because it is a concise report explaining
the matter in summary.
2. Describing company’s business model in relation to the Framework is one the hardest aspects
to implement, because of the Framework’s capitals-based approach.
3. Conciseness is also a challenge when reporters want to include new information, either to meet
regulatory requirements or because additional content could be helpful to readers. Many
reporters find conciseness difficult as they try to provide sufficient context to help readers
understand the organisation’s value-creation process and performance.
4. Lack of standardization,
5. Reluctance in disclosing sensitive information,
6. Lack of importance of non-financial information, associated cost of reporting, difficulties with
measuring and linking sustainability performance.

GLOBAL REPORTING INITIATIVE FRAMEWORK

Introduction

Global Reporting Initiative (GRI) is an organization that provides a framework for sustainability
reporting that can be used by all types of organizations. Its Guidelines on sustainability reporting
are widely used.

GRI is an independent, international organization that helps businesses and other organizations
take responsibility for their impacts, by providing them with the global common language to
communicate those impacts.

The GRI was formed by the United States based non-profits Coalition for Environmentally
Responsible Economies (CERES) and Tellus Institute, with the support of the United Nations
Environment Programme (UNEP) in 1997. It has its Secretariat in Amsterdam. Although the GRI
is independent, it remains a collaborating centre of UNEP and works in co-operation with the
United Nations Global Compact.

GRI’s Mission is to make sustainability reporting standard practice by providing guidance and
support that enable organizations to report transparently and accountably, as drivers of the
transition to a sustainable global economy.

As GRI grew, the reporting system was broadened to include social, economic, and governance
issues.

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GRI Standards for Reporting

The GRI Standards are a modular system of interconnected standards. They allow organizations
to publicly report the impacts of their activities in a structured way that is transparent to
stakeholders and other interested parties.

Three series of Standards support the reporting process: the GRI Topic Standards, each dedicated
to a particular topic and listing disclosures relevant to that topic; the GRI Sector Standards,
applicable to specific sectors; and the GRI Universal Standards, which apply to all organizations.

Using these Standards to determine what topics are material (relevant) to report on helps
organizations indicate their contributions – positive or negative – towards sustainable
development.

a) GRI Universal Standards

The GRI Universal Standards apply to all organizations, and consist of the following:

• GRI 1: Foundation 2021 (GRI 1) outlines the purpose of the GRI Standards, clarifies critical
concepts, and explains how to use the Standards. It lists the requirements that an organization
must comply with to report in accordance with the GRI Standards. It also specifies the
principles – such as accuracy, balance, and verifiability – fundamental to good-quality
reporting.
• GRI 2: General Disclosures 2021 (GRI 2) contains disclosures relating to details about an
organization’s structure and reporting practices; activities and workers; governance; strategy;
policies; practices; and stakeholder engagement. These give insight into the organization’s
profile and scale, and help in providing a context for understanding an organization’s impacts.
• GRI 3: Material Topics 2021 (GRI 3) explains the steps by which an organization can
determine the topics most relevant to its impacts, its material topics, and describes how the
Sector Standards are used in this process. It also contains disclosures for reporting its list of
material topics; the process by which the organization has determined its material topics; and
how it manages each topic.

b) GRI Sector Standards

The GRI Sector Standards intend to increase the quality, completeness, and consistency of
reporting by organizations. Standards were initially developed for 40 sectors, starting with those
with the highest impact,

such as oil and gas, agriculture, aquaculture, and fishing. The Standards list topics that are likely
to be material for most organizations in a given sector, and indicate relevant disclosures to report
on these topics. If an applicable Sector Standard is available, an organization is obliged (‘required’)
to use it when reporting with the GRI Standards.

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c) GRI Topic Standards

The GRI Topic Standards contain disclosures for providing information on topics. Examples
include Standards on waste, occupational health and safety, and tax. Each Standard incorporates
an overview of the topic and disclosures specific to the topic and how an organization manages its
associated impacts. An organization selects those Topic Standards that correspond to the material
topics it has determined and uses them for reporting.

Understanding the GRI Framework

GRI reporting protocols aim to cover a wide range of ESG issues, from employee safety and human
rights to environmental management. In order to determine the weight of greenhouse gas emissions
(GHG) generated on-site, companies must carefully track their product usage, chemical inventory,
and control technologies. This is also true for water consumption and waste tracking as well as
hazardous waste generation. These are all part of the GRI reporting framework that will require a
deeper knowledge of company processes and supply chains, as well as comprehensive data inputs.

The GRI offers 30 environmental performance indicators that should be used as part of the
environmental sustainability report. These performance indicators are divided into nine primary
categories:

1. Materials: Includes raw materials (natural resources, manufactured chemicals, and materials
needed for manufacturing) as well as packaging materials and recycled product content.

2. Energy: Includes direct and indirect energy consumption, renewable energy amounts used, such
as wind, solar, and geothermal, and efforts made to reduce energy requirements through more
energy efficient processes.

3. Water: Covers the total amount of water withdrawn from water sources and company impact
on those water sources, as well as the percentage and total volume of water that is recycled or
reused.

4. Biodiversity: Provides information regarding company impact on the biodiversity of

adjacent/nearby protected areas and/or areas considered to have high biodiversity, as well as
company strategies for managing impacts on biodiversity.

5. Emissions, Effluents, Waste: Includes total weight of direct and indirect emission of GHGs,
ozonedepleting emissions, and NOx, SOx, and other air emissions by type; total water discharge
by quality and destination; total weight of waste generated by type and disposal method; total
weight of treated, transported, or imported hazardous waste either as well as the percentage of
waste shipped internationally; total volume and number of spills on and off-site.

6. Products and Services: Provides the percentage of products sold and packaging materials that
are reclaimed/recycled.

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7. Compliance: Provides the total monetary value of noncompliance fines and number of
noncompliance sanctions.

8. Transport: Describes the impact of transporting your materials and finished products.

9. Overall: Provides the total values of environmental protection expenses and investments.

REPORTING PROCESS UNDER GRI FRAMEWORK

The foundation of sustainability reporting is for an organization to identify and prioritize its
impacts on the economy, environment, and people – to be transparent about their impacts.

GRI 1 is the starting point for all organizations reporting using the GRI Standards in that it lays
out key concepts and principles, and lists the requirements for reporting in accordance with the
GRI Standards.

Identifying and assessing impacts

Identifying its impacts and assessing their significance is part of an organization’s day-to-day
activity, which varies according to its specific circumstances.

The Sector Standards are of help at this point in that they describe the characteristics of a sector
that underlie its impacts. The topics and impacts listed in the Sector Standards provide a valuable
means of identifying an organization’s impacts. An organization needs to consider the impacts
described, and decide whether these impacts apply to it.

Understanding an organization’s context is a crucial factor in identifying and assessing the

significance of its impacts.

GRI 2 aids in this process by specifying disclosures in detail for different aspects of an
organization’s activities (reporting practices, governance).

GRI 3 explains step-by step how to identify and assess impacts together with their significance.

Once an organization has assessed the significance of its impacts, it needs to decide on which to
report. To do this, it needs to prioritize the impacts. Grouping the impacts into topics (such as
‘water and effluents’ or ‘child labor’) facilitates this, as it indicates what topics are most relevant
to the organization’s activities - its material topics. GRI 3 also contains a step-by-step explanation
of how to organize this grouping. To report in accordance with the GRI Standards, an organization
needs to document the process by which it determined its material topics, and the disclosures
contained in GRI 3 facilitate this.

Again, the Sector Standards are part of the process of determining material topics. An organization
should test its selection of material topics against the topics in the applicable Sector Standard. This
helps the organization ensure that it has not overlooked any topics that are likely to be material for
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the sector. If an applicable Sector Standard is available, then an organization is obliged to use it
when reporting in accordance with the GRI Standards. Using the Sector Standards is not a
substitute for determining material topics, but an aid. However, the organization still needs to
consider its specific circumstances when selecting its material topics.

