ESG Regulations

Context: 

In recent years, there has been a growing trend towards measuring businesses not only on economic metrics like shareholder return, but also on their environmental impact, social commitment, and corporate governance. 

• The main driver is the realisation that environmental, social and governance (ESG) considerations need to be included by investors in a company’s risk profile.

Image Source: The Hindu

What is the meaning of ESG?

• ESG is a set of standards for a company’s operations that socially conscious investors use to choose potential investments. 
  • Environmental criteria consider how the operations of a company impact the environment (e.g., emissions or air/water pollution). 
  • Social measures examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. 
  • Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Evolution of ESG Reporting Norms in India?

• ESG reporting in India started in 2009 with the issuance of the National Voluntary Guidelines on Corporate Social Responsibility by the Ministry of Corporate Affairs.
• In 2012, SEBI mandated that the top 100 listed companies by market capitalisation file the Business Responsibility Report (BRR) along with annual reports.
  • The BRR was later extended to the top 1,000 listed companies in 2019.
• SEBI describes the current report format as aligned with evolving global standards, which places considerable emphasis on quantifiable metrics to allow companies to engage meaningfully with stakeholders and enhance investor decision making.
• The disclosures range from greenhouse gas emissions to the company’s gender and social diversity.
• The Companies Act, 2013 mandates CSR activities for companies falling under the prescribed category.
• The Indian government has increased its emphasis on ESG issues, as seen in India’s more active role in global climate forums and the Reserve Bank of India’s announcement of auctioning ₹80 billion ($981 million) in green bonds.

Benefits of ESG Norms:

• ESG reporting norms (like BRSR Guidelines) are likely to play a bigger role in how companies are assessed, not only by investors but by consumers and stakeholders.
• The ESG frameworks are heading towards standardisation, which would reduce the scope of misrepresentation and greenwashing.
  • (Greenwashing is the act of giving a false image or giving false information about how an organisation’s products are more environmentally friendly.)
• It will attract greater investments in socially-responsible and environmentally-sustainable companies. This will prompt coporates to adopt sustainable measures.

Implications for Indian Companies:

• Compliance by Indian companies with the ESG regulations of the U.S., the U.K., the European Union and elsewhere will be critical if India is to take full advantage of the growing decoupling from China and play a more prominent role in global supply chains and the global marketplace overall.
• Indian companies look to expand their ESG risk management with due diligence that include 
  1. Looking at company records, 
  2. Interviewing former employees 
  3. Making discreet visits to observe operations to ensure that the measures to comply with international ESG standards are in effect. 

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

Conclusion 

• There is a need to enhance compliance of sustainability norms gradually. SEBI’s BRSR (Business responsibility and sustainability reporting) norms should be gradually expanded to all listed and unlisted companies. 
• There is a need of uniformity across various reporting standards and create a standard ESG Reporting Framework. Multilateral institutions like G20 can take a lead here to undertake consultation with representation from both developing and developed countries.

Source: The Hindu