Greenwashing Regulation Will Put Spotlight On ESG Assurance

Accurate and reliable environmental, social and governance data have always been a concern for those, especially investors, who depended on such data for their decision-making.

With increasing concern around rampant greenwashing and the evolving greenwashing regulations across the world, another large stakeholder group, customers, will now start demanding credible environmental data. Large companies across geographies, including in India, have been getting their ESG report/data third-party assured, offering some level of credibility and safeguard against greenwashing.

With the greenwashing regulation by the Central Consumer Protection Authority of India coming into force in October 2024, Indian companies will and should be looking at ESG assurance more seriously than before. The regulation aims to rein in greenwashing or the practice of engaging in incorrect, deceptive or misleading environmental claims about products or services. The CCPA regulation does not outright rule out any form of green claim, but it requires such claims to be explained and backed up by accessible and verifiable evidence and certifications.

Environmental claims should ideally follow studies, measurements, observation, and analysis and interpretation of relevant data and information. In that process, it is important to verify every step of the process and every input and assumption used.

This is where third-party assurance comes into play. As a part of the ESG report assurance, third-party assurance providers audit and verify data and procedures. The extent of testing and verification by an assurance provider depends on the type of assurance being provided.

A limited assurance offers only limited, sample-based testing and verification, leading to an assurance certificate covering the entire reporting boundary of the reporting company through extrapolation. A reasonable assurance provides a more thorough and detailed testing and verification, leading to a more reliable and defensible outcome. Obviously, the effort and cost involved are also significantly different.

At a time when ESG assurance is expected to play a key defender role under the new greenwashing regime, the Securities Exchange Board of India is proposing to further dilute its own regulatory mandate of reasonable assurance of Business Responsibility and Sustainability Report. SEBI issued a Consultation Paper on May 22, 2024, titled 'recommendations of the expert committee for facilitating ease of doing business with respect to BRSR', proposing, among others, to substitute the term assurance with assessment, and inviting public comments regarding the proposal.

It is not yet clear what the SEBI-proposed assessment involves. Regardless, any form of assessment will not be a substitute for assurance when it comes to the credibility of the ESG or environmental data.

SEBI's proposal is based on the ease-of-doing-business concerns and not founded on the need for data credibility. Also, the top 150 listed companies by market capitalisation have already complied with the reasonable assurance mandate in the last financial year.

Given the risks of greenwashing, it is in the best interest of reporting companies that SEBI does not carry out the proposed change and continues the currently-mandated reasonable assurance mandate and glide path for the top 1,000-listed Indian companies.

The provision of stiff penalties, including imprisonment, under the new greenwashing regulation, along with the risk of potential disputes, will bring added rigour to the assurance process. ESG assurance, even a reasonable assurance, is no armour in steel against greenwashing. However, companies have an opportunity to make their ESG/BRSR assurance count as their first line of defence against potential greenwashing claims.

Bose Varghese is the senior director of ESG at Cyril Amarchand Mangaldas.

Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.