Reporting disclosures

An organization that has determined its material topics needs to gather relevant data to report
specific information on each topic. The topics in a Sector Standard list specific disclosures from
the Topic Standards identified for reporting on the topic by an organization in the sector. Where
relevant, additional disclosures specific to the sector are included.

The disclosures in the Topic Standards specify the information that needs to be collected to report
according to the GRI Standards. Together with the disclosures from GRI 2 and GRI 3, they provide
a structured way of reporting this information. If an organization cannot comply with the particular
reporting requirements, it is in certain instances permitted to omit the information, provided that a
valid reason is given for the omission. In addition to the requirements listed under these
disclosures, there are also recommendations and guidance that would add to the quality and
transparency of a report.

Reporting in accordance with the GRI Standards

The GRI Standards allow an organization to report information in a way that covers all its most
significant impacts on the economy, environment, and people, or to focus only on specific topics,
such as climate change or child labor. GRI recommends reporting in accordance with the GRI
Standards. Under this approach, the organization reports on all its material topics and related
impacts and how it manages these topics. This reporting approach

provides a comprehensive picture of an organization’s most significant impacts on the economy,

environment, and people. However, if an organization cannot fulfill some of the requirements to
report in accordance with the GRI Standards or only wants to report specific information for
specific purposes, such as when complying with regulatory requirements; in that case, it can use
selected GRI Standards or parts of their content, and report with reference to the GRI Standards.

Navigating a report

Reports using the GRI Standards may be published in various formats (e.g., electronic, paper-
based) and made accessible across one or more locations (e.g., standalone sustainability report,
webpages, annual report). Reports must contain a GRI content index. The content index makes
reported information traceable and increases the report’s credibility and transparency. The content
index provides an overview of the organization’s reported information and helps stakeholders
navigate the report at a glance. It specifies the GRI Standards that the organization has used. The
index also lists the location, such as a page number or URL, for all disclosures that the organization

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has used to report on its material topics. The content index can also help a stakeholder understand
what the organization has not reported. The organization must specify in the content index if a
‘reason for omission’ is being used. In addition, the disclosure or the requirement that the
organization cannot comply with, together with an explanation, must be listed in the content index.
If Sector Standards apply to the organization, Sector Standard reference numbers provide a unique
identifier for each disclosure listed in a Sector Standard. This helps information users assess which
of the disclosures listed in the applicable Sector Standards are included in the organization’s
reporting.

GRI reporting is broken down into a five-step process:

• Step 1: Prepare - Organizations define a vision for the report, create a report team, develop a
plan of action, and set a kickoff meeting.
• Step 2: Connect - Companies identify, hold meetings, and set priorities with key stakeholders
in order to determine reporting priorities and define scope.
• Step 3: Define - The reporting team selects issues for action and reporting as well as decides
on the report content.
• Step 4: Monitor - The reporting team monitors activities and records data, checks processes
and systems, ensures quality of information, and follows up as needed.
• Step 5: Report - Companies choose the best way to communicate, write, finalize, and launch
the report publicly.

BUSINESS RESPONSIBILITY AND SUSTAINABILITY REPORTING

As per Global Reporting Initiative (GRI), “A sustainability report is a report published by a

company or organization about the economic, environmental and social impacts caused by its
everyday activities. A sustainability report also presents the organization’s values and governance
model, and demonstrates the link between its strategy and its commitment to a sustainable global
economy.”

Sustainability Reporting or Non-Financial Reporting is the process of communicating the social,

environmental and governance effects of a company’s operations to the stakeholders at large.
Many companies have realized the importance of factoring in environmental, social and
governance parameters in the business strategy of the company. It is also felt that companies that
disclose their sustainability efforts are rewarded by the market.

The BRSR is intended towards having quantitative and standardized disclosures on ESG
parameters to enable comparability across companies, sectors and time. Such disclosures will be
helpful for investors to make better investment decisions. The BRSR shall also enable companies
to engage more meaningfully with their stakeholders, by encouraging them to look beyond
financials and towards social and environmental impacts.

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BRR TO BRSR – A COMPARATIVE STUDY

The BRR was introduced in August 2012. It was SEBI’s reporting requirement, which was in tune
with the National Voluntary Guidelines (NVGs) on Social, Environmental and Economic
Responsibilities of Business.

BRR guidelines on sustainability information can be classified into five (5) categories as below:

Business Responsibility Report Classification

Both the BRSR and the BRR were designed around the nine business sustainability principles
identified by the Ministry of Corporate Affairs in their voluntary ESG guidelines published in 2011
(“MCA ESG Guidelines”), but that is where the similarity ended.

The BRR was not well received, since it based its ESG disclosure requirements almost entirely on
the nine sustainability principles from the MCA ESG Guidelines (often, as a Y/N questionnaire)
and provided very little meaningful ESG data. The BRSR, on the other hand, built upon the
framework of the MCA ESG Guidelines,

derives inspiration from international reporting frameworks like the GRI standards, and provides
for detailed ESG data, both qualitative and quantitative.

OVERVIEW AND APPLICABILITY OF BRSR

SEBI has played a key role in promoting sustainability reporting in India by issuing the SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015. On 05th May, 2021 SEBI
vide Notification No.SEBI/LAD-NRO/ GN/2021/22 amended Regulation 34(2)(f) of the SEBI
(LODR), Regulations, 2015 and mandated top 1000 listed companies based on their market
capitalization (as on the 31st March of every financial year) to prepare a Business Responsibility
Report (BRR) describing the initiatives taken by the listed entity from an Environmental, Social
and Governance (ESG) perspective, in the format as specified by SEBI from time to time and
provided that.

• BRR shall be discontinued after the financial year 2021–22;

• From the financial year 2022–23 the top 1000 listed entities based on market capitalization
shall submit a Business Responsibility and Sustainability Report (BRSR) in the format as
specified by SEBI from time to time;
• During the financial year 2021–22, the top 1000 listed entities may voluntarily submit BRSR
in place of mandatory BRR;
• The remaining listed entities including the entities which have listed their specified securities
on the SME Exchange, may voluntarily submit BRSR.

On 10th May, 2021 SEBI issued another Circular No. SEBI/HO/CFD/CMD-2/P/CIR/2021/562

providing the Applicability of BRSR and Disclosure format. The Circular introduced format of
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BRSR in Annexure I and the Guidance Note in Annexure II to the Circular to enable the companies
to interpret the scope of disclosures.

With effect from the financial year 2022-2023, filing of BRSR has been made mandatory for the
top 1000 listed companies (by market capitalization) and has replaced the existing BRR.

With ESG investing becoming more mainstream, SEBI’s disclosure requirements through BRSR
have been introduced to keep pace with such investment strategies, and growing concerns about
responsible corporate governance and climate change.

BRSR is an essential component of sustainability finance that aims to integrate sustainability

considerations into a company’s reporting and disclosure practices. The increasing global concerns
about climate change, social inequality, and environmental degradation have led to a growing
demand for businesses to disclose their ESG performance to stakeholders. BRSR helps businesses
communicate their sustainability performance, challenges, and opportunities to their stakeholders
transparently.

BRSR involves reporting on various ESG parameters, such as environmental impact, social and
community development, governance practices, and economic performance. The disclosure of
such information enables stakeholders to assess the company’s sustainability performance and take
informed decisions.

