Under the larger category of the non-financial criterion of company performance analysis, ‘ESG elements’ constitute a sub-category. When the governance policies of publicly listed companies are concerned, it is essential that certain criteria are met to protect the interests of the shareholders. They are aware that systems that are socially, ecologically, economically, and politically stable and have good governance are necessary to achieve long-term, sustainable revenues.
ESG investment is a kind of sustainable investing that evaluates the moral contribution made by a company to all of the essential stakeholders.[1] The pandemic is the first demonstration of sustainability that can be considered definitive. India, being a fast-expanding market, it becomes crucial that companies take the issues and concerns related to ESG seriously and on priority. ESG investing is not only cost-neutral, but it also has the potential to safeguard capital and even increase profits while contributing to a more desirable future.[2] In light of this, more and more companies are turning towards ‘Socially Responsible Investment’ in order to meet the objectives of ESG issues confronting their organizations.[3]
As investors and analysts become more interested in such kind of transparency related to ESG to select some paramount shares for inclusion in their portfolios, there has recently been a sharp surge in public attention on ESG operations of the corporations. In order to do so, the advancement of ESG policies by the companies has been made compulsory through regular incentivization.[4]
The conventional disclosures reported in financial statements are no longer the only considerations in security selection nowadays.[5] Internationally, significant concern has been drawn by governments and organizations to execute a shift to a sustainable economy and to alleviate the negatives of climate change to some extent.[6]
This further highlights the importance of ESG regulations because they provide ways through which stakeholders and investors can make informed choices while looking at the sustainable practices of the companies.[7] Significantly, in recent times Indian companies have slowly shifted their focus from CSR[8] to ESG. The introduction of the ‘Companies Act in 2013’ (hereinafter referred to as “CA, 2013”) has aided in codifying the ‘stakeholder model of governance’ and mandated companies to think beyond their shareholders by addressing the concerns of the larger group of stakeholders, including the general public.[9]
Keeping this as the backdrop, the present article seeks to cover and analyze the implementation of ESG regulations in India, its significance, the role of the BRSR framework, the implementation of ESG regulatory framework, compliance with these regulations, the suggestions that can be implemented for realizing such a framework and it finally concludes with the way forward for India.
I. ESG REGULATIONS AND ITS SIGNIFICANCE
In recent times, there has been a direct shift away from the financial-centric models towards ESG-related disclosure to nudge companies to look beyond the traditional models of corporate governance. These disclosures have become highly consequential for investors both from a profit-maximization and sustainability viewpoint. Investors are looking towards these disclosures to determine the social and environmental impact of a company’s functioning and to include climate-related considerations in their asset valuation processes.[10]
The growth of these ESG requirements in India started with the introduction of ‘Section 134(m) of the CA 2013’ [11]Which stipulated companies include a report by the ‘Board of Directors’ (hereinafter referred to as “BoD”) on the aspects of ‘conservation of energy’ The primary themes of ‘transparency and accountability’, which till now had been the hallmarks of corporate governance, have slowly given way to ‘achieving the goals of ESG’, a trend which has been exacerbated by the post-pandemic scenario.[12]
Taking into account all of this, a number of strategies are being seriously undertaken by several companies to meet their ESG requirements. Some of these strategies include the utilization of renewable energy, making voluntary disclosures to the regulatory authorities, and making ESG a part of their ‘Key Result Areas’ (hereinafter referred to as “KRAs”). [13] The downside of not complying with ESG regulations is that companies run the risk of losing their hard-built reputation, and their profit-making capability, and they become vulnerable to future exigencies.[14]
As an incentive, companies are being given ESG ratings, which have been categorized into the following two types:-
- Impact rating– It deals with the impact that a corporate entity has on issues related to ESG. For instance, ITC Limited, a major company, has been recognized for its focus on initiatives taken for sustainability.
- Risk rating– It deals with the risks caused by ESG which the corporations are continuously exposed to.[15] For instance, Tata Steel has been recognized for its ability to manage ESG-related risks, which include mitigating carbon emissions.
