This Article has been written by Ms. Pragati Singh, A Third Year Law Student of Calcutta University, West Bengal
Abstract
ESG disclosures play a crucial role for companies. They help companies identify potential risks and assess their ability to sustain in the future. By understanding these risks, companies can take necessary steps to adapt and avoid losing profit-making capacity and market reputation. ESG disclosures also help companies identify opportunities for innovation that can yield high results in the future. They allow companies to reassure stakeholders about their values and commitment to responsible business practices.
Introduction
ESG regulations, which stand for Environmental, Social, and Governance regulations, are all about promoting sustainable and responsible business practices. When we talk about environmental factors, we’re looking at things like climate change, pollution, resource depletion, and waste management. Social factors cover topics like labor practices, human rights, and how a company impacts the community. Lastly, governance factors focus on business ethics, transparency, and how a company is run.
These factors are becoming increasingly important for investors. They use ESG criteria to evaluate a company’s long-term sustainability and make informed investment decisions. This shift is driven by the recognition that sustainable practices are crucial for the success and stability of the global economy.
As a result, we’re seeing a rise in ESG regulations. These regulations aim to encourage companies to adopt responsible business practices that consider their impact on the environment, society, and overall governance. It’s all about promoting a more sustainable and responsible approach to doing business.
The Companies Act, 2013, has brought about a stakeholder model of governance. It mandates companies to go beyond just considering the interests of shareholders. Companies are now required to address the concerns of a larger group of stakeholders. For example, directors of a company are obligated to act in good faith to promote the company’s objectives for the benefit of its members, employees, shareholders, the community, and the environment.
This shift towards a stakeholder-centric approach encourages companies to consider the broader impact of their actions and make decisions that align with responsible business practices. It emphasizes the importance of sustainability, social responsibility, and ethical conduct in the corporate world. By embracing ESG disclosures and incorporating stakeholder concerns, companies can build trust, enhance their reputation, and contribute to a more sustainable and inclusive future.
ESG reporting in India
ESG reporting in India has indeed come a long way since its inception in 2009. It’s great to see how the reporting process has continuously improved and evolved over the years. The introduction of various frameworks like Corporate Social Responsibility (CSR), Business Responsibility Reporting (BRR), National Guidelines on Responsible Business Conduct (NGRBC), and Business Responsibility and Sustainability Report (BRSR) has played a significant role in shaping the ESG reporting landscape in India. These frameworks have provided companies with guidelines and standards to follow, ensuring transparency and accountability in their social and environmental practices. It’s exciting to witness the progress and commitment towards sustainable business practices in India.
Importance of ESG :
ESG reporting is important for several reasons. Firstly, it enhances communication with stakeholders by providing a framework to measure and disclose non-financial performance, such as environmental and social impact. This helps companies address non-financial risks and identify opportunities.
Secondly, ESG reporting promotes corporate transparency, allowing stakeholders to assess a company’s performance more comprehensively. It fosters accountability and helps build trust between the company and its stakeholders.
Additionally, ESG reporting boosts stakeholder engagement. By identifying and engaging with stakeholders, companies can better understand their concerns and expectations, leading to more sustainable reporting practices.
Lastly, ESG reporting improves risk management. It helps companies identify potential risks and opportunities that may be overlooked through other analytical methods. This enables better decision-making and proactive management of sustainability issues.
Overall, ESG reporting plays a crucial role in promoting sustainable business practices, accountability, and stakeholder engagement.
ESG regulations in India:
The regulatory framework governing environmental, social, and governance (ESG) practices in India is not consolidated under a single law but is dispersed across various pieces of legislation. These include the Factories Act, 1948; 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; Companies Act, 2013; Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015; Prevention of Money Laundering Act, 2002; Prevention of Corruption Act, 1988; and laws related to minimum wage, bonus, gratuity, welfare activities, health, and safety.
These legislative provisions address various aspects of ESG in a fragmented manner. For example:
– Section 134(3)(m) of the Companies Act mandates that the board’s report include information on energy conservation.
– Section 166 of the Companies Act imposes a duty on company directors to act in good faith for the benefit of the company’s stakeholders, including employees, shareholders, the community, and environmental protection.