Apart from introducing a relatively comprehensive disclosure framework, BRSR also includes the
following aspects, with an aim to enhance ESG complaint business practices in India:

• Implementation of the NGRBC principles to address ESG-related concerns;

• Disclosure of adequate policies and mechanism that a company implements to remain ESG-
compliant. BRSR lays considerable emphasis on quantifiable metrics for ensuring comparison
across sectors, companies, and time periods;
• Enhanced disclosures on climate and social related issues;
• Segregation of disclosures into essential and leadership indicators, the former being the
mandatory requirement. The leadership indicators, inter alia, also emphasizes disclosures
related to the value chain of eligible entities;
• BRSR allows interplay for organisations that are already publishing sustainability reports
under other internationally recognized frameworks.

STRUCTURE / FRAMEWORK OF BRSR

Before exploring the structure / framework of BRSR, it is essential to have a look on the approach
adopted for developing the BRSR Core

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i) Quantifiable and outcome oriented metrics

The KPIs sought in the BRSR Core are quantifiable to the extent possible, so as to facilate
comparability of the disclosures. The KPIs also incorporate metrics that are reflective of
sustainable outcomes in companies. For instance, one of the metrics recommended by the
Committee was ‘gross wages by gender’ which was reflective of whether a company has gender
diversity practices which attract and retain women in its workforce.

ii) Relevance of the attributes / areas in the BRSR Core

The BRSR Core contains factors that are relevant to both the manufacturing and service factors
and are relevant in the Indian context. Therefore, under the ‘S’ parameters, attributes such as job
creation, and inclusive development have been considered. The ‘G’ parameter included openness
/ concentration of business including related party transactions.

iii) Comparability across jurisdictions

The KPIs in the BRSR Core, contain a number of intensity ratios, such as intensity of Green-House
Gas (GHG) emissions, water consumption, waste generation etc., so as to enable comparability,
irrespective of the size of the company.

These intensity rations are based on both revenue and volume. Considering the fact that these ratios
are also used by global investors and global ERPs, it is felt appropriate that intensity ratios based
on economic value adjusted for Purchasing Power Parity (PPP) should be computed in addition to
the norm intensity ratios, for global comparability to be fairer to low cost / developing economies.
It is proposed that in the first phase, country level PPP may be used and over time, sector specific
PPP may be developed.

The reporting framework is divided into three sections

Section A: General disclosures

This section contains details of the listed entity; products/services; operations; employees; holding,
subsidiary and associate companies (including joint ventures); CSR; transparency and disclosure
compliances.

Under this basic details of company shall be disclosed such as, name, CIN, registered office,
contact details, paidup capital, name and contact details of the responsible person for BRSR, details
about operation, production, turnover, details of employee, gender ratio of employee,
representation of women at the top management and turnover ratio of the employees etc.

Section B: Management and process disclosures

It contains questions related to policy and management processes, governance, leadership and
oversight. It includes preparation/identification of policy(ies), processes put in place towards
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adopting the NGRBC principle and core elements, Sustainability Governance Structure to
benchmark, implement and monitor sustainability aligned decisions and actions.

Section C: Principle-wise performance disclosures

Companies are required to report upon KPIs in alignment with the nine principles of the NGRBC
given below. The section classifies KPIs into two sub-categories that companies are required to
report upon:

• Essential indicators (mandatory): KPIs include data on training programmes conducted,

environmental data on energy, emissions, water and waste, social impact generated by the
company, etc.
• Leadership indicators (voluntary): Companies are expected to comply with these indicators
for better accountability and responsible purpose. Some of the KPIs include data on life cycle
assessments (LCAs), details on conflict management policy, additional data on biodiversity,
breakup of energy consumption, Scope 3 emissions and supply chain disclosures.
Nine principles of the NGRBC

The NGRBC are designed to be used by all businesses irrespective of their ownership, size, sector,
structure or location. It is expected that all businesses investing or operating in India, including
foreign multinational corporations (MNCs) will follow these guidelines. Correspondingly, the
NGRBC also provide a useful framework for guiding Indian MNCs in their overseas operations,
in addition to aligning with applicable local national standards and norms governing responsible
business conduct.

Furthermore, the NGRBC reiterate that need to encourage businesses to ensure that not only do
they follow these guidelines in business contexts directly within their control or influence, but that
they also encourage and support their suppliers, vendors, distributors, partners and other
collaborators to follow them.

The nine principles of NGRBC are as under:

Principle 1
Businesses should conduct and govern themselves with integrity, and in a manner that is ethical,
transparent and accountable.

• Detailed description of number of trainings and awareness programmes on any of the principles
held for the Board, KMP, employees and workers
• Details of fine/penalties /punishments/awards/compounding fees/settlement paid
• Disclosure on number of complaints received l
• Details relating to anti- corruption

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Principle 2

Businesses should provide goods and services in a manner that is sustainable and safe

• Disclose percentage of Research and development and capital expenditure investments

• Disclose procedure on Sustainable sourcing
• Details of Life Cycle Assessment
• Disclosure on Extended producer Responsibility
Principle 3

Businesses should respect and promote the well-being of all employees, including those in
their value chains.

• Detailed measure taken by entity for their employee’s

• Details of retirement benefits
Principle 4

Businesses should respect the interests of and be responsive to all its stakeholders.

• Disclosure about the processes for identifying key stakeholder group

Principle 5

Businesses should respect and promote human rights

• Details of training
• Details of minimum wages paid
Principle 6

Businesses should respect and make efforts to protect and restore the environment.

• Specific disclosures relating to water withdrawal

• Disclosure regarding whether the entity has implemented a mechanism for zero liquid
discharge
• Details of air emission or greenhouse gases
• Disclose the details of environmental impact assessment project
Principle 7

Businesses, when engaging in influencing public and regulatory policy, should do so in a

manner that is responsible and transparent.

• Disclose details on trade and industry chambers of the entity

• Disclose details of corrective actions taken or underway on any issues related to anti -
competitive conduct by the entity
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Principle 8

Businesses should promote inclusive growth and equitable development.

• Disclose details of Social Impact Assessment (SIA) of projects undertaken by the entity
• Disclose details of preferential procurement policy
Principle 9

Businesses should engage with and provide value to their consumers in a responsible manner.

• Number of consumer complaints received during the current year and previous year
• Advertising, cyber security and unfair trade practises along with the details regarding
mechanism
• Disclosure regarding framework /policy on cyber security and risks related to data privacy
along with providing weblink of the policy.

BENEFITS OF BRSR REPORTING

1. Improved ESG Performance: BRSR reporting helps companies to identify and monitor their
ESG (Environmental, Social, and Governance) performance. This allows them to better understand
their environmental impact, social responsibility, and governance practices. By having a better
understanding of their performance, companies can make informed decisions about how to
improve their sustainability practices. Ultimately, this can lead to a reduction in environmental
impact, improved social outcomes, and better governance practices.

2. Competitive Advantage: By reporting on their sustainability practices, companies can

differentiate themselves from their competitors. This can help attract environmentally and socially
conscious investors who may prefer to invest in companies that have a positive impact on the
environment and society. This can also help companies attract customers who are increasingly
concerned about the sustainability practices of the companies they do business with.

3. Compliance with Regulations: BRSR reporting helps companies to comply with regulations
such as SEBI guidelines and the National Voluntary Guidelines on Social, Environmental and
Economic Responsibilities of Business. By disclosing their sustainability practices and
performance, companies can demonstrate that they are following relevant regulations and
guidelines. This can help them avoid potential fines or penalties and maintain a positive reputation.

4. Improved Stakeholder Engagement: By disclosing their ESG performance, companies can

engage with stakeholders such as investors, customers, and employees on sustainability issues.
This can help build trust and credibility with stakeholders and demonstrate a commitment to
sustainability. Stakeholders may have a significant impact on a company’s success, and engaging
with them can lead to opportunities for collaboration and co-creation. This can ultimately result in
a more sustainable business model.
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5. Risk Management: BRSR reporting helps companies to identify and manage ESG-related
risks. By understanding their environmental and social impact, companies can identify potential
risks and take steps to mitigate them. This can help reduce the likelihood of negative impacts on
the environment, society, or the company’s reputation. Effective risk management can also help
protect a company’s financial performance and increase its resilience to unexpected events.

