The rise of the ESG regulations

In Context

• Over the last decade, regulators and corporations have embraced environmental impact, commitment to social issues and the soundness of their corporate governance and protection of shareholder rights as part of their business model.

About

• Companies have a realization that environmental, social and governance (“ESG”) considerations need to be included by investors in a company’s risk profile in order to accurately assess the enterprise. 
• The evolution of ESG laws and regulations is, however, still at a nascent stage in India, where the focus is often on providing protections regarding the environment or workplace conditions.  
• In this regard, the Securities and Exchange Board of India (SEBI) has substantially revised the annual Business Responsibility and Sustainability Report (BRSR) required by the 1,000 largest listed companies in India.

What is ESG?

• ESG refers to three key factors considered by investors and stakeholders when evaluating a company’s sustainability and societal impact
  • Environmental factors : It relate to a company’s impact on the natural environment, including energy use, greenhouse gas emissions, waste management, and resource consumption
  • Social factors: It refer to a company’s impact on society, including relationships with employees, customers, suppliers, and communities
  • Governance factors: It focus on a company’s management and decision-making structures, including board composition, executive compensation, and transparency
• Companies demonstrating good ESG practices may benefit from reduced operational costs, better risk management, and enhanced reputation among consumers and investors
• Investors recognize the importance of ESG factors in evaluating long-term sustainability and profitability of companies
• Companies neglecting ESG considerations may face reputational damage, regulatory scrutiny, and increased operational costs
• Many consumers and employees also consider ESG factors when making decisions about which companies to support or work for.

How ESG differs from CSR?

• India has a robust corporate social responsibility (CSR) policy that mandates that corporations engage in initiatives that contribute to the welfare of society.
• This mandate was codified into law with the passage of the 2014 and 2021 amendments to the Companies Act of 2013 which requires:

• Companies with a net worth of ?500 crore (approximately $60 million) or a minimum turnover of ?1,000 crore (approximately $120 million) or a net profit of ?5 crore (approximately $6,05,800) in any given financial year.
• Companies spend at least 2% of their net profit over the preceding three years on CSR activities.

Why is ESG Relevant in India?

• India has a number of laws and bodies regarding environmental, social, and governance issues
• New initiatives in India establish guidelines that emphasize monitoring, quantification, and disclosure, akin to ESG requirements found in other parts of the world.
• Compliance with ESG regulations from other parts of the world will be critical if India is to take full advantage of the growing decoupling from China.
• Adhering to ESG can play a more prominent role in global supply chains and the global marketplace overall

Implications for Indian Companies

• Compliance with ESG regulations poses a significantly different challenge than India’s CSR regulations
• Thorough due diligence will play a key role in expanding ESG risk management.
• Companies that wish to maximize their opportunities in the global economy need to embrace these new requirements and adjust their organizations accordingly.

• Indian companies looking to expand their ESG risk management need to conduct thorough due diligence that can stand up to scrutiny.
• ESG due diligence needs to be supported within the company with detailed procedures for assessing risks and controls for assuring that no corners are cut.

Way Ahead

• Environmental, Social, and Governance (ESG) factors are increasingly important considerations for investors and stakeholders when evaluating the sustainability and societal impact of a company. 
• The evolution of ESG laws and regulations needs controls and disclosure that are a hallmark of contemporary ESG regulation.
• There is also a need to further bring legislation by the Indian government on ESG issues, which can be seen in India’s more active role in global climate forums and secure long-term growth in today’s business landscape.

Source: TH