Navigating towards Corporate Sustainability through ESG
The regulatory framework regarding Environmental and Social Governance “(ESG)” grew traction when it was first introduced in India in 2009 when the Ministry of Corporate Affairs “(MCA)” introduced voluntary guidelines for Corporate Social Responsibility “(CSR)”. Though this overarching goal was to holistically cover a sustainable corporate ecosystem but it fell far short of the broader vision of the UN Sustainable Development Goals “(SDGs)” i.e., the 17 global goals addressing such challenges as poverty, inequality, climate change and justice by the 2030s. For India, ESG reporting practices may not adequately reflect a company’s contribution to the SDGs. This gap exists because ESG reporting focuses more on corporate sustainability risk and performance, potentially missing the SDGs’ focus on global partnerships and overlapping goals.
The main difference between the ESG regulations and the SDGs in India is its scope and objectives. Indian ESG regulations are primarily concerned with business aspects of companies, which help in risk management and investment decisions through disclosure. On the other hand, the SDGs provide a broad framework that includes social, economic and environmental goals. This means that a company may be performing well in ESG reporting, but may not be contributing much to the SDGs.
ESG Regulatory Landscape in India
Currently, there is no specific act that regulates ESG in India though other statutes such as the Environmental Protection Act 1986, Companies Act 2013, Indian Forest Act 1927 and Water (Prevention and Control of Pollution) Act 1974 cover different aspects of ESG such as environmental and climate risks revolving around companies, the CSR compliance by companies with certain turnover and formation of committees which oversee such compliance. Securities Exchange Board of India “(SEBI)” and MCA have a significant role in regulating and promoting ESG reporting in India. SEBI has taken initiatives such as introducing Business Responsibility Reports to be submitted by certain companies. Though SEBI has taken such steps to tap into the global trends with regards to ESG, the SEBI regulations are only applicable to a small number of companies.
The Companies Act 2013 also played a key role in establishing ESG disclosure requirements with Section 134 (m), mandating companies to include energy conservation, technology acquisition, excluding foreign income and derivatives as part of the annual directors’ reports. In 2012, the SEBI issued guidelines on ESG disclosure for listed companies, which mandated that the top 100 listed companies by market capitalization shall file a BRR. It was then updated in 2015 which extended these guidelines to top 500 listed companies.
Further, MCA issued the National Guidelines on Responsible Business Conduct “(NGRBC)”, which are voluntary guidelines to encourage companies to align their strategies with SDGs and incorporate ESG considerations into their decision-making process. These guidelines provided a broader framework for ESG integration beyond reporting and to influence companies to integrate ESG principles into their business operations. As these guidelines are not mandatory, the MCA has provided several incentives for companies to adhere to these guidelines such as enhanced reputation and brand recognition which also attracts investment and funding opportunities, as the companies following these guidelines may be viewed as low-risk investments. This also means that the companies adhering to these guidelines will be better prepared for future regulatory requirements as global and domestic standards are evolving at a fast pace especially in India, as it is still in the process of strengthening ESG norms in the country.
Obstacles in implementation of ESG regulations
The introduction of the Business Responsibility and Sustainability Reporting “(BRSR)” Core Regulations by SEBI in 2021 has stirred discomfort and has left the Indian market unnerved. With the advent of these regulations, both upstream and downstream partners of the top 250 (FY 2024-2025) listed companies are now mandated to make ESG disclosures. While the primary responsibility seems to rest with the listed companies, the supply chain partners would now be bound to reassess their operations through the prism of the ESG regulations. Therefore, for SMEs and startups that are a part of the supply chains of these listed companies, this is not just another regulatory compliance but a matter of securing their sweet spot in the market.
In an observation, SEBI revealed that in FY2021-22, 328 of 500 companies that were mandated by law to follow a formalized and strategic approach to align their operations and report on the sustainability requirements, regrettably missed the mark in doing so. This non-compliance is attributable to obliviousness in the Indian market coupled with gaps in the regulatory framework, rendering companies unable and unprepared to inculcate sustainability into their business models as a motto instead of viewing it as a mere regulatory compliance.
However, in order to ease the situation, SEBI has proposed to restrict the disclosure requirements to those value chain partners comprising of 2% or more of the total sales or purchases of the company. This might provide a fleeting relief to a certain extent but would not effectively address the underlying issues in establishing a robust ESG regime.