6. Cost Savings: BRSR reporting can help companies to identify areas where they can reduce
costs by improving their sustainability practices. For example, by identifying ways to reduce
energy consumption or waste, companies can reduce their operating costs, which can have a
positive impact on their bottom line. Additionally, companies that adopt sustainable practices may
be able to save on costs associated with fines and penalties for non-compliance with environmental
and social regulations.

7. Innovation: BRSR reporting can be a powerful tool to encourage companies to innovate and
develop new products and services that are more sustainable. For example, by tracking their carbon
emissions and setting reduction targets, companies may identify opportunities to develop new low-
carbon products or services. Similarly, by monitoring their water usage and identifying ways to
reduce it, companies may be able to develop new water-efficient products or technologies.

8. Investor Confidence: BRSR reporting can enhance investor confidence by providing relevant
information about a company’s ESG performance. This information can help investors make
informed decisions about which companies to invest in and which to avoid. By disclosing their
sustainability practices and performance, companies can build trust with investors and attract those
who prioritize ESG factors in their investment decisions.

9. Improved Reputation: BRSR reporting can also enhance a company’s reputation by

demonstrating a commitment to sustainability. A positive reputation can help attract and retain
customers, employees, and other stakeholders, while a negative reputation can lead to lost business
and legal or regulatory consequences. By disclosing their sustainability practices and performance,
companies can demonstrate a commitment to transparency and accountability, which can help
build trust and enhance their reputation.

10. Long-Term Value Creation: BRSR reporting can help companies create long-term value by
promoting sustainable business practices. By considering the environmental and social impact of
their operations, companies can identify opportunities to reduce costs, improve efficiency, and
develop innovative products and services. By integrating sustainability into their business strategy,
companies can create value for shareholders while also contributing to a more sustainable future.
Moreover, companies that prioritize sustainability may be better equipped to navigate risks related
to climate change, social inequality, and other ESG factors, which can help them create long-term
value for all stakeholders.

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CHALLENGES OF BRSR REPORTING

Challenges of Sustainability Reporting include –

• Diverse views on Sustainability – There is no one definition of sustainability. This results in

the ambit of sustainability becoming very large, and it could be overwhelming for companies
to collate such a lot of information and present it in the form of a report.
• Multiple reporting standards and frameworks – Globally there are various reporting standards
and frameworks for Sustainability Reporting, such as Carbon Disclosure Project (CDP), the
Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the
International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards
Board (SASB). Each of these provide their own guidelines for Sustainability Reporting. This
can result in challenges in reporting, basis each of these frameworks.
• Time-consuming exercise – Given the extensive data that is required, Sustainable Reporting
could be time consuming, especially for smaller companies.
• Lack of understanding within management – The personnel responsible for collecting such
data need to be educated and trained efficiently. Problems can arise if there is lack of proper
coordination between different departments within a company. The credibility and reputation
of the company depends on the accuracy of the data published.
• No clear proof of financial return on investment – Although studies have shown that
stakeholders reward companies with sustainable practices, there is mixed empirical evidence,
partly because data continues to be a challenge.

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CHAPTER-27 Sustainability Audit; Esg Rating; Emerging

Mandates from Government and Regulators
MEANING OF SUSTAINABILITY

Sustainability means meeting of the needs of the present without compromising the ability of
future generations to meet theirs. It has three main pillars: economic, environmental, and social.
These three pillars are informally referred to as people, planet and profits. These three Ps have its
priority orders too. One should take first take care of the PEOPLE and thereafter the PLANET.
PROFIT is an economic activity and is much for the survival of the unit, but in the array of these
three Ps, its priority should stand in last and not at the cost of People and Planet.
Sustainability is based on a simple principle: Everything that we need for our survival and well-
being depends, either directly or indirectly, on our natural environment.
Sustainability creates and maintains the conditions under which
humans and nature can exist in productive harmony, that permit
fulfilling the social, economic and other requirements of present and
future generations.
CONCEPT OF SUSTAINABLE DEVELOPMENT

It is a process of change in which the exploitation of resources, the

direction of investments, the orientation of technological development,
and institutional change are all in harmony and enhance both current and future potential to meet
human needs and aspirations.

In 1987, a report of the World Commission on Environment and Development (WCED) of the
United Nations (popularly known as Brundtland Report) first introduced the concept

SUSTAINABLE DEVELOPMENT

MEANING: it means balances the need for For example, natural energy resources like Coal,
economic growth with environmental Petroleum etc., should be prudently used and
protection and social equity. wastage should be avoided so that future
generation can have these energy resources for
their survival also.

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FUNDAMENTAL PRINCIPLE OF SUSTAINABLE DEVELOPMENT

1. Need to preserve natural resources for future generation.
2. Use of natural resources in a prudent manner without or with minimum tolerable impact on
nature.
3. Use of natural resources by any state / country must take into
account its impact on other states.
4. Environmental aspects and impacts of socio-economic activities
should be integrated so that prudent use of natural resources is
ensured.

CORPORATE SUSTAINABILITY

Corporate sustainability indicates new philosophy as an alternative to the traditional growth and
profit-maximization model under which sustainable development comprising environmental
protection, social justice and equity, and economic development are given more significant focus
while recognizing simultaneous corporate growth and profitability.
It is a business approach that creates long-term shareholder value by embracing opportunities and
managing risks deriving from economic, environmental and social developments. Corporate
sustainability describes business practices built around social and environmental considerations.
CORPORATE SUSTAINABILITYAND CORPORATE SOCIAL RESPONSIBILITY
Although scholars and practitioners often interpret Corporate Sustainability and Corporate Social
Responsibility as being nearly synonymous, pointing to similarities and the common domain. The
two concepts have different backgrounds and different theoretical paths.

Corporate Sustainability can be considered as the attempt to adapt the concept of Sustainable
Development to the corporate setting, matching the goal of value creation with environmental and
social considerations.
CSR has many interpretations but can be understood to be a concept imposing a liability on the
Company to contribute to the society (whether towards environmental causes, educational
promotion, social causes etc.) along with the reinforced duty to conduct the business in an ethical
manner.

It is also known as corporate conscience, corporate citizenship, social performance or sustainable

business/responsible business.

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SUSTAINABILITY AUDIT

MEANING OF SUSTAINABILITY AUDIT

1. Sustainability Audit is a comprehensive assessment of an organization’s environmental, social

and economic impacts.
2. The purpose of the audit is to identify areas where the organization can improve its
sustainability performance and minimize its negative impacts on the environment, society and
economy.
3. The audit typically covers areas such as energy use, greenhouse gas emissions, waste
management, water usage, product sourcing, supply chain management, employee relations,
and community engagement.
4. The outcome of a sustainability audit is used to develop a sustainability strategy and set goals
for ongoing sustainability performance improvement.
5. A sustainability audit is a process that evaluates the performance of an organization in relation
to its sustainable development goals.
6. It assesses how well a company performs in the three areas of social, environmental and
economic aspects and is thus also referred to as a “triple bottom line” assessment.
7. It includes an analysis of both internal and external factors affecting the organization’s
sustainability.

FRAMEWORK OF SUSTAINABILITY AUDIT

A sustainability audit typically follows a structured framework that includes the following
steps:

Planning and Preparation: This involves defining the scope and objectives of the audit,
identifying stakeholders, and preparing a plan for conducting the audit.

Data Collection and Analysis: This involves gathering data on the organization’s environmental,
social, and economic impacts, as well as reviewing policies, procedures, and practices related to
sustainability.

