Historical Background
India has undergone a significant transformation in its approach towards Environmental, Social, and Governance (ESG) disclosures, promoting responsible business practices and sustainable investments. This shift has been driven by regulatory developments, changing stakeholder expectations, and a growing recognition of the economic and financial impacts of ESG factors.
- The 2013 Companies Act laid the foundation for ESG disclosures, mandating energy conservation reports in annual financial statements.
- The 2015 Listing Regulations further advanced disclosures, emphasizing comprehensive reporting on opportunities, risks, and concerns.
- In 2017, SEBI’s circular on ‘Disclosure Requirements for Green Debt Securities’ established a regulatory framework for ESG-aligned projects in renewable energy, sustainable transport, water management, climate adaptation, energy efficiency, waste management, land use, and biodiversity preservation.
In response to the growing global focus on ESG factors, India has introduced frameworks for sustainability reporting, such as the Business Responsibility and Sustainability Reporting (BRSR) framework, which comes into effect in 2023. The “Balanced Framework for ESG Disclosures, Ratings and Investing” document highlights the need for a balanced regulatory framework to address ESG-related issues and emphasizes the importance of informed decision-making. The proposed framework aims to mitigate greenwashing risks while streamlining compliance processes, ensuring consistency and flexibility.
Regulatory Framework in India governing ESG
“How are environmental, social, and governance (ESG) legislation and implementation largely governed by regulatory frameworks and standards of practice in your jurisdiction?”
In India, there is no centralized law that codifies the regulations controlling ESG problems. Instead, many regulations (collectively referred to as “the ESG framework”) cover ESG-related topics that are relevant to the activities of business organizations in India.
- Environmental protection (for instance, the Water (Prevention and Control of Pollution) Act of 1974 and the Environment Protection Act of 1986);
- Employment advantages (such as the Factories Act of 1948, shop and establishment legislation, bonus and gratuity laws); and
- Corporate governance, such as the Securities and Exchange Board of India (SEBI) Act, 1992, the Prevention of Money Laundering Act, 2002, the Prevention of Corruption Act, 1988, and the Companies Act, 2013.
The three main pillars of ESG are as follows:
Environmental Commitment: This refers to a company’s overall commitment to sustainability and its influence on the environment, including its carbon emissions and footprint, energy use, waste production, and environmental responsibility.
Social Commitment: This includes a company’s internal workplace culture, employee retention, contentment, diversity, working conditions, and employee health and safety. Companies with contented workers perform better and are seen as better investments.
Corporate Governance: A firm’s dedication to governance involves compliance, internal corporate culture, compensation ratios, the company ethos, and openness and accountability in leadership. Investors are drawn to businesses that are committed to workplace fairness and equality and that are able to adapt to changing laws and regulations.
Environmental Commitment: This refers to a company’s overall commitment to sustainability and its influence on the environment, including its carbon emissions and footprint, energy use, waste production, and environmental responsibility.
Social Commitment: This includes a company’s internal workplace culture, employee retention, contentment, diversity, working conditions, and employee health and safety. Companies with contented workers perform better and are seen as better investments.
Corporate Governance: A firm’s dedication to governance involves compliance, internal corporate culture, compensation ratios, the company ethos, and openness and accountability in leadership. Investors are drawn to businesses that are committed to workplace fairness and equality and that are able to adapt to changing laws and regulations.
Implementation of ESG Principles
- ESG Scorecard for the Internal Organization: Highlights Strengths and Weaknesses: To more conveniently track and trend important indicators and performance, use centralised management systems or data tools.
- Analyzing Gaps: Inform the Board of Potential Risks and Opportunities.
- Prioritizing Financial Impact: ESG Factors may be seen as important to an investment if they indicate risk that might hurt performance or if they indicate that companies with strong ESG features have the potential for high risk-adjusted returns.
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Integrating ESG into Business:
Organizations are embedding Environmental, Social, and Governance (ESG) principles into their core corporate strategy to create a more resilient and sustainable business model.
- This involves a tailored strategic solution that addresses specific needs and goals, focusing on top opportunities and risks.
