The Environmental, Social and Governance (‘ESG’) factors have always played an important role in international considerations. The United Nations (‘the UN’) has been at the forefront of pushing the ESG agenda with initiatives such as the formation of the International Labour Organisation (1919), UN Framework of Climate Change (1992), publishing of the Millennium Development Goals (2000-2015) (‘UN MDGs’), etc. Presently, the UN Sustainable Development Goals, which are a set of 17 interlinked objectives that replaced the UN MDGs, are the guiding light towards improvement of ESG conditions worldwide.

The increase in human induced global warming, rising inequality and recurring governance failure within organizations have the potential to cause serious repercussions for the world. A step towards a better world is only possible if the government, the private sector and individuals follow principles which benefit the environment and the society. This has resulted in nations adopting and implementing an ESG compliance framework.  However, the following themes pose a recurring challenge for developing a sound and credible ESG compliance framework:

1. Green Washing i.e. promoting a product, service, or company as more environmentally-friendly than it truly is by falsely advertising environmental benefits.
2. Incremental Costs due to putting in place an ESG framework / infrastructure and implementing / monitoring of such framework.
3. Lack of Infrastructure in many mid-size corporates as well as SMEs to undertake ESG compliance such as measuring CO2 emissions, compliance with environmental standards.
4. Lack of voluntary initiative on behalf of corporates and business houses for undertaking ESG disclosures.
5. Supply chain challenges such as ensuring ESG compliance by supply chain vendors.
6. Credibility of data being reported under the EGS compliance framework and verification of such data.

The ESG factors have always been considered in India while framing national legislations. The current global expectations exist in India as part of culture. “Ram Rajya” is a term we have heard from our childhood which refers to a State which is best in governance on all aspects. For us, adopting a new ESG compliance framework is like an old wine in a new bottle.

Some of the ESG factors considered in the current legislation framework are as follows. In relation to environment, Article 48A directs the State to protect and improve the environment which has resulted in passage of Environment Protection Act, 1986, undertaking EIA, etc. For improvement of social conditions, the Employee State Insurance Act, 1948, Maternity Benefit Act, 1961, etc have been passed. For improvement of governance, the National Code on Corporate Governance was passed and made applicable to listed companies.

The development of an ESG compliance framework in India is led by institutions such as the MCA, SEBI & RBI via issuance of notifications and circulars on matters related to ESG. The ESG compliance framework in India is based on the nine principles formulated under the National Guidelines on Responsible Business Conduct (‘the NGRBC’) by MCI in 2019. Based on the principles, SEBI has introduced the Business Responsibility and Sustainability Reporting (‘BRSR’) which has been made mandatory for the top 1000 listed companies by market capitalization. Further, SEBI is now holding consultation with the industry to- a) improve ESG disclosures by providing assurances and developing a BRSR Core index; and b) regulate ESG rating providers and ESG investing. Further even, the RBI has recently notified the framework for acceptance of green deposits thereby strengthening ESG framework in the banking and financial sector.

The onus has been shifted on the corporate sector to undertake ESG compliance. This leads to the question as to how Corporate India should approach this subject as it is evolving on daily basis. Some suggestions in this regard are stated below–

1. Limited audit of ESG compliance basis information publicly available and that provided by the entity. The limited audit can be in the form of a gap analysis highlighting compliances done and major gaps with respect to ESG compliance. Further, steps can be taken to curate the said gaps to bring the entity within the compliance environment.
2. Specific audit to analyse on real time basis the nature and extent of compliances on ESG and/or the shortcomings if any.
3. In absence of inhouse resources, an entity can hire external ESG Practitioners to help formulate a policy and manual for effective management and implementation of compliances under ESG.
4. Where ESG compliance is being done or underway, there are rating agencies which can rate the company on ESG which is now a global expectation.
5. Voluntary reporting under BRSR. This may help in improving the reputation of an entity and help the entity to get access to cheaper funds by way of debt and equity in India and from global players.
6. Communication with in the organization and supply chain could improve on awareness and compliance on ESG.
7. Board supervision and training to KMPs could accelerate the process.

ESG is like old wine in a new bottle and ESG compliance are likely to be made applicable to most of the entities. Hence, taking the first step towards undertaking EGS compliance is the most difficult and the most important step.

Written by:

RAJESH NARAIN GUPTA, MANAGING PARTNER AND MANAN PANT, ASSOCIATE, SNG & PARTNERS