Author: Kumudini Ethiraj

The conversation around Environmental, Social & Governance (ESG) practices in India is shifting from corporate boardrooms to the shop floors of Small and Medium Enterprises (SMEs). What was once considered a “nice-to-have” feature for large corporations is now becoming a business imperative that directly impacts the survival and growth of smaller businesses across India. The introduction of the Business Responsibility & Sustainability Reporting (BRSR) framework by SEBI is expected to create a cascading effect that will fundamentally transform how Indian SMEs and MSMEs conduct business. 

Think of this transformation as similar to how the introduction of GST changed the way businesses operate. Just as GST compliance became mandatory for businesses above a certain threshold and indirectly affected even smaller suppliers, this BRSR compliance can create a domino effect across India’s complex value chains. The difference is that while GST was primarily on tax compliance, BRSR touches every aspect of a business, right from its environmental footprint to its social impact and governance practices. Particularly, SMEs that are value chain partners to publicly-listed corporate companies are directly impacted.

Understanding value chain partners

Value chain partners encompass all entities that contribute to a company’s business operations, both upstream and downstream. Upstream partners include suppliers, vendors, raw material providers, and service providers who contribute to the production process. Downstream partners are distributors, retailers, customers, and end-users who are part of a service or product’s delivery chain.

For instance, a textile manufacturing company’s value chain would include cotton farmers and chemical suppliers in its upstream, while garment manufacturers, retailers, and consumers are in the downstream. Under the new BRSR requirements, listed companies must report on their value chain partners that account for above 2% of their total purchases (upstream) or sales (downstream), which encompasses a significant portion of SME suppliers and customers.

Current BRSR reporting framework

SEBI’s shift from its 36 questions under the Business Responsibility Reporting framework to BRSR’s approximately 140 data points signifies a move from CSR as philanthropy to ESG as a core business strategy component. Today, the Indian BRSR reporting framework operates on a tiered approach built on nine principles of responsible business conduct with three distinct variants:

• BRSR Comprehensive: The full-scale reporting framework is mandatory for the top 1,000 listed companies in India, covering all nine principles of responsible business conduct across 130+ data points that include detailed environmental, social, and governance metrics.
• BRSR Core: This is a focused subset of BRSR Comprehensive introduced by SEBI in July 2023, consisting of a set of Key Performance Indicators (KPIs)/ metrics under the nine ESG attributes specifically designed for the top 250 listed entities (as of now) to include value chain reporting. Considering the relevance to the Indian market context, these KPIs have been identified for assurance: job creation in small towns, openness of business, gross wages paid to women, etc.
• BRSR Lite: This is a proposed simplified reporting framework intended for smaller companies, featuring reduced reporting requirements and focusing only on the most material ESG aspects relevant to SMEs.

Implementation timeline:

• FY2026: Top 250 listed entities must provide ESG disclosures for their value chain partners
• FY2027: Assessment/ assurance requirements become applicable for value chain partners (deferred by one year from the original FY2026 timeline)

This value chain reporting covers various ESG metrics such as energy consumption, water usage, waste generation, carbon emissions, labour practices, and governance structures. From FY2026-27 onwards, these disclosures will require assessment or assurance, meaning independent verification of the reported data by third-party auditors based on standards developed by the Industry Standards Forum (ISF) in consultation with SEBI.

BRSR Lite: a potential stepping stone

BRSR Lite was proposed by the Indian Ministry of Corporate Affairs through its ‘Report of the Committee on Business Responsibility Reporting’, in May 2020 as a simplified BRSR reporting framework for smaller companies. While not yet officially implemented, this voluntary framework would provide a scaled-down version of BRSR requirements, potentially making ESG reporting more accessible for SMEs. BRSR Lite would focus on the most crucial ESG aspects relevant to smaller businesses, reducing the complexity and cost of compliance while maintaining the core principles of sustainability reporting. However, even with BRSR Lite, SMEs would still need to develop basic ESG reporting capabilities to meet the requirements of their large corporate partners.

Assurance challenge: What SMEs need to know

The assurance or assessment is a type of independent audit where third-party auditors verify the accuracy of a company’s reported ESG data. It provides moderate confidence compared to reasonable assurance given in financial audits and BRSR Core. For SMEs, this means some cost implications depending on complexity and a need for robust data management systems, internal controls, staff training, and documentation processes to maintain audit trails. While SMEs may not directly need assurance as of now, the large companies they supply do. This creates cascading pressure for SMEs to provide data that can withstand audit scrutiny.

Implementing BRSR-compliant ESG practices presents significant challenges for SMEs. The complexity of tracking dozens of ESG metrics, combined with limited resources and tight budgets, makes this transition particularly challenging. Consider a typical manufacturing SME supplying to a large listed company – they must now track energy consumption, water usage, waste generation, carbon emissions, employee diversity metrics, safety records, and governance practices, all the while ensuring data accuracy and verifiability.

However, these challenges also present opportunities. SMEs that proactively embrace ESG practices can differentiate themselves in the market, gain preferential access to contracts, improve operational efficiency, and access green financing options.

Preparation strategies: Building ESG readiness

Conduct a comprehensive ESG assessment to understand the current position and identify gaps. Focus on the key impacts in your operations and establish measurable targets:

Environmental preparation

• Implement energy and water management systems
• Develop waste reduction and recycling programs
• Establish carbon footprint tracking
• Start with simple measures like LED lighting and waste reduction

Social preparation

• Develop employee welfare programs
• Ensure workplace safety compliance
• Establish community engagement initiatives
• Document existing social programs and identify expansion opportunities

Governance preparation

• Establish clear organizational structures
• Implement ethical business practices
• Create transparency mechanisms
• Develop documented policies for anti-corruption, conflict of interest, and stakeholder engagement

Technology solutions

Digital solutions can automate data collection and streamline reporting processes. Different IoT devices can monitor energy and water consumption automatically, while cloud-based platforms can centralize ESG data management. Several Indian technology companies are developing specialized ESG-software platforms designed specifically for SMEs, offering affordable solutions that scale with business growth.

Sector-specific considerations

Different industry sectors face varying ESG challenges. Manufacturing SMEs must focus heavily on environmental metrics, while service sector SMEs need to prioritize social and governance aspects. The textile sector faces particular scrutiny regarding labour practices and environmental impact, while automotive component suppliers must align with the industry’s shift toward electric vehicles.

Building partnerships

Smaller businesses cannot navigate this transition alone. Industry associations provide guidance and best practices, while collaborative procurement initiatives allow resource pooling. Large corporations increasingly offer sustainability programs to support their SME partners, creating opportunities for accessing expertise, funding, and markets.

The path forward

Successfully navigating the ESG transition requires a strategic approach balancing compliance requirements with business growth objectives. SMEs should start with low-cost, high-impact initiatives that demonstrate ESG commitment, then gradually expand their efforts as capabilities grow.

Developing a phased implementation plan can help manage costs and complexity. Initial efforts should focus on critical ESG risks and opportunities that align with core business activities. Investing in employee training and capacity building ensures ESG practices become embedded in organizational culture rather than treated as separate compliance exercises.

Conclusion: Embracing the ESG future

The integration of ESG practices into SME operations represents a fundamental shift in how Indian businesses will operate. While challenges are significant, opportunities for those who embrace change are substantial. The advent of the BRSR reporting framework and its value chain requirements are catalysts for positive change across India’s business ecosystem.