The fundamental issue of absence of a codified and consolidated regulatory framework for ESG in India exacerbates the challenges as the existing legal framework proves to be archaic and inept to supplement the application and integration of ESG regulations. For instance, The Air (Prevention and Control of Pollution) Act 1981 stipulates imprisonment up to three months and a fine up to Rs 10,000. The Companies Act 2013 entails no provision for ESG disclosures by unlisted companies. Additionally, leadership indicators in BRSR disclosures pertaining to contribution made to the India’s nationally determined contributions, information regarding social and environmental impact assessment, details of products curated to mitigate potential environmental risk have been stated as voluntary disclosures. All these details are significant in assessing how well synchronized companies are with the ESG requirements.
The reporting of ESG data is another hurdle that companies grapple with as a lack of robust and defined statutory framework not only impacts the availability of data but also calls into question the veracity of data collected. Various FMCG companies like Hindustan Unilever, Nestle, Fast-Fashion brands like Zara and H&M have been accused of greenwashing i.e. deceptive portrayal of goods as environmentally friendly.
Bridging the gap between ESG rules and SDG
Some Indian companies are integrating their business strategies with the SDGs, focusing on specific and measurable goals related to education, health, water, and climate change. Tata Group, for example, is promoting renewable energy, rural livelihoods, and women’s empowerment. Similarly, Reliance Industries and ITC Limited have implemented projects in education, healthcare, environmental conservation, responsible sourcing, and community development.
The awareness of the benefits of ESG-conscious investing is growing among Indian corporations. A study by the Indian Institute of Management Ahmedabad showed that companies with high ESG scores exhibited lower volatility and higher returns, particularly during the COVID-19 pandemic. This can be attributed to better and judicious use of resources and efficient risk management system due to This has fuelled a rising interest in ESG investing in India. Companies are proactively adopting internationally recognized ESG reporting frameworks, allowing stakeholders to evaluate sustainability performance and helping companies identify ESG-related risks and opportunities.
SEBI has incorporated ESG into listing regulations, requiring companies to report on their ESG initiatives and adhere to specified norms. The alignment of ESG initiatives with the UN’s SDGs is gaining prominence, and companies are urged to contribute to these global goals. According to the 2021 Capri Global Capital Hurun India Impact 50 Report, companies prioritize SDGs like Climate Action (SDG13), Responsible Consumption and Production (SDG12), and Clean Water and Sanitation (SDG 6).
While there are discrepancies between ESG rules and SDGs, Indian companies are actively working to bridge these gaps through various strategies and initiatives. However, there is a need for further efforts to ensure that ESG practices in India fully align with the comprehensive vision of the SDGs.
Impact of EU’s Taxonomy on Indian Corporate Sector
The evolution of non-financial discourses has taken its course and while attempts have been made by several international bodies to formulate their own disclosure such as those developed by Global Reporting Initiative, United Nations Global Compact, Task Force on Climate-Related Financial Disclosures etc., to be followed voluntarily, EU is ahead of the curve and has made significant efforts in scaling up the European green deal. It has tailored a taxonomy which is a classification system with curated catalogue of economic activities deemed to be sustainable.
Furthermore, the EU has introduced sustainable financial disclosure requirements both at the entity and product levels. This is a positive step ahead towards realizing the collective goal of sustainable development. However, these stringent and mandatory regulations would have severe repercussions on Indian entities having business with undertakings in the European Union. The companies would grapple with such conflicting reporting regulations-EU’s very intricate disclosure requirements and a disintegrated, incohesive regulations, majorly discretionary in nature.
Way Forward
As India navigates the path ahead in its journey of becoming a sustainable nation, it is imperative that the focus is shifted from superficial compliance with the ESG regulations to actually embracing and integrating sustainability in the business portfolio of Indian companies.
Doubts regarding discredited data reporting systems and use of various non-standardized indices by companies need to be addressed in order to bridge the gaps in the existing ESG framework. Valuable insights can be drawn from the EU’s taxonomy. A sector-based classification, analogous to EU’s NACE, tailored to realize India’s international sustainable development targets can be adopted.
However, India’s humungous sustainable development goals require $2.6 trillion in capital between 2015 and 2030 for private investors and international agencies. A standardized green finance taxonomy, adhering to best principles and aiming for global convergence, emerges as a catalyst for the much-needed investments. The shift in corporate attitudes, exemplified by initiatives like SBI Magnum Fund and the Green Growth Equity Fund (GGEF) with NIIF and the UK government, signals progress.
Yet, the accomplishment of the desired goals rests on a notable departure from “cherry picked” addressing of ESG elements via numerous statues in a fragmented manner to a standardized comprehensive legislation and a reliable, robust data reporting system. India, as a developing nation, can only benefit from a solid regulatory framework and steadfast enforcement of ESG principles, ensuring that sustainable development becomes an integral part of its growth trajectory.
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Authors: Kanishtha Daswani and Chitrangda Saini, both fifth-year BA LLB students at National Law University Odisha.
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