Charting the ESG Course: A Comprehensive Outlook on Navigating the Environmental, Social, and Governance Landscape
I. INTRODUCTION
Corporate governance is a dynamic field that undergoes continuous transformation, paralleling the evolving mechanisms for holding corporations accountable in their responsibility to the environment and social obligations. In recent times, the discourse on corporate governance has notably integrated the environmental, social, and governance (ESG) framework, signifying its growing significance. However, it is imperative to elucidate the true essence of ESG, its implications for investors, and the reasons why it warrants attention. ESG, in legal terms, refers to the tripartite framework encompassing Environmental, Social, and Governance factors that companies are increasingly expected to integrate into their operational and decision-making processes.
This framework is instrumental in evaluating a company’s commitment to sustainable practices, social responsibility, and robust governance structures. For investors operating within the legal sphere, ESG holds considerable weight as it provides a comprehensive lens through which to assess a company’s risk management, ethical conduct, and long-term sustainability. Investors, under legal obligations to act in the best interests of their stakeholders, are compelled to factor in ESG considerations in their investment decisions. This involves scrutinizing a company’s environmental impact, social initiatives, and governance practices to ascertain alignment with legal and ethical standards.
The Framework of ESG compliances comes under purview of various statutes other than Companies Act, 2013. The list of the major statutes that govern this framework are as follows:
1. Factories Act, 1948.
2. Environment Protection Act, 1986.
3. Air (Prevention and Control of Pollution) Act, 1981.
4. Water (Prevention and Control of Pollution) Act, 1974.
5. Hazardous Waste (Management, Handling and Transboundary Movement) Rules 2016.
6. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations, 2015.
7. Prevention of Money Laundering Act, 2002.
8. Prevention of Corruption Act, 1988.
The interconnection between the Sustainable Development Goals (SDGs) and Environmental, Social, and Governance (ESG) factors is substantial. ESG practices, such as reducing carbon emissions and promoting diversity, align with and contribute to achieving specific SDGs.
Simultaneously, integrating ESG principles into investments serves as a catalyst for expediting SDG fulfilment. In recent times, there has been a noticeable surge in ESG-focused investing. Investors are increasingly drawn to companies championing sustainability and ethical business practices due to heightened environmental and social awareness, growing demand for sustainable products, and regulatory pressures to enhance ESG performance. The convergence of SDGs and ESG is pivotal in the modern landscape. The collaboration among businesses, investors, and governments in pursuit of SDGs underscores the integral role of ESG in propelling collective progress. As sustainable development gains momentum, ESG becomes a driving force, guiding stakeholders toward environmental stewardship, social responsibility, and robust governance. This intersection signifies a transformative dynamic wherein ESG acts as a linchpin for progress, fostering a shared vision of a sustainable and equitable future.
II. ESG FRAMEWORK AND MANDATES
The Environmental, Social, and Governance (ESG) framework constitutes a blend of both mandatory legal requirements and voluntary codes of governance. The degree of compliance with the ESG framework varies, with some entities being obligated to adhere to its provisions, and the extent of these obligations contingent on the size of the relevant entity.
To illustrate, the Companies Act of 2013 stipulates more stringent governance controls for larger companies, a determination based on parameters such as paid-up share capital, net worth, turnover, or profit thresholds. Additionally, companies surpassing specific turnover, net worth, or profit criteria are compelled to allocate a minimum of 2% of their average net
profits from the preceding three financial years to corporate social responsibility initiatives. Further, the Environment Protection Act of 1986 classifies industries based on their pollution load, categorized as Red, Orange, Green, or White in descending order of environmental impact. Industries with higher pollution loads are prohibited from operating in ecologically sensitive areas. This classification aligns with the overarching objective of environmental protection, demonstrating a mix of legal requirements and regulatory measures aimed at mitigating adverse environmental effects based on industry operations.
The Companies Act of India, particularly Sections 134, 166, 135, 149, 177, and 178, along with relevant regulations under the Listing Regulations and SEBI guidelines, impose various corporate governance and disclosure requirements on companies. Here’s an overview of the key provisions:
1. Section 134(3)(m): Energy Conservation Disclosure: Requires the board’s report to include details on energy conservation efforts, alternative energy sources, capital investment in energy conservation equipment, and technology absorption.
