ESG or Environmental, Social, and Governance is a way of evaluating a company from factors other than its financial performance. This indicator examines company policies related to environmental protection and employee satisfaction, among other things. The environmental metric assesses the effectiveness of companies in reducing their carbon footprint and implementing the best practices for reducing pollution and waste management. The social metric deals with creating fair value propositions for society, improving the health and safety of employees, encouraging gender equality at work, working towards the social and economic mainstreaming of disadvantaged communities, and engaging with customers fairly and transparently. The governance metric deals with a company’s corporate governance structure, timely financial audits, business ethics, and opposition to practices like bribery and corruption.
An ESG-compliant organisation adds great value to its business and strengthens its brand image. India lacks a centralised legislation that can rationalise ESG compliance; instead, we have fragmented regulations stemming from various Central and State legislations.
Some of the key legislations that form part of the ESG compliance framework are:
The Prevention of Corruption Act, 1988
The Prevention of Money Laundering Act, 2002
The Environment Protection Act, 1986
The Air (Prevention and Control of Pollution) Act, 1981
The Water (Prevention and Control of Pollution) Act, 1974
The Factories Act, 1948
The central government has prioritised the concept of social responsibility of body corporates in the past decade. In 2014, India became the first nation to make Corporate Social Responsibility mandatory for companies and the framework for the same was laid down in section 135 of the Companies Act, 2013. The Central and State Governments have been actively managing ESG-related regulatory compliances to ensure sustainability.
The Ministry of Corporate Affairs introduced the 'Voluntary Guidelines on Corporate Social Responsibility’ in 2009, and these guidelines were subsequently issued as the National Voluntary Guidelines on Social, Environment and Economic Responsibilities of Business (NVG). NVGs emphasise that businesses must endeavour to become responsible actors in society to move towards sustainable growth and economic development in 2019, NVGs were revised, and the National Guidelines on Responsible Business Conduct (NGRBC) were introduced.
The Companies Act, 2013 has also codified directors' duties regarding their responsibilities towards the community and environment. Section 166 of the 2013 Act requires a director of the company to 'act in the best interest of the community as well as the environment'. Section 135 and the rules framed thereunder have also constituted a comprehensive code on every company's corporate social responsibility. Furthermore, the annual board report of companies now has to include the steps taken by the board of directors toward the conservation of energy, utilisation of alternative sources of energy, and capital investment in energy conservation equipment.
Securities and Exchange Board of India (SEBI) made it mandatory for the top 100 listed companies by market capitalisation to include the Business Responsibility Report (BRR) as part of their 2012 annual report. In 2021, the BRR was replaced by the Business Responsibility and Sustainability Report (BRSR), a more comprehensive reporting framework focused on measurable key performance indicators across all the principles of the NGRBCs. BRSR is now mandatory for the top 1000 listed companies by market capitalisation from the financial year 2022-2023. Companies are now required to make the following disclosures in their BRSR:
Disclosure of ESG risks and their mitigation strategy along with its financial implications.
Reporting of sustainability goals and their related performances.
Environment-related disclosures (Waste management practices, GHG Emissions etc.)
Disclosures related to the company’s workforce policies
Disclosures on the social impact of company actions, including CSR
Disclosures related to consumer complaints, data privacy, and cybersecurity.
A staggering 69,233 compliances from 1,536 acts are applicable to organisations carrying out business in India. Every year, more than 3,000 changes are introduced in this regulatory ocean, making compliance more and more difficult. For medium and small businesses, keeping track of such huge regulatory requirements and constant changes in maintaining compliance can be a daunting prospect.
Even large organisations are not immune to the sheer number of regulations they have to comply with in their day-to-day business operations. The ever-changing nature of the compliance ecosystem makes it difficult for personnel responsible for compliance management to keep up. ESG-related regulations are gaining increased importance as governments and regulatory bodies at both the state and central levels are trying to inculcate a culture of sustainability in the economy. All of this is to mitigate climate change risk and ensure sustainable development.
ESG has become an even more critical compliance parameter as investors and lenders alike are now looking to invest in businesses that are ESG-compliant. ESG indicators are pointers used to determine whether a business is sustainable and presents a healthy investment opportunity. To improve the lucrativeness of the Indian businesses and economy to foreign investors, the commitment to ESG is required to build a circular economy that can address climate change.
In the next decade, we can safely presume that the Indian regulatory fabric is going to be heavily influenced by ESG. The vision of a carbon-neutral and sustainable future rests on today's efforts to incorporate ESG metrics in the country's governance and regulatory framework.