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The rise of the ESG regulations

GS Paper 3

Syllabus: Conservation, Environmental Pollution and Degradation, Environmental Impact Assessment/Corporate Governance

 

Source: TH

Context: The evolution of environmental, social and governance (ESG) laws and regulations are still at a nascent stage in India.

 

Background:

  • Businesses should be measured not just on traditional economic metrics (shareholder return), but also by their –
    • Environmental impact,
    • Commitment to social issues and the
    • The soundness of their corporate governance and protection of shareholder rights.
  • Companies have a distinct responsibility as corporate citizens and the ESG considerations in a company’s risk profile are needed to accurately assess the enterprise.

 

How ESG differs from corporate social responsibility (CSR)?

  • India has a robust CSR policy codified in the Companies Act 2013, mandating that corporations engage in initiatives that contribute to the welfare of society by spending at least 2% of their net profit over the preceding 3 years on CSR activities.
  • ESG regulations differ in process and impact. For example, The U.K. Modern Slavery Act requires companies to publish the efforts they have taken to identify the risks of child labour in their supply chain, etc.

 

Current focus of India: Places more emphasis on protecting the environment or working conditions than on implementing the controls and disclosure that are essential components of modern ESG legislation.

 

Attempts to bring ESG legislation in India:

  • India has a number of laws and bodies regarding ESG issues, including
    • The Environment Protection Act of 1986,
    • Quasi-judicial organisations such as the National Green Tribunal,
    • A range of labour codes and laws governing corporate governance practices.
  • While these provide important environmental and social safeguards, new initiatives establish guidelines for monitoring, quantification and disclosure, akin to ESG.
  • For example, SEBI revised the annual Business Responsibility and Sustainability Report (BRSR) required by the 1,000 largest listed companies in India, mandating disclosures from GHG emissions to gender and social diversity.
Challenges for Indian companiesImplications for Indian companiesWay ahead
●        Compliance with ESG regulations (both originating in India and elsewhere – US, UK, EU), pose a significantly different challenge than India’s CSR regulations.

●        Ownership that is obscured through shell companies can present additional challenges.

Compliance will be essential if India wants to fully benefit from the growing decoupling from China and play a more significant role in global supply chains.

 

Thorough due diligence (for assessing risks and controls) will play a key role.

 

Conclusion: Companies that wish to maximise their opportunities in the global economy need to embrace these new requirements and adjust their organisations accordingly.

 

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Strengthening the CSR framework is a profitable idea