2. Section 166: Duty of Directors: Casts a duty on directors to act in good faith for the benefit of the company, its members, employees, shareholders, community, and environmental protection.
3. Section 135 and CSR Rules: Corporate Social Responsibility (CSR): Mandates companies meeting specified criteria to constitute a CSR committee, spend at least 2% of average net profits on CSR, and disclose committee composition, CSR policy, and reasons for any unspent amount.
4. Regulation 17(1)(b): Composition of Board for Listed Entities: Stipulates that one-third of the board should be independent directors if the chairperson is a non-executive director and not a promoter or related to a promoter.
5. Section 149: Female Director Requirement: Requires certain classes of companies to have a female director, and top 1,000 listed entities must have an independent, female director.
6. Section 177: Audit Committee: Requires the board of listed and certain public companies to constitute an audit committee with a majority of independent directors.
7. Section 178: Nomination and Remuneration Committee (NRC): Requires listed and certain public companies to have a nomination and remuneration committee with a majority of non-executive directors, including independent directors.
8. SEBI BRSR (Business Responsibility and Sustainability Report): Originally introduced as BRR (Business Responsibility Report) for the top 100 listed companies, expanded to BRSR for the top 1,000 listed entities. Mandates disclosure of initiatives taken from an ESG (Environmental, Social, and Governance) perspective in the annual report.
These provisions underscore the legal framework compelling companies, especially listed entities, to adopt and disclose practices that align with sustainability, ethical governance, and social responsibility principles.
III. REGULATOR’S APPROACH TO ESG ENFORCEMENT
In the legal domain, entities like Registrars of Companies and authorities under the Income Tax Act, 1961, play a vigilant role in addressing corporate and financial offenses within the Environmental, Social, and Governance (ESG) framework. Empowered with information obtained from company filings, these entities actively investigate and frequently reveal significant irregularities through routine inquiries. The Directorate of Enforcement, operating as a financial investigation agency under the Department of Revenue, consistently examines potential violations related to foreign exchange and anti-money laundering laws.
Additionally, Pollution Control Boards, serving as custodians of the environment, levy penalties such as fines and utilize measures like closures and seizures to dissuade and penalize wrongdoers. A recent example of their decisive actions includes the shutdown of the Sterlite Industries Limited plant in Tamil Nadu by the Tamil Nadu government and pollution control board due to environmental concerns. Together, these enforcement bodies play a crucial role in maintaining the credibility of the ESG framework through proactive measures
and investigations.
IV. AUTHOR’S NOTE
In summary, the dialogue surrounding corporate governance has advanced, incorporating the Environmental, Social, and Governance (ESG) framework as a pivotal facet. ESG, within the legal context, denotes a tripartite framework progressively expected of companies for integration into their operations, evaluating their dedication to sustainability, social responsibility, and robust governance structures. India’s regulatory framework is delineated by diverse statutes, including the Companies Act of 2013 and assorted environmental protection laws, exemplifying a fusion of obligatory and discretionary compliance measures inherent to the ESG framework. The interrelation between Sustainable Development Goals (SDGs) and ESG factors is conspicuous, with ESG practices serving as catalysers for attaining specific SDGs. This synergy has propelled a surge in ESG-centric investments, with investors acknowledging the value of supporting enterprises championing sustainability and ethical principles. In this milieu, ESG compliance transcends a mere legal obligation; it assumes the character of a strategic imperative for companies aspiring to enduring success.
Enforcement entities such as Registrars of Companies, the Directorate of Enforcement, and Pollution Control Boards play a pivotal role in upholding ESG integrity. They actively scrutinize transgressions, bringing irregularities to light and imposing sanctions to ensure alignment with environmental standards and financial regulations. A recent exemplification, the closure of the Sterlite Industries Limited plant in Tamil Nadu, accentuates the decisive measures taken in response to environmental apprehensions. As India progresses in its pursuit of sustainable development, the ESG framework assumes a central role in shaping corporate conduct and nurturing a culture of accountability. It transcends mere legal adherence, symbolizing a dedication to ethical comportment, environmental custodianship, and societal influence. Enterprises and investors navigating this terrain are not merely fulfilling regulatory requisites; they are actively contributing to a more sustainable and just future. The evolving ESG narrative in India mirrors a collective endeavor toward conscientious corporate citizenship, with regulatory entities and stakeholders collaboratively molding a forward- thinking and responsible business landscape.
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