– Section 135 of the Companies Act, along with the CSR Rules, 2014, requires eligible companies to allocate a portion of their profits towards Corporate Social Responsibility (CSR) activities and disclose details in their board reports.
– Regulation 17(1)(b) of the Listing Regulations specifies the composition of independent directors on the boards of listed entities.
– Section 149 of the Companies Act mandates certain companies to appoint female directors, with additional requirements for gender diversity in board composition under the Listing Regulations.
– Section 177 of the Companies Act and Regulation 18 of the Listing Regulations outline the composition and responsibilities of audit committees in listed companies.
– Section 178 of the Companies Act mandates that every listed company and certain classes of public companies establish a nomination and remuneration committee (NRC) comprising at least three non-executive directors, with a majority being independent directors. The chairperson of the company can be a member of the NRC but not its chair. Regulation 19 of the Listing Regulations stipulates that at least two-thirds of the NRC directors of a listed entity must be independent, with the chairperson being an independent director.
SEBI, the capital markets regulator, requires certain categories of listed entities to report on business responsibility and sustainability. Initially, the top 100 listed companies were mandated to file a business responsibility report (BRR) focusing on ESG factors. In May 2021, SEBI expanded this requirement to include a new business responsibility and sustainability report (BRSR) for the fiscal year 2022–2023. The top 1,000 listed entities are now required to include a BRSR in their annual reports, detailing their ESG initiatives.
In June 2023, SEBI introduced the BRSR Core framework through an amendment to the Listing Regulations and a circular. This framework includes key performance indicators (KPIs) under nine ESG attributes, an updated BRSR format, BRSR Core for the value chain, and an assurance requirement for BRSR Core. The top 1,000 listed entities must disclose as per the updated BRSR format from FY 2023–24, with assurance initially required for the top 150 entities and gradually extending to the top 1,000 entities by FY 2026–27.
SEBI also established regulations for ESG Rating Providers (ERPs) effective from July 4, 2023, under the SEBI (Credit Rating Agencies) Regulations 1999. ERPs issuing ESG ratings must now be registered with SEBI, meeting eligibility criteria and disclosure requirements to ensure transparency and prevent conflicts of interest. Cross-holdings among ERPs are restricted, with limitations on share ownership and board representation.
These legal provisions collectively aim to promote responsible business practices, sustainability, and accountability in corporate governance by addressing environmental, social, and ethical considerations.
Latest amendments by SEBI and RBI relating to ESG
SEBI has recently made significant amendments to the SEBI (Mutual Funds) Regulations, 1996 and introduced the ESG Mutual Fund Schemes Circular to strengthen regulations in the mutual fund sector, particularly focusing on ESG investments. Previously, mutual funds were only allowed to launch one ESG scheme under the thematic category for equity schemes. However, with the new circular, mutual funds can now offer ESG schemes under six different strategies, such as exclusion, integration, impact investing, and sustainable objectives. These schemes must invest at least 80% of their assets in equity instruments specific to their chosen strategy. Additionally, ESG schemes are now required to invest in companies with comprehensive BRSR disclosures, with plans to increase this threshold to 65% by October 2024.
In the realm of green debt securities, SEBI has updated its regulatory framework to align with global standards like the ‘Green Bond Principles’ recognized by IOSCO. The definition of ‘green debt securities’ has been expanded to include various categories related to sustainable projects, such as renewable energy, clean transportation, and sustainable land use. The recent amendments have further broadened the scope to cover areas like pollution prevention, circular economy products, and blue and yellow bonds related to water and solar energy respectively. Issuers of green debt securities are now required to monitor their environmental impact, prevent greenwashing practices, utilize funds for intended purposes, and report any misutilization to investors. These changes reflect SEBI’s commitment to promoting transparency and sustainability in the financial markets.
The amendments made by SEBI to the SEBI (Mutual Funds) Regulations, 1996 and the introduction of the ESG Mutual Fund Schemes Circular aim to enhance the regulation of mutual funds focusing on ESG investments. The new framework allows mutual funds to launch ESG schemes under six different strategies, with specific requirements on asset allocation and investments in companies with comprehensive BRSR disclosures. This move is intended to prevent mis-selling and greenwashing in the ESG investment space.