Assessment and Evaluation: This involves evaluating the data collected and analyzing the
organization’s sustainability performance. This step typically includes benchmarking the
organization’s performance against industry standards and best practices.

Report Generation: This involves summarizing the findings of the audit and presenting
recommendations for improvement.

Implementation and Monitoring: This involves taking action on the recommendations made in
the report and monitoring progress to ensure that sustainability goals are met over time.

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Different organizations may use slightly different frameworks for sustainability audits, but the
basic steps are generally consistent across different approaches. The choice of framework often
depends on the organization’s specific sustainability goals and the resources available for
conducting the audit.

PROCESS OF CONDUCTING SUSTAINABILITY AUDIT

A sustainability audit may be conducted in the following manner:

Defining the scope and objectives of the audit: This involves determining what aspects of the
organization’s operations will be included in the audit and what sustainability goals the audit is
intended to achieve.

Gathering data: This involves collecting data on the organization’s environmental, social, and
economic impacts, as well as reviewing policies, procedures, and practices related to sustainability.
This may include analyzing data from existing sustainability reports, conducting surveys of
employees and stakeholders, and reviewing internal documents and data.

Conducting assessments and evaluations: This involves evaluating the data collected and
analyzing the organization’s sustainability performance. This step typically includes
benchmarking the organization’s performance against industry standards and best practices, and
identifying areas for improvement.

Preparing a report: This involves summarizing the findings of the audit and presenting
recommendations for improvement. The report should be clear, concise, and actionable, and
should be designed to engage and inform stakeholders.

Implementing and monitoring actions: This involves taking action on the recommendations
made in the report, and monitoring progress over time to ensure that sustainability goals are met.
This may involve developing and implementing new sustainability policies and procedures,
investing in new technologies or processes, and engaging with stakeholders to drive sustainability
improvements.

Reporting and communicating: Report on the findings of the sustainability audit, including the
results of the performance assessment, areas for improvement, and the action plan. Communicate
the results to stakeholders, including employees, customers, shareholders, and the wider
community.

SUSTAINABILITY AUDIT REPORT

A sustainability audit report is a comprehensive document which provides a detailed analysis of
an organization’s sustainability performance. The report assesses the organization’s
environmental, social, and governance impacts and identifies areas for improvement. It is used to

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help the organization understand its sustainability performance and make informed decisions about
how to improve it further.

Sustainability audit report is an important tool for organizations to understand and improve their
sustainability performance. It is usually prepared by an independent third-party auditor, to ensure
its accuracy and credibility. The report may also be made available to the public, and published on
the organization’s website or included in its annual sustainability report, to demonstrate its
commitment to transparency and accountability.

The report typically includes the following key elements:

Executive Summary: This section provides a high-level overview of the report, including the
purpose of the audit, the key findings, and the main recommendations.

Background: This section provides context for the audit, including information about the
organization, its sustainability goals and objectives, and the scope of the audit.

Methodology: This section outlines the methodology used to conduct the audit, including the data
sources, the stakeholders consulted, and the tools and techniques used to gather and analyze the
data.

Key Findings: This section presents the main findings of the audit, including a detailed analysis
of the organization’s sustainability performance on key ESG issues, such as energy use,
greenhouse gas emissions, waste management, water use, employee relations, community
engagement, and compliance with relevant laws and regulations.

Recommendations: This section provides specific recommendations for how the organization can
improve its sustainability performance in the areas identified by the audit. The recommendations
may include specific actions that the organization can take, such as reducing energy use, improving
waste management practices, or enhancing employee engagement programs.

Implementation Plan: This section outlines a plan for implementing the recommendations from
the audit, including specific goals, timelines, and responsibilities.

Conclusion: This section provides a summary of the main findings and recommendations from
the audit, and reiterates the organization’s commitment to sustainability.

CASE STUDY

Are the Olympic Games sustainable? (Source: https://www.mountainwilderness.org)

Researchers at the University of Lausanne, Switzerland, recently reviewed the social,
environmental and economic sustainability of 16 editions of the Summer and Winter Olympic
Games from Albertville 1992 to Tokyo 2020 and found that in all three areas, there has been a
steady decline in performance, as economic benefits have gone down and environmental costs
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have risen. This has occurred, despite the fact that the International Olympic Committee (IOC)
and its host cities have been making ever more grandiose environmental claims.

‘That the Olympics be sustainable is a requirement laid down in the contract between Olympic
host cities and the International Olympic Committee (IOC). Sustainability is one of the three pillars
of the IOC’s road map for the future, Olympic Agenda 2020, and features prominently in its
continuation, Olympic Agenda 2020+5. The IOC’s sustainability strategy aims to “ensure the
Olympic Games are at the forefront in the field of sustainability”

In 2018, the United Nations passed a resolution that declared “sport as an enabler of sustainable
development” and signed a letter of intent highlighting the contribution of the Olympic Games to
the UN Sustainable Development Goals (SDGs).

In 2018, the United Nations passed a resolution that declared “sport as an enabler of sustainable
development” and signed a letter of intent highlighting the contribution of the Olympic Games to
the UN Sustainable Development Goals (SDGs).

Researchers used a conceptual model with the above-mentioned three dimensions of sustainability,
dividing each into three indicators and measuring sustainability via a score card

The definition and model assign equal weight to the classic three dimensions of sustainability
(inner ring-- ecological, social and economics), evaluating them with three indicators each (outer
ring)

It turned out that Winter Olympics in Sochi in 2014 and the Summer Olympics in Rio de Janeiro
in 2016 had the lowest sustainability scores. The latter displaced a large number of residents for
Olympics-related development and provided the excuse for comprehensive legal exceptions. The
resulting sports venues remained poorly used after the event, and cost overruns were the highest.

Data show that: ‘There are no Olympics that score highly in all or even the majority of the
indicators. Cities such as Vancouver and London, which have marketed themselves as models of
sustainable Olympic Games and have advised other Olympic hosts on sustainability, score below
average’.

The study concludes that the rhetoric of sustainability does not match actual sustainability
outcomes and sustainability in the Olympics is clearly declining over time as Salt Lake City (2002)
and Albertville (1992) scored higher than all the rest.

AUDIT STANDARDS ON SUSTAINABILITY

There are several standards and guidelines that organizations can use to conduct sustainability
audits. Some of the most widely used include:

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Global Reporting Initiative (GRI) Standards: The GRI is a widely recognized sustainability
reporting framework that provides guidelines and indicators for organizations to measure and
report on their sustainability performance. The GRI Standards provide a comprehensive and
consistent approach to sustainability reporting, and are used by organizations around the world to
report on their sustainability performance.

ISO 26000: ISO 26000 is an international standard for corporate social responsibility that provides
guidelines for organizations on how to implement, maintain, and continually improve their social
responsibility practices. This standard can be used as a framework for conducting sustainability
audits, and provides guidance on topics such as environmental responsibility, human rights, and
community involvement.

Sustainability Assessment Standards: There are a number of sustainability assessment standards

that organizations can use to conduct sustainability audits. These standards provide a systematic
and comprehensive approach to sustainability assessment, and include the Environmental
Management Accounting (EMA) standards, the AA1000 Account Ability Principles Standard, and
the Sustainability Assessment Framework (SAF).

National and Regional Standards: There are also a number of national and regional standards
that organizations can use to conduct sustainability audits. For example, the European Union has
developed the EU Eco-Management and Audit Scheme (EMAS), which provides a framework for
organizations to measure and report on their sustainability performance.

IMPORTANCE OF SUSTAINABILITY AUDIT

1) Identifying areas for improvement: A sustainability audit helps organizations to understand

their environmental, social, and economic impacts, and identify areas where they can improve their
sustainability performance. This can lead to cost savings, increased efficiency, and reduced
environmental impacts.