However, all in all, Indian companies have a long way to go. Measures such as boosting energy efficiency, utilizing renewable energy, effectively recycling old materials, etc. should be taken on an urgent priority by the companies and implemented effectively at the ground level.[16]
[1] Legal, ESG: General Considerations for Investing Practices, Samisti Legal (Dec 27, 2022), https://samistilegal.in/esg-general-considerations-of-investing-practices/#:~:text=Environmental%20Social%20Governance%20is%20a,beliefs%20is%20seen%20fastest%20growth.
[2] Witold Henisz, Tim Koller & Robin Nuttall, Five ways that ESG creates value, McKinsey Quarterly (Nov. 2019), https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx.
[3] Pippa Stevens, Your complete guide to investing with a conscience, a $30 trillion market just getting started, CNBC (Dec. 14, 2019), https://www.cnbc.com/2019/12/14/your-complete-guide-to-socially-responsible-investing.html.
[4] Boodoo, Muhammad Umar, Does Mandatory CSR Reporting Regulation Lead to Improved Corporate Social Performance? Evidence from India, Warwick Business School (August 15, 2016). https://ssrn.com/abstract=2823956.
[5] Srijan Mitra Das, ESG reports, unlike financial statements, are evolving rapidly to reflect a changing world: Ethan C. Rouen, The Economic Times (Jan. 20, 2023), https://economictimes.indiatimes.com/news/et-evoke/esg-reports-unlike-financial-statements-are-evolving-rapidly-to-reflect-a-changing-world-ethan-c-rouen/articleshow/97147600.cms?from=mdr.
[6] George Atalla, Meghan Mills & Julie McQueen, Six ways that governments can drive the green transition, ERNST & YOUNG (May 13, 2022), https://www.ey.com/en_gl/government-public-sector/six-ways-that-governments-can-drive-the-green-transition.
[7] Neetika Ahuja, Vasudha Luniya, India: Introduction To Environmental, Social, And Governance (ESG) Disclosures In India With An Overview Of The Global Standards On ESG, MONDAQ (Nov 14, 2022), https://www.mondaq.com/india/diversity-equity–inclusion/1250572/introduction-to-environmental-social-and-governance-esg-disclosures-in-india-with-an-overview-of-the-global-standards-on-esg.
[8] Companies Act 2013, § 135 cl. 1
[9] Arjun Goswami, An introduction of ESG disclosures in Indian Regulatory Space – Part 2, Conventus Law (Dec. 6, 2021), https://conventuslaw.com/report/an-introduction-of-esg-disclosures-in-indian/ .
[10] Id.
[11] The Companies Act, 2013, § 134(3), No. 18, Acts of Parliament, 2013 (India).
[12] Chaitanya Kalia, Shailesh Tyagi & Saunak Saha, How ESG megatrends and opportunities are shaping our future, Ernst & Young (Jun. 27, 2022), https://www.ey.com/en_in/climate-change-sustainability-services/how-esg-megatrends-and-opportunities-are-shaping-our-future.
[13] ESG prioritization and measures taken by companies in India, India CSR (Dec. 31, 2022), https://indiacsr.in/esg-prioritization-and-measures-taken-by-companies-in-india/.
[14] Mukund Rajan, Responsible companies and ESG, Gerson Lehrman Group (Jul 2022), https://glginsights.com/articles/responsible-companies-and-esg/.
[15] Paridhi Jain, ESG rating providers: Analyzing India’s proposed regulatory framework, IndiaCorpLaw (Mar. 10, 2022), https://indiacorplaw.in/2022/03/esg-rating-providers-analyzing-indias-proposed-regulatory-framework.html.
[16] Ajit R Sanghvi, Top performing ESG Companies in India & how are their stocks faring, The Economic Times (Dec. 24, 2020), https://economictimes.indiatimes.com/markets/stocks/news/top-performing-esg-companies-in-india-how-are-their-stocks-faring/articleshow/79935953.cms.