- Engagement with employees, partners, and stakeholders is crucial for identifying growth opportunities.
- Embedded ESG strategies help businesses design sustainable future-proofing plans, with climate risk becoming a major concern.
- Companies prioritize ESG policies in their associate selection and adopt a top-down and bottom-up approach, integrating ESG into their mission, vision, and values.
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Mandatory and Voluntary Reporting of ESG:
Reporting on an organization’s environmental, social, and governance (ESG) performance is known as ESG Reporting. A company’s development in relation to these 3 fields can be compared to benchmarks and targets by publishing this information in a report. One more time, an ESG report is made to give complete transparency regarding the environmental, social, and governance impact of a firm to a wide range of stakeholders, including investors, employees, and clients.
Importance of ESG Reporting:- Sustainability reporting enhances corporate transparency by providing a balanced assessment of a company’s performance, promoting accountability and enhancing disclosure beyond traditional financial metrics.
- Sustainability reporting helps listed companies identify emerging risk areas and opportunities, enhancing risk management and protecting corporate reputation and shareholder value.
- Stakeholder engagement is crucial for sustainability reporting and is emphasized by international frameworks. Companies must identify stakeholders like shareholders, employees, customers, suppliers, and communities to effectively engage with them, considering their information needs.
- The company’s disclosure strategy includes non-financial environmental and social impact, offering a framework for measuring performance and managing non-financial risks. Sustainability reports aid in benchmarking, assessing performance, and promoting stakeholder communication.
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ESG Investment and Insurance needs:
- Environmental, social, and governance (ESG) investing is used to screen investments based on corporate policies and to encourage companies to act responsibly.
- Many mutual funds, brokerage firms, and robo-advisors now offer investment products that employ ESG principles.
- ESG investing can also help portfolios avoid holding companies engaged in risky or unethical practices.
- The rapid growth of ESG investment funds in recent years has led to claims that companies have been insincere or misleading in touting their ESG accomplishments.
Benefits and Major Obstacles in Applying ESG Principles
| Benefits | Key Challenges |
|---|---|
| Offers a Competitive Advantage | Understanding KPI’s |
| Long Term Profitability | Identifying Stakeholder groups |
| Attracts Investors and Lenders | Collection and Tracking ESG data |
| Improves Financial Performance | Identifying material topics |
| Builds Customer Loyalty | Having Right Set of Skilled ESG Professionals |
| Makes Company Operations Sustainable | Increased Cost of Compliance |
Conclusion:
In conclusion, ESG analysis is a crucial component of a business’ growth strategy and offers a road map for ethical corporate conduct. Businesses that prioritize ESG factors will be better able to traverse the difficulties of the contemporary business environment and promote change among many stakeholders. Stakeholder engagement is crucial for sustainability reporting, and companies must identify stakeholders like shareholders, employees, customers, suppliers, and communities. ESG investing screens investments based on corporate policies and encourages companies to act responsibly. Many mutual funds, brokerage firms, and robo-advisors offer investment products that employ ESG principles. However, the rapid growth of ESG investment funds has led to claims of insincerity or misleading claims.
Mr. Rajendra N. Punde
Sr. Legal Counsel and Company Secretary
A comprehensive framework of Environment, Social and Governance (ESG) framework is critical for evaluating and promoting sustainable and responsible business practices. ESG focus underscores the obligation of entities to conduct business operations responsibly. Efficiently executed ESG framework can help reduce capital costs and improve the firm’s valuation. With wider adoption of disclosures, being early movers on ESG action and transparency will prepare companies to deal with regulatory mandates requiring ESG disclosures. Stock markets react positively to firms with strong ESG disclosure. ESG efforts to ensure sustainable practices are more likely to attract patient capital.
Despite implementational challenges such as increased costs, lack of universally recognized ESG reporting standards, difficulty in quantifying impact and measuring comparative performance, gaps in acknowledging economic and climate related realities; companies that integrate ESG principles into their strategies are better positioned to thrive in a changing business landscape, meet regulatory requirements, attract patient capital, and contribute to a more sustainable and socially responsible economy.
Disclaimer
The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.