2) Measuring sustainability performance: A sustainability audit provides a systematic and

comprehensive way to measure an organization’s sustainability performance, and to track progress
over time. This information can be used to set sustainability goals, benchmark performance against
industry standards, and engage stakeholders.

3) Demonstrating commitment to sustainability: By conducting a sustainability audit and

taking action on its findings, organizations can demonstrate their commitment to sustainability and
show that they take their environmental and social responsibilities seriously.

4) Enhancing reputation and brand image: A sustainability audit can help organizations to
enhance their reputation and brand image by demonstrating their commitment to sustainability and
by improving their sustainability performance. This can help to attract and retain customers,
employees, and other stakeholders who value sustainability.

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5) Fostering innovation and competitiveness: By identifying areas for improvement and taking
action to improve sustainability performance, organizations can foster innovation and
competitiveness. This can help to stay ahead of the curve, to respond to changing market demands,
and to differentiate themselves from competitors.

6) Overall, a sustainability audit provides a valuable tool for organizations to understand their
sustainability performance, to identify areas for improvement, and to take action to enhance their
sustainability and to achieve their sustainability goals.

ESG RATING

MEANING OF ESG

ESG (environmental, social, and corporate governance) is a framework designed to be embedded

into an organization’s strategy that considers the needs and ways in which to generate value for all
of organizational stakeholders (such as employees, customers and suppliers and financiers).

ESG is a term used to represent an organization’s corporate financial interests that focus mainly
on sustainable and ethical impacts.

Capital markets use ESG to evaluate organizations and determine future financial performance.
While ethical, sustainable and corporate governance are considered non-financial performance
indicators, their role is to ensure accountability and systems to manage a corporation’s impact,
such as its carbon footprint.

WHAT ARE THE CRITERIA FOR ESG?

Each criterion of ESG plays an important role in the effort to increase focus on sustainable and
ethical investments.

1. Environmental
Environmental factors involve how much an organization considers the protection of natural
resources. These factors include the environment, climate change, energy consumption and use
and its overall impact.

Examples of environmental factors include:

• Air and water quality

• Biodiversity
• Deforestation
• Energy performance
• Carbon footprint, including greenhouse gas emissions
• Natural resource depletion

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• Waste management and pollution

2. Social

Social factors address how an organization treats people, Community relations, including the
organization’s connection and impact on the local communities in which it operates and serves,
Examples of social factors include:

• Customer satisfaction
• Data protection and privacy policies and efforts
• Efforts to fund projects or institutions that help poor and underserved communities globally
• Employee diversity, equity and inclusion (DEI)
• Employee engagement and relations
• Health and safety
• Human rights, including child labor and slavery
• Labour standards
3. Governance
Governance examines how a corporation polices itself, focusing on internal system controls and
practices to maintain compliance. Governance focuses on transparency, industry best practices,
organization management and associated growth initiatives.

Examples of governance factors include:

• Company leadership
• Board composition, including diversity and structure
• Corruption and bribery
• Donations and political lobbying
• Executive compensation and policies
• Tax strategy, including audit committee structure, internal controls and regulatory policies
• Whistleblower programs.
MEANING OF ESG RATING

An ESG score is an objective measurement or evaluation of a given company, fund, or security’s

performance with respect to Environmental, Social, and Governance (ESG) issues. Specific
evaluation criteria vary between the different rating platforms that issue ESG scores; however,
they all fall within one (or more) of the E, S, or G.

ESG scoring systems tend to be either industry-specific or industry-agnostic. Industry-specific

scoring systems assess issues that have been deemed material to the industry at large. Industry-
agnostic ESG scores tend to incorporate widely accepted factors that are meaningful across
industries – issues like climate change, diversity, equity and inclusion (DEI), and human rights.

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ESG rating platforms determine a weighting for each measurement criterion; then, they assess an
organization’s performance against each criterion. An organization’s final ESG score is typically
a sum-product of the criteria ratings and the (proprietary) criteria weightings.

ESG KEY PERFORMANCE INDICATORS

ESG key performance indicators, or KPIs, are trackable figures meant to help firms understand the
environmental, social and governance impact of their operations. For venture capital and private
equity managers, ESG KPIs are integral in understanding the ESG impact of the companies they
invest in or are thinking about investing in, and thus the impact of their funds. ESG KPIs also
provide managers and investors with an idea of what risks their investments and funds face.

With reference to the Key Performance Indicators (KPIs) of ESG, it will be of paramount academic
interest to explore Regulation 34(2)(f) of the SEBI (LODR) Regulations, 2015 as amended by
SEBI (LODR) (Second Amendment) Regulations, 2023 dated 14th June 2023 reads as under:

“for the top one thousand listed entities based on market capitalization, the annual report shall
contain a Business Responsibility and Sustainability Report on the environmental, social and
governance disclosures, in the format as may be specified by the Board from time to time.

Provided that the assurance of the Business Responsibility and Sustainability Report Core
shall be obtained, with effect from and in the manner as may be specified by the Board from time
to time.”

Explanation:

1. Business Responsibility and Sustainability Report Core shall comprise of such key performance
indicators as may be specified by the Board from time to time;

2. “Value chain” for the listed entities shall be specified by the Board from time to time.

On referring the Consultation Paper on ESG Disclosures Ratings and Investing by SEBI it is
mentioned that Assurance can be either limited or reasonable. Limited Assurance is being adopted
globally by jurisdictions as it is relatively easy to implement. However, due to its inherent nature,
limited assurance draws relatively low confidence, while reasonable assurance despite being
relatively more expensive, draws more confidence.

In order to achieve the twin objectives of improving credibility and limiting the cost of compliance,
BRSR Core has been proposed by SEBI for reasonable assurance which consists of select Key
Performance Indicators (KPIs) under each E, S and G attributes / areas that needs to be reasonably
assured.

SEBI in this regard issued a consultation paper on ESG Disclosures, Ratings and Investing in the
month of February 2023 introducing the concept of BRSR Core for third party assurance on select
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Key Performance Indicators (KPIs) under E, S and G areas. ESG Advisory Committee (EAC) of
SEBI adopted the following approach in developing BRSR Core:

1. The KPIs sought in BRSR are quantifiable to the extent possible so as to facilitate comparability
of the disclosures.

2. It contains factors that are relevant to both Manufacturing and service sectors and are relevant
in the Indian Context.

3. The KPIs contain a number of intensity ratios so as to enable comparability irrespective of size
of the Company.

The consultation paper recommended a glide path approach in implementation of assurance

mandates on BRSR Core as under:

For FY 22-23 – BRSR Mandatory Reporting for top 1000 companies and Assurance–No
mandatory Requirement
For FY 23-24-Reasonable Assurance of BRSR Core –Mandatory for top 250 companies

For FY 24-25 - Reasonable Assurance on BRSR Core mandatory for top 500 companies

For FY 25-26- Reasonable Assurance on BRSR Core mandatory for top 1000 companies

Further, at present the metrics related to supply chain of a company are covered under leadership
indicators in the BRSR, that may be reported on voluntary basis. It was proposed in the
consultation paper to introduce a limited set of ESG disclosures i.e. BRSR Core in a gradual
manner and on comply or explain basis as under.

For FY 24-25 – ESG disclosures as per BRSR Core, for supply chain for top 250 companies on
comply or explain basis; Assurance not mandatory.

For FY 25-26 - ESG disclosures as per BRSR Core, for supply chain for top 250 companies on
comply or explain basis; Assurance on comply or explain basis.

ESG RATING ORGANISATION/ ESG RATING PROVIDERS AND ESG

METHODOLOGY

The ESG Rating Agencies are organizations that examine a company’s environmental, social, and
corporate governance policies to determine its sustainability. Stakeholders may use an ESG rating
agency’s report to see how sustainable a company is, allowing them to better determine which
ones to invest in and where to do business.

