In the first part of this series, we had a glimpse at the concept of sustainability and the evolution of sustainability reporting in India. In the current part,we will cover the concepts of 'stakeholders', 'sustainability risks' and how these risks impact decision making of 'stakeholders'. Stakeholders are pivotal to the sustainability reporting theme and different frameworks are designed primarily keeping the needs of various stakeholders in mind.

Introduction

The Companies Act, 2013 is framed with the purpose to protect the interest of various stakeholders in a company such as, top management, employees, customers, creditors, suppliers, etc. A director should act in accordance with the provisions of the Act, 2013, the Articles of Association of the company and in the best interests of the company, disregarding his personal interest. However, from the point of view of sustainability and sustainability reporting, the concept of 'stakeholder' has a wider connotation. The GRI standard GRI � 101 - Foundation defines a stakeholder as

Stakeholders are defined as entities or individuals that can reasonably be expected to be significantly affected by the reporting organization's activities, products, or services; or whose actions can reasonably be expected to affect the ability of the organization to implement its strategies or achieve its objectives. This includes, but is not limited to, entities or individuals whose rights under law or international conventions provide them with legitimate claims visЈvis the organization

Stakeholders & their decision making needs

Basis the above definition, stakeholders can be classified into two categories

• Internal stakeholders : Internal stakeholders refer to those who have direct involvement in the organization.
• External stakeholders : External stakeholders are those who have an indirect involvement in the organization.

The dynamics of the relationship between each stakeholder and their interest in the organization are clear from the above diagram. Each stakeholder has an interest in the organization which is impacted by the risks an organization faces and its risk mitigation strategies.

Each stakeholder makes informed decisions with respect to the organization and their interests therein from the information available to them. Regulatory frameworks inter alia, endeavour to make relevant information available to multifarious stakeholders through various reporting procedures, practices and systems. The evolving sustainability framework

Sustainability Risks

We are all familiar with the different categories of business risks. Broadly, these risks can be categorized into the following types

1. Strategic risks
2. Operational risks
3. Compliance risks
4. Reputational risks

Sustainability challenges and threats have now created a new set of risks that an organization faces. The following schematic diagram shows us an interactive scenario of various sustainability risks in the context of the business environment.

Mitigation of sustainability risks should be an integral element of the overall Enterprise Risk Management (ERM) framework of an organization and as such, these risks need to be addressed like any other business risk falling into the above four broad categories.

Sustainability risks are pervasive over various stakeholder categories and thus, their business decisions are impacted by the ERM practices of the organization. The process of onboarding stakeholders with the ERM of an organization is a part of the stakeholder engagement mechanism and forms an integral element for identification, assessment and mitigation strategies related to sustainability risks.

Regulatory Recognition of Sustainability Risks in India

There are 67 stock exchanges in the world which have provided written ESG guidance documents for the companies listed by them. (https:// sseinitiative.org/esg/guidance/database/)

 The RBI, in its Discussion paper on Climate Risk (2022) mentions that 'climate change risk is ascending the hierarchy of threats to financial stability across advanced and emerging economies alike and consequently, the need for an appropriate framework to identify, assess and manage climate- related risk has become imperative.' It further states:

'It is, therefore, important for the REs (Regulated Entity) to understand the interaction between climate-related and environmental risks and their business activities and identify the potential effect of such risks through various prudential risk categories including:

Credit risk: Rising frequency and severity of extreme weather events can impair the value of assets held by the banks' customers, or impact supply chains affecting customers' operations and profitability, and their viability.

Credit risk: Exposed to decline in valuation and increased volatility in their investments because of shifts in investor preferences or climate induced adverse effects on the underlying economic activity.

Liquidity risk: Increased demand for liquidity to respond to extreme weather events or the difficulties that may be faced in liquidating assets given their negative impact.

Operational risk: Disruption in business continuity due to the impact on the bank's infrastructure, processes, staff and systems. In addition, exposure to claims from stakeholders who have suffered climate related losses and who then seek to recover those losses.

Recognition of sustainability induced business risks from the banking and business perspective by the RBI brings to the forefront the importance of a comprehensive risk management framework to recognize and address these risks.

Sustainability Risks in the Business Operational Context

Sustainability risks in business include environmental, socioeconomic, and governance risks.The following case gives us a brief idea of the above risks and how regulators (in their capacity as external stakeholders) impose fines, penalties and strictures for corporate inaction in managing these risks or for inadequate/ inappropriate handling of such risks.

