ESG in India – Guidance on Current Status

Over the past few decades, concerns regarding climate change, environmental degradation, and social inequity have played a pivotal role in contouring investor preferences. Resultantly, an increase in the scrutinization of a Company’s social conduct has brought about the introduction of Environment, Social, and Governance (ESG) guidelines.

As of lately, there is an increased demand from various stakeholders of a Company, especially potential investors, to ensure that a Company’s business practices are ESG compliant to ensure sustainable operability, thereby underpinning the long haul of ESG practices in the years to come.

What is ESG?

ESG refers to the three primary pillars of the non-financial spectrum of a Company’s operations. In simple words, a strong ESG pertains to the three core tents of sustainable business practices i.e.,

1. E – It pertains to the environmental criteria. The Environment criteria of ESG encompasses a variety of concerns related to the environment such as emissions produced by a company, efficient use of resources, carbon emissions, climate change, and environmental sustainability associated with company practices.
2. S - It pertains to the social criteria. The Social criteria of ESG primarily relates to social equity of a company in terms of employment practices, social impact, equitable opportunity as well as social justice and fairness.
3. G - It pertains to the Governance criteria – The Governance criteria relate to the internal operation of a company, its practices, procedures, processes used to make decisions, catering to stakeholders, complying with the law, and managing its operations effectively and efficiently.

Therefore, a strong ESG profile is not only indicative of a company’s resolve towards sustainable practices and strong social values, but also adds a layer of value to a company’s portfolio in addition to the financial component of its performance.

With global ESG assets reaching an estimated prediction of 40 trillion USD by 2030 despite various geopolitical and market challenges , the acceleration of heightened investor preferences in terms of core environmental, social and governance values has become evident as an indispensable precursor of a company’s long-term success in addition to its financial performance. Thereby making ESG an important, yet evolving component of the industry standard.

ESG in India?

The ESG landscape in India has witnessed considerable development over the past years. However, it is key to note that the present regulatory framework on ESG reporting is not confined to any one particular legislation. Instead, the regime on ESG reporting finds genesis in a plethora of legislation such as Environment Protection Act, 1986; Air (Prevention and Control of Pollution) Act, 1981; Water (Prevention and Control of Pollution) Act, 1974; Hazardous Waste (Management, Handling and Transboundary Movement) Rules, 2016; Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”); Companies Act, 2013 (“Companies Act”) etc.

The Companies Act stipulates various obligations that conform with the three core tents of ESG reporting:

1. Section 134(3)(m) of the Companies Act – Imposes an obligation upon the Board of Directors of a company to contain details on conservation of energy in the board report.
2. Section 149 of the Companies Act – Mandates that every company shall have a Board of Directors comprising of at least one women director.
3. Section 166 of the Companies Act – Makes it incumbent upon the director of a company to act in good faith and to advance the company's goals for the collective benefit of its members, prioritizing the company's best interests, the well-being of its employees, shareholders, and the community, as well as safeguarding the environment.

Albeit non-exhaustive, the aforementioned stipulations in the Companies Act underscore the ESG norms prevalent in the extant legislation.

Noticeably, the ESG landscape in India underwent a considerable change with the introduction of Business Responsibility and Sustainability Report (BRSR) under the Listing Regulations vide circular No. SEBI/HO/CFD/CFD-SEC-2/P/CIR/2023/122, dated July 12, 2023, thereby propelling ESG reporting at the forefront of India’s regulatory framework.

Although applicable to the top 150 listed companies from FY 2023-24 based on market capitalization with an eventual expansion to the top 1,000 listed companies based on market capitalization from FY 2026-27, the integration of ESG has materialized as a significant consideration for companies across the industrial plane.

The newly introduced BRSR and BRSR Core, a sub-set thereunder has brought about considerable changes in the realm of reporting by companies:

i.    Introduction of KPI’s: The BRSR Core consist of a total 9 Key Performance Indicators (KPI’s) covering all three pillars of ESG attributes i.e., Environment, Social, and Governance given below:

• Water footprint.                                   
• Embracing circularity – details regarding waste management by the entity.
• Gender diversity in businesses.
• Green-House Gas footprint.
• Fairness in consumer/supplier dealings.
• Energy footprint.
• Employ wellbeing and safety.
• Inclusive development.
• Openness of business.

ii.    Value Chain Disclosures: The new circular further mandates that the top 250 companies (based on market capitalization) disclose information about their value chain as a part of its annual report.

The value chain shall include the company’s upstream and downstream partners, accounting for 75% of its purchases and/or sales by value. Therefore, spotlighting a company’s ESG impact beyond its direct operability and across the value chain i.e., embracing the entire spectrum of a company’s product or service, from sourcing raw material to the end of the product/service cycle.

Resultantly, the newly enforced mandate of value chain disclosures has perforated to relatively smaller and medium enterprises across the value chain, thereby not only spreading ESG awareness among such enterprises but also urging ESG compliant behavior and performance as not to hinder the ESG reporting requirement imposed upon larger corporations. Hence, resulting in indirect enforcement of ESG norms by way of larger corporations.

Benefits of ESG Compliance?

1. Positive Imaging: ESG compliant companies have emerged as a new market favorite for all stakeholders of a company. A strong ESG portfolio not only cultivates stronger relations with a company’s existing stakeholders but also has the propensity to cultivate strong relations with key players across the industry, especially potential investors.
2. Heightened Employee Performance: A strong ESG proposition with considerably positive social and governance profile can be an enticing proposition for hiring and retaining quality employees. Not only are such core values conducive to heightened employee performance and satisfaction, but they also instill a sense of belonging with the enterprise, therefore translating into enhanced productivity and overall performance.
3. Mitigates Legal and Regulatory Intervention: An ESG compliant company often has greater strategic and operational freedom and is not embroiled by governmental pressure or adverse legal action. Therefore, by undertaking ESG related measures, a company may be able to garner governmental support.

Risks of Non-Compliance or Incorrect Disclosures?

The importance of ESG regulations can be further adduced by the penal provisions apropos to misleading or incorrect disclosures.

Although, there exist no specific penalty in relation to the newly introduced ESG Regulations, Regulation 98 of said Regulations may find a Company liable and impose a penalty for contravening the provisions of the Listing Regulations including the newly introduced ESG Regulations thereunder. Thereby, not only resulting in fines, but also suspension of trading and freezing promoter/promoter groups.

Additionally, listed companies may also face liability under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 (FUTP Regulation) in the event the incorrect or misleading disclosures made by a company fall within the purview of “fraud” under the FUTP Regulation. Thereby potentially tarnishing the image of a company in addition to incurring liability under the FUTP Regulation.

Conclusion

In view of the above-stated, it is evident that ESG has long term implications the Indian market. Be it regulatory compliances or its perforation throughout the value chain, ESG norms are here to stay. Thereby making it imperative for companies to adopt such ESG values in order to fortify not only investment values but also ensure operational sustainability in the long run.

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