With ESG investing becoming mainstream, the demand for ESG data and indices has also
increased globally. Investors are increasingly relying on ESG ratings to gauge a company’s
performance on ESG issues and exposure to ESG related risks. ESG ratings help to bridge this gap
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by collecting the myriad ESG data, analyzing and diluting it to a single score/rating. ESG rating
providers (“ERPs”) collect ESG data for a given company mainly from a company’s own
disclosures, news items, third party reports and questionnaires. ERPs thereafter employ their
distinct methodology to aggregate and process this data into a single score/rating.

Some of the widely known ESG Rating organisations include –

Dun & Bradstreet

Dun & Bradstreet is an international business data and analytics provider, which provides insights
into company performance, trends, and ESG factors. Through its ESG analysis, Dun & Bradstreet
provides companies with a comprehensive view of their sustainability performance in relation to
global peers.

They offer company-level ESG scores and ratings, sector-level analysis, and a range of other data
points to help organizations identify key areas for improvement or risk management. Dun &
Bradstreet also offers ESG-focused research reports, tailored to specific industries or countries, as
well as proprietary tools to help companies track and analyze their own ESG performance.

Knowing the environmental, social, and governance risks of doing business with third parties is a
key factor in maintaining a competitive advantage in any economic climate. That’s why they
provide you with an easyto-understand snapshot of these rankings, including a comparison to
industry averages, so you can make informed decisions about investing.

Sustainalytics ESG Risk Ratings

Sustainalytics is an ESG rating and data supplier that provides ESG ratings on 20,000 companies
and 172 countries. They rate 40,000 companies worldwide. Sustainalytics is a subsidiary of
Morningstar, one of the largest stock market data providers in the world. The ESG ratings from
Sustainalytics measure the environmental, social, and corporate governance performance of
companies on a global scale. They cover about 13,000 international equities across all regions
worldwide.

ESG describes the Environmental (E), Social (S), and Governance (G) metrics that are evaluated
to inform security selection.

ESG ratings are based on both quantitative ESG data and qualitative analysis. ESG Scores cover
several different areas including governance, environmental impact, social contribution, and
financial performance to provide a holistic view of the ESG profile of companies.

MSCI ESG Ratings

MSCI ESG Ratings are created by MSCI ESG Research, one of the largest rating agencies. These
ESG ratings are released for 14,000 different equity and fixed-income issuers.
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SCI ESG Ratings are generally known to be one of the industry leaders in publishing scores and
ratings for ESG companies.

MSCI rates companies according to their exposure to industry specific ESG risks and opportunities
and their ability to manage those risks and opportunities relative to peers.

The company level ratings are aggregated to the fund level, which are further aggregated to the
portfolio level to provide the ESG rating available on the Sustainability tab of the 360 Evaluator.

The MSCI ESG Ratings model seeks to answer four key questions about companies:

• What are the most significant ESG risks and opportunities facing a company and its industry?
• How exposed is the company to those key risks and/or opportunities?
• How well is the company managing key risks and opportunities?
• What is the overall assessment of how the company is managing ESG risks and opportunities
and how does it compare to its global industry peers?
The key issue scores and weights are combined and normalized per industry to offer an overall
ESG score (0-10) and rating (AAA-CCC) for each issuer.

The criteria covered by MSCI under three pillars- Environmental, Social and Governance is as
under:

Pillar MSCI
Environmental Climate Change
Natural resources
Pollution & waste
Environmental opportunities
Social Human capital
Product liability
Stakeholder opposition
Social opportunities
Governance Corporate governance
Corporate behaviour

Bloomberg ESG Disclosures Scores

Bloomberg ESG Disclosure Scores is an ESG data system that provides ESG information for over
11,800 companies in more than 100 countries. Their ESG data includes topics such as climate
change, human capital, and shareholders’ rights. The ESG Disclosure Scores rank companies on
their level of ESG disclosure and span key sustainability topics.

The following criteria covered under Environmental, Social and Governance

Pillar Bloomberg
Environmental Carbon Emissions
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Climate change effects

Pollution
Waste disposal
Renewable energy
Resource depletion
Social Supply chain
Discrimination
Political contributions
Diversity
Human rights
Community relations
Governance Cumulative voting
Executive compensation
Shareholders’ rights
Takeover defence
Staggered boards
Independent directors
Thomson Reuters

Thomson Reuters uses more than 400 different ESG metrics, of which a subset of 186 fields are
selected, with history going back to 2002. The ESG metrics are then grouped into ten categories
(Resource use, Emissions, Innovation, workforce, human rights, community, product
responsibility, management, shareholders and CSR strategy) which are combined to formulate the
three pillar scores of Environmental, Social and Governance.

The ESG criteria covered by Thomson Reuters is presented below

Pillar Thomson Reuters

Environmental Resource Use
Emissions
Innovation
Social Workforce
Human Rights
Community
Product Responsibility
Governance Management
Shareholders
CSR strategy

ADVANTAGES OF ESG RATING

Unsurprisingly, people prefer to invest in companies that manage their risks better than their
competition. Companies with high ESG scores appear sustainable, boast fewer liabilities, build
positive brand reputations, and maintain strong relationships with their clients and stakeholders.

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As a result, these companies have an advantage when attracting talent, impressing consumers, and
raising capital.

There are five main benefits small to mid-sized companies can gain by starting an ESG program:

• Competitive Advantage
• Cost Reduction
• More Attractive to Lenders and Investors
• Supply Chain Prospects
• Attraction and Retention of Talent
Competitive Advantage:

Having an ESG program in place helps boost brand recognition and even promotes brand loyalty.
Today’s consumers and clients are increasingly aware of ethical spending and care more about
what a company does to support sustainability. Small to mid-sized companies that have taken steps
to meet sustainability concerns (having an ESG program) have been known to attract more
customers and clients who seek to do business with companies addressing these issues.

Small to mid-size companies can create value by having an ESG program. In the past, it was harder
to track and be consistent when it came to ESG data and took extra resources. Today ESG data
management is simpler with software programs that allow for the ability to consolidate information
such as tracking greenhouse gas emissions (GHG), energy data, utility data sync, waste
management, etc.

Cost Reduction:

By implementing an ESG program, small to mid-sized companies can track key metrics like energy
consumption, water consumption, waste shipping/treatment costs, and raw material usage. This
tracking ability is a prerequisite for companies to plan programs to improve efficiency, which leads
to reduced costs associated with energy and water usage and waste transport. In addition to
improving cost management, ESG programs also allow for operational efficiency, less exposure
to fines/penalties, better risk management, and improved innovations.

More Attractive to Lenders and Investors:

Attracting the attention of investors and lenders is one of the biggest advantages of having an ESG
program. It seems no matter where you look for ESG benefits, the top thing that comes up is that
investors and lenders are gaining interest in companies with an ESG program in place over those
without. Study(opens in a new tab) after study(opens in a new tab) has shown companies that made
ESG a priority stand out to both investors and lenders because they tend to outperform their
competition.

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Supply Chain Prospect:

Much like investors are paying more attention to ESG, many companies are looking for supply
chain partners that embrace sustainability efforts. For example, many retail stores are making
decisions not to stock products made by companies considered to have poor ESG performance.
Companies’ supply chains have an effect on the environment, people, and society, so companies
that take their ESG goals seriously find it to be in their best interest to partner with suppliers who
share the same vision. Multiple large companies have already made the move to implementing
ESG, making it more beneficial for them to partner with suppliers that have an ESG program in
place, as well as easier to attract partners who insist on better ESG performance as a condition for
partnership.