German car brand Volkswagen in September 2015 was found guilty by the Environmental Protection Agency of cheating in their carbon emission testing by devising a software named as defeat device in its diesel engine that could detect that a vehicle was being tested and that vehicle's performance could be erroneously amended accordingly to showcase better results. According to the (BBC), Volkswagen admitted to fitting the device in 11 million cars globally, 8 million of which were in Europe. Volkswagen launched a special marketing campaign in America to sell its diesel cars claiming that the car will release very low emissions, but the brand later admitted to being guilty of cheating carbon emission testing. As a result of this scandal the company had to deal with the following:

• 3.7% and 11.6% fall in sales and production compared to the previous year.
• 4.8bn fines from the scandal leading to severe quarterly financial losses.
• 20% diminution in sales and profit following the scandal in 2016 (Guardian)
• 37% loss of shareholder value (Hustle)

In another recent case, the SEC (Securities Exchange Commission, USA) fined BNY Mellon, an American financial service provider. The company had managed certain mutual funds from 2018 to 2021, over which it had claimed that an ESG quality review had been undertaken on all its investments. However, the company had failed to undertake the quality review in accordance with its claims. It had made investments in some cases without conducting the quality review and ascertaining ESG quality review score, but its investors were misled to believe otherwise. In the instant matter, the securities regulator rightly stepped in to remedy the situation. The Climate and ESG Task Force of the SEC charged the company for misstatements and misleading the customers who rely on ESG considerations to make investment decisions. BNY Mellon was ordered to pay a penalty of $1.5 million to settle the matter and take all requisite measures to correct the situation.

Indian Corporate ESG Scenario

Companies across industries both in the manufacturing and service sectors have now recognised their role in managing climate change risks. ACC, Ambuja Cements, Ultratech from the Cement industry which is one of the largest consumers of energy are investing heavily in sustainability initiatives. Other examples in the manufacturing sector are Mahindra & Mahindra, ITC Limited, JSW Energy and JSW Steel. In the service sector, Infosys, TechMahindra, Wipro, Mindtree, HDFC Bank and Reliance Jio Infocomm have undertaken Climate Change initiatives. Many have set targets to become carbon neutral. The Mahindra group, for example, has committed to become carbon neutral by 2040 and Reliance Industry, by 2035. Tata Power has committed to achieve a target of 70% of power generation through renewable sources by 2025. India has set an ambitious target of 500 GW (Gigawatt) of renewable energy by 2030 and companies are gearing towards contributing to achieving this target.

As production increases, there is a depletion in natural resources like water, minerals and forest products. These natural resources are being recognised as 'material risks' by companies in industries dependent on them as a source of input in their processes.

Controversies

In Satish Chandra Gupta vs. Assessing Officer 54 ITD 508 (ITAT, Delhi Bench), the assessee had purchased a site and could not complete the construction of the house within the prescribed period of three years. However, the house was constructed and completed subsequently. Relief was given on the ground that the delay had occurred on account of reasons beyond the control of the assessee. The honourable Income-tax Appellate Tribunal deleted the penalty on the deceased person.

Hence if the assessee has invested the sale proceeds towards a property under construction and the construction could not be completed within the stipulated time for reasons beyond the control of the assessee then also the assessee may be eligible for exemptions u/s 54.

Even after the decision, the issue is still highly debatable because provisions of the Act can be misinterpreted tothe benefit of the Assessee. The assessee may delay in investing the sale proceeds towards purchase or constructionof a house property or non-compliance to the provision may not penalize the assessee due to the relaxations given invarious judgements.

 In view of above, in my humble opinion, if for reasons beyond the control of the tax payer, construction is not completed within the stipulated time, an assessee, cannot be disallowed for exemption under section 54.

Summary & Conclusion

Business scenarios and externalities are rapidly changing. The accepted theories postulating the notion of stakeholders has undergone a change in the context of unequivocal risks now faced by organizations in their relevant operational environment. Sustainability related risks are real and there is no second opinion about it. However, their assessment, measurement, contextualization and eventual strategic mitigation also provides organizations opportunities that have not yet been fully encapsulated by the existing and evolving management sciences, regulatory frameworks and finally external stakeholder perception and impacts. Although sustainability reporting is a rapidly evolving sphere of consideration for internal stakeholders, the process of evolution for the same is underway and it is yet to reach its culmination.