Vidushi Maheshwari & Ishaan Singh*

Though there is a plethora of information on the growth and future of ESG in India, this paper mainly delves into the need for reforms for the governance of the ESG sector in India. It attempts to analyse fragmented rules and regulations that indirectly govern the ESG sector of India and point out some major loopholes that these laws cannot address. Further, there has been a usage of international regulations about the ESG sector and other literary works regarding the same along with recommendations such as enhancing ESG Index, employing credit scores, addressing layoffs, gender inequality, and increasing public awareness to further the authors’ stance.

INTRODUCTION

The concept of Environmental, Social, and Governance (‘ESG’) has become a crucial framework for companies to follow. It evaluates a company’s sustainability and societal impact. Nowadays, consumers are increasingly demanding sustainable products and services, while investors are actively seeking socially responsible investments for long-term profitability. Further, reports have also indicated that, on average ESG-regulated firms have higher profitability than non-ESG-regulated firms. In India, SEBI has taken proactive steps towards sustainability by making it mandatory to disclose the ESG initiatives taken by the top 1000 listed companies under the notification dated 10^th May 2021.

This article seeks to evaluate the regulations governing the ESG sector in India. Drawing insights from the European Union and Australia, the finest implementers of ESG, it explores their successful implementation of ESG norms and assesses the potential applicability of such regulations in India. The article concludes by presenting recommendations on how to advance ESG regulation in the country.

CORPORATE INDIA’S ADHERENCE TO ESG NORMS – OVERVIEW AND ANALYSIS

The complex landscape of ESG in India is governed by a labyrinth of laws and regulations. To understand the legal landscape and implement ESG effectively, a clear analysis of the laws surrounding each component of ESG is necessary. Deciphering and breaking down the laws that fall under each letter of the acronym will provide a clearer understanding of the regulatory framework.

There are various laws and regulations that companies must adhere to, some of which include Water (Prevention and Control of pollution) Act, 1974, Air (Prevention and Control of Pollution) Act, 1981, Forest (Conservation) Act, 1980, Wildlife Protection Act, 1972 etc. However, a careful examination of these regulations reveals several loopholes. First, the process of granting environmental clearance for projects and industries lacks transparency, with inadequate involvement of the public in decision-making. Though, it may not be feasible to consider public opinion on a mass level but there should be a clearance committee mechanism in place to seek inputs from academicians, researchers, and NGOs representing individuals directly affected by a project. Second, the effectiveness and implementation of environmental regulations in India are undermined by various factors, including insufficient coordination among government agencies, restricted access to information, corruption, and limited civic participation, allowing companies to evade compliance by exploiting legal gaps and engaging in bribery. Third, the provisions become ineffective because government agencies are incapable of enforcing court-ordered fines and penalties on companies, mainly due to their lack of awareness about relevant cases and recovery procedures. According to a report by the Centre for Science and Environment (‘CSE’), many industries in India are operating without the required environmental clearance and are flouting pollution control norms.

Moving on, the “S” in the ESG laws, which stands for “social,” is often overlooked in India despite the pivotal role played by employees as the bedrock of companies. A substantial part of this industry operates without necessary legal safeguards for employees, impeding productivity and hindering social and economic progress. To address social security, the Code of Social Security, 2020 was introduced but failed to offer long-lasting solutions. First, despite the Code’s commitment to create a Social Security Fund for social security and welfare of the unorganised workers, gig workers and platform worker, it has no provisions for a minimum wage that would protect these individuals from exploitation. Second, notwithstanding the presence of regulatory frameworks, companies still encounter persistent challenges related to issues like gender inequality and a hostile working environment.