Attraction and Retention of Talent :

Today, many job seekers are no longer looking for just a paycheck. They want to enjoy their jobs,
feel appreciated, and make a positive impact. Working for a company with strong ESG goals
appears to be the top factor for employees’ job satisfaction, along with evidence that the company
“walks the walk” by putting its stated goals into practice. Adding to that, the “Great Resignation”
has shown many employers that at least some of their employees have other options, and will use
them if their current job doesn’t fulfill their needs and values.

Promote Company’s Growth and Improves Financial Performance:

All the above-listed benefits for having an ESG program in place go hand in hand in contributing
to the growth and improved financial performance of a company, especially small to mid-size
companies. In the past, the correlation between companies with high ESG performance and strong
financial performance might only have been achievable for companies having the resources to
invest in an ESG program. However, as mentioned above, this is no longer the case because
utilization of ESG software can significantly lower the resources required to pursue ESG.

Raises Corporate Transparency

It broadens organisational disclosure beyond traditional financial metrics and raises corporate
transparency on environmental and social metrics. Sustainability reporting allows a balanced and
understandable assessment of the company’s performance by stakeholders to facilitate corporate
accountability, as promulgated by one of the principles under the Code of Corporate Governance.

Strengthens Risk Management

Sustainability reporting allows listed companies to consider emerging risk areas and to identify
opportunities presented by risks that are overlooked by other analytical and system driven
approaches. A risk management approach that incorporates sustainability provides management

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with useful data for identifying emerging issues and developing appropriate responses that help
protect corporate reputation and improve shareholder value.

Promotes Stakeholder Engagement

Identification of and engagement with stakeholders are fundamental to sustainability reporting and
are cited as critical steps by various international sustainability frameworks. Listed companies
need to identify their stakeholders to effectively engage those that are interested in and affected by
the company’s sustainability performance. Given the varied nature and interests of stakeholders
such as shareholders, employees, customers, suppliers and communities, stakeholder engagement
enables the company to take into account the Information needs of various stakeholders with
regards to the disclosure of sustainability related information.

EMERGING MANDATES FROM GOVERNMENT AND REGULATORS

ESG REPORTING IN INDIA

ESG reporting in India commenced in 2009 with the Ministry of Corporate Affairs (MCA) issuing
the Voluntary Guidelines on Corporate Social Responsibility. Ever since the reporting framework
has come a long way with the introduction of Business Responsibility Reporting (“BRR”),
Corporate Social Responsibility (CSR), National Guidelines on Responsible Business Conduct
(NGRBC) and the newly introduced Business Responsibility and Sustainability Report (BRSR).

The Companies Act, 2013 introduced one of the first ESG disclosure requirements for companies.
Section 134(m) mandates companies to include a report by their Board of Directors on
conservation of energy, along with annual financial statement. This requirement is further detailed
under Rule 8(3)(A) of the Companies (Accounts) Rules, 2014, which mandates the board to
provide information regarding conservation of energy. Similar requirement existed in the
Companies Act, 1956 also.

Further, it is the statutory duty of a director of an Indian company to act in good faith in order to
promote the objects of the company for the benefit of its members as a whole, and in the best
interests of the company, its employees, the shareholders, the community and for the protection of
the environment.

In addition to this, companies are mandated to include disclosures on opportunities, threats, risks
and concerns as part of their annual reports under Regulation 34(3) of the SEBI (Listing Obligation
and Disclosure Requirements) Regulation, 2015 (“LODR Regulations”). However, such
disclosure requirements do not seek details about the metrics and processes adopted by companies
to identify such opportunities or risks nor mandate the companies to chart its progress over the
course of time

In recent times, adapting to and mitigating climate change impact, inclusive growth and
transitioning to a sustainable economy have emerged as major issues globally. There is an
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increased focus of investors and other stakeholders seeking businesses to be responsible and
sustainable towards the environment and society. Thus, reporting of company’s performance on
sustainability related factors has become as vital as reporting on financial and operational
performance. The Securities and Exchange Board of India (“SEBI”) introduced the requirement
of ESG reporting back in 2012 and mandated that the top 100 listed companies by market
capitalisation file a BRR. This was later extended to the top 500 listed companies by market
capitalisation in 2015.

In 2017, SEBI issued a circular on ‘Disclosure Requirements for Issuance and Listing of Green
Debt Securities’, to introduce the regulatory framework for issuance of green debt securities in
India and enhance investor confidence. It supplements the SEBI (Issue and Listing of Debt
Securities) Regulation, 2008 and envisages a list of disclosures that an issuer must make in its offer
document before and after the commencement of a project financed by green debt. These
additional disclosure requirements have been prescribed in order to attract the finance reserved for
ESG-compliant projects, such as renewable and sustainable energy, clean transportation,
sustainable water management, climate change adaption, energy efficiency, sustainable waste
management, sustainable land use, and biodiversity conservation.

In addition to this SEBI circular, the Indian Banks’ Association (IBA) has also released the
National Voluntary Guidelines for Responsible Financing, laying down broad and general
principles towards ‘integrating ESG risk management into Financial Institution’s (FIs) business
strategy, decision-making process and operations. For instance, Principle 2 provides that FIs
‘should integrate the analysis of environmental, social and governance factors in their investment,
lending and risk-management processes across business lines to minimize adverse impact on their
own operations and on society. However, these Guidelines do not envisage any framework for
credible and transparent issuance of green debt instruments.

On 10 May 2021, SEBI introduced new reporting requirements on ESG parameters called the
Business Responsibility and Sustainability Report (“BRSR”) by amending regulation 34 (2) (f) of
SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 (“LODR Regulations”).

The BRSR seeks disclosures from listed entities on their performance against the nine principles
of the ‘National Guidelines on Responsible Business Conduct’ (NGBRCs) and reporting under
each principle is divided into essential and leadership indicators. The essential indicators are
required to be reported on a mandatory basis while the reporting of leadership indicators is on a
voluntary basis. Listed entities should endeavor to report the leadership indictors also. It is
mandatory for the top 1,000 listed companies to annually disclose ESG-related information from
financial year 2022-23.

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 Page 583 of 587

ESG REGULATIONS AROUND THE WORLD

As ESG becomes a topic of much discussion and debate, various stakeholders such as investors,
employees, customers, governments, and regulatory agencies are all emphasizing the importance
of sustainable management. The integration of sustainable practices into corporate strategy is now
increasingly considered as a prominent way to meet shareholder expectations and requirements of
a company’s environmental, social, and governance (ESG) criteria globally.

International standards such as the United Nations Principles of Responsible Investment (UNPRI),
Task Force on Climate-Related Financial Disclosures (TCFD), and the Global Reporting Initiative
(GRI) have recently advocated different suggestions to improve ESG reporting procedures around
the world.

The regulatory landscape is moving in tandem, especially concerning ESG disclosures and
transparency obligations, which the ever-expanding pool of sustainable investors rely on to
determine how well financial services and products meet their predefined ESG investment criteria.
According to a study conducted in Australia, reporting regulations distinctly influence the
intentions of ESG disclosures of companies in the metal and mining sector. However, these
monumental changes to the regulatory landscape are more than just a compliance requirement.
They are also an opportunity for businesses to make a fundamental choice by approaching the
emerging ESG disclosure regulations to comply or recognize this as a long-term change in their
business strategy.

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Page 584 of 587

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• csanoopjain.in for all corporate laws update (please check our website at least 1 month before
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• academy99.in (Online store for purchasing CS books/PEN DRIVES)/ANDROID APP
• ajpublication.in (our publication house)
•
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JOIN US ONLY AFTER COMPARING THE RESULTS

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24 classes on takeover of companies 8 classes on valuation of shares
22 classes on merger and amalgamation 8 classes on winding up of companies

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Page 586 of 587

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