Regarding green debt securities, SEBI has updated the regulatory framework in line with global standards such as the ‘Green Bond Principles’ recognized by IOSCO. The definition of ‘green debt securities’ has been expanded to include various categories related to sustainable projects and assets, aligning with India’s environmental goals under the Paris Agreement. The updated guidelines also emphasize the avoidance of greenwashing, requiring issuers to monitor their environmental impact, use funds for intended purposes, and report any misutilization to investors.
Overall, these regulatory changes by SEBI demonstrate a commitment to promoting transparency, accountability, and sustainability in the financial markets, particularly in the areas of ESG investments and green debt securities.
Implications of ESG:
The progress in enhancing ESG purviews may have some ups and downs in the next few years, but the overall trend is definitely moving towards greater focus on ESG. While it’s true that India’s ESG regulatory landscape can be a bit confusing and enforcement of current rules may be lacking, businesses, especially those in energy-intensive sectors, shouldn’t underestimate the government’s commitment to improving ESG regulations.
Foreign investors who stay ahead of the regulatory curve will be better prepared to adapt to changes in a timely and cost-effective manner, while also mitigating reputational risks. It’s crucial for them to identify the material issues that affect businesses and proposed investments, keep an eye on local regulatory trends, and engage with domestic players and regulators to ensure that ESG frameworks are practical and aligned with the realities on the ground.
By being proactive and staying informed, businesses can navigate the evolving ESG landscape in India and make a positive impact while ensuring their long-term sustainability.
Challenges faced in implementing ESG regulations in India:
The implementation of ESG regulations in India does face several challenges. One major challenge is the lack of standardization and comparability in ESG reporting. Currently, there is no standardized framework for reporting, so companies can choose their own metrics and formats. This makes it difficult to compare and evaluate companies’ ESG performance.
Another challenge is the lack of awareness and capacity among companies to report on ESG issues. Many companies in India are new to ESG reporting and may not have the necessary systems and processes in place to collect and report ESG data. This is especially true for smaller firms that may lack the resources and expertise to implement ESG practices.
Additionally, the regulatory framework for ESG in India is still limited and not comprehensive enough to address all sustainability and responsible business practices. It will require a collective effort from regulators, companies, and investors to promote ESG compliance and foster a culture of sustainability.
However, the rise of ESG regulations is a crucial step towards achieving a sustainable future. They provide a framework for companies to measure and report their ESG performance, helping investors make informed decisions about where to allocate their capital wisely. It’s an exciting time as we work towards creating a more sustainable and responsible business environment in India.
Conclusion:
In today’s interconnected world, it’s more important than ever to prioritize diligent ESG reporting. Taking a reactive approach, where companies only address issues as they arise, is not sustainable in the long run. It can have negative consequences for the company’s reputation and overall success.
Instead, fostering a culture of compliance is key. By proactively integrating ESG reporting into business practices, companies can ensure they are meeting their responsibilities and staying ahead of potential risks. This approach involves not only meeting the compliance requirements of different jurisdictions but also going beyond those requirements to demonstrate a commitment to sustainability and responsible business practices.
While compliance requirements may vary across jurisdictions, there is a global call for standardized reporting guidelines. Having consistent guidelines would not only make it easier for companies to navigate the reporting process but also enhance transparency and comparability across industries and regions. This would facilitate a better understanding of companies’ ESG performance and foster trust among stakeholders.
By embracing standardized reporting guidelines and promoting a culture of compliance, companies can demonstrate their commitment to sustainable practices, build trust with stakeholders, and contribute to a more sustainable and responsible global business environment.
References:
https://iclg.com/practice-areas/environmental-social-and-governance-law/india
https://www.indialawoffices.com/legal-articles/is-esg-reporting-mandatory-for-companies-in-india
https://vidmaconsulting.com/esg-compliance-and-rep/
https://timesofindia.indiatimes.com/blogs/voices/rise-of-the-esg-regulations/
https://www.datatracks.com/in/blog/top-1000-listed-companies-to-file-esg-reports-with-sebi/
https://www.india-briefing.com/news/india-brsr-core-esg-rating-provider-regulation-29062.html/