Last, the “G”, which denotes governance, serves as the crucial linchpin for the successful implementation of ESG principles. The Companies Act of 2013 serves as the primary legislation governing Indian companies and provides a comprehensive framework for their governance. Section 166 of the Companies Act establishes the duty of a director to act in the best interests of the company, its members, shareholders, the community, and the environment. Non-compliance with this provision can result in penalties. However, the issue lies in the enforcement of this requirement, as it lacks a defined procedure for evaluating a director’s performance. Second, there is no formation of dedicated specialist teams tasked with advising businesses on ESG matters, which can play a crucial role in formulating the company’s approach towards ESG disclosure and reporting. The structure and processes a board create to oversee ESG issues depends on number of factors such as complexity of company operations, its industry, the magnitude of company’s ESG risks and opportunities and the degree to which ESG issues are central to company’s strategy. For many companies this is a change management effort and requires significant organizational change, which deters the formation of such specialist teams.

Therefore, the aforementioned critiques highlight the necessity for a comprehensive overhaul of the existing rules and regulations. In the next section, we will further examine these flaws by studying successful ESG implementation in Europe and Australia, recognised as leading practitioners of ESG principles.

ALIGNING INDIAN ESG STANDARDS WITH GLOBAL VISION: TAKING LESSONS FROM GLOBAL COUNTERPARTS

To frame a policy and proceed with the advent of ESG in India there needs to be a peer review to know what could be incorporated as a bag of borrowings from countries that have realized the implementation of ESG. Implementation of ESG-related laws is a global challenge. Europe’s Corporate Sustainability Reporting Directive, effective from 2023, brings about a modernized and fortified framework for companies to report on social and environmental information. This directive expands the scope of reporting to include a broader range of large companies and listed SMEs, ensuring accessibility of crucial information for investors. Moreover, by standardizing the information to be disclosed, the CSRD aims to reduce reporting costs for companies in the long run. In Australia, ESG disclosure requirements stem from a variety of regulations like Fair Work Act, 2009, Workplace Gender Equality Act, 2012 etc.  and encompass various aspects such as workers’ rights, environmental compliance, corporate governance, and anti-bribery and corruption laws. By conducting a comprehensive analysis, India can identify and incorporate valuable lessons and best practices from these nations, shaping a robust policy framework for ESG integration.

Europe

The EU Action Plan on Financing Sustainable Growth sets out a comprehensive strategy to mobilize private finance for sustainable investment. This entails the promotion of projects that are climate neutral, energy efficient, resource efficient, and circular. The primary goal is to minimize the economic damage caused by the escalating impact of weather-related disasters. Furthermore, it involves taking into greater account the sustainability preferences of investors.

To substantiate EU Action Plan, three disclosure tools combine to form a cohesive framework. The EU Taxonomy sets criteria for determining environmentally sustainable economic activities. To qualify, an activity must significantly contribute to environmental objectives like climate change mitigation, pollution prevention and control, etc., avoid causing harm to these objectives, comply with minimum safeguards, and meet technical screening criteria set by the European Commission. Further to tackle the issue of transparency, the Corporate Sustainability Reporting Directive ensures that companies within its scope disclose both their environmental performance and information about their economic activities aligned with the Taxonomy. Furthermore, companies will be required to undergo an audit of the sustainability information they disclose. Additionally, the regulation facilitates the digitization of sustainability information. Finally, the Sustainable Finance Disclosure Regulation complements corporate disclosures by creating a comprehensive reporting framework specifically for financial products and entities. Under SFDR, asset managers are obliged to disclose the correlation between their activities and ESG values and adopt a consistent standard to ensure transparent reporting.

Australia

Majority of employees in Australia are covered by Fair Work Act, 2009, which creates the national workplace system. This system establishes minimum 11 National Employment Standards that must be provided to all employees covered by the Act which includes maximum weekly hours, flexible working arrangements, parental leave, annual leave, public holidays, notice of termination etc. The system also sets up national minimum wage and awards that apply across the country for specific industries and occupations. There is also a statutory body called “Safe Work Australia” which is responsible for developing national policy relating to workplace health and safety and workers’ compensation in the country.

Addressing gender equality, one of the significant challenges in ESG framework, non-public sector employers with a workforce of 100 or more employees are mandated by the Commonwealth Workplace Gender Equality Act 2012 to submit a report to the Workplace Gender Equality Agency (WEGA). It works with the employers to help them comply with the requirements of the Act and promotes productivity and competitiveness of Australian businesses by promoting and advancing gender equality in both employment and the workplace.

A voluntary approach for Australian publicly listed companies, the ASX Corporate Governance Council Principles and Recommendations (4th edition), provides guidelines for recommended corporate governance practices. These practices must be either complied with or explained in an annual Corporate Governance Statement. Recommendation 7.4 specifically requires listed entities to disclose any significant exposure to environmental or social risks and outline their management strategies for such risks. If an entity fails to include or omits necessary information from its annual corporate governance statement as required by Listing Rule 4.10.3, and ASX considers this omission to be substantial, ASX will notify the entity and request immediate rectification. The entity must provide any requested information, document, or explanation within the specified time to ensure compliance with Listing Rules. If the entity submits a corporate governance statement that is fabricated or contains material falsehoods, ASX will view it as a significant violation of section 1309 of the Corporations Act, 2001 and report the matter to ASIC under section 792B(2)(c).

India’s adaptability to ESG norms

India, being a developing nation, faces certain limitations when it comes to investing extensively in Environmental, Social, and Governance (ESG) reforms. In the pursuit of eradicating poverty and fostering inclusive economic growth, India finds itself at a crossroads when allocating resources toward ESG reforms. The transition to sustainable practices often requires significant financial burdens and technological advancements, which can be challenging for SMEs and rural communities. Additionally, India’s expanding population and economy result in a high demand for energy, primarily met through fossil fuels like coal. Significant financial resources are also allocated to crucial areas such as healthcare, education, poverty alleviation, and social infrastructure, leaving limited funds for comprehensive ESG reforms. Nevertheless, amidst these constraints, embracing ESG principles cannot be disregarded. India needs to adopt a pragmatic and nuanced approach that considers the country’s unique circumstances while progressively integrating ESG considerations into policies and practices.

A BRIGHTER FUTURE: PROPOSALS FOR ADVANCING ESG IN CORPORATE INDIA

SEBI’s recent revision of ESG guidelines commencing with the 2023 financial reporting year, mandating top 1,000 companies in India ranked by market capitalization to submit a Business Responsibility and Sustainability Report (BRSR) along with their yearly filings to the stock exchanges, shows the urgency and growing recognition of the need for an ESG policy. However, it is important to acknowledge that India is still a developing country and hence, it is crucial to adopt a balanced approach that ensures financial growth is not compromised while embracing ESG norms. Therefore, Indian ESG sector needs a tailored regulation incorporating specific key elements to effectively achieve its objectives without imposing significant operational costs.  

Sowing seeds of sustainability: Thriving in green future

Though MSCI India ESG Leaders Index is currently operational in India, it is designed to look at the financial significance of ESG issues. This may lead to prioritizing short-term financial gains over broader environmental and social impacts and encourage companies to engage in greenwashing. Hence, it is crucial to categorize companies, based on revenue and employee count, and assign them a credit score using a set of objective criteria, guaranteeing transparency and accountability. Some of the essential criteria that must be included are as follows:

• Carbon footprint of the company: The amount of greenhouse gases emitted by the company should be measured and recorded, giving an insight into their contribution of polluting the environment.
• Gender diversity: Companies should be evaluated on their ratio of male, female, and transgenders, promoting equality and inclusivity in the workplace.
• Laying off rate of employees: It also plays a crucial role in determining the ESG ranking of a company. A low laying off indicates stability and security for employees, making it an essential factor to consider.
• Employee satisfaction: It is a vital aspect of the ESG index and can be assessed through anonymous surveys. Employees can rate stress levels, workload, and happiness etc. on a scale of 1-10, and an average will be calculated to give an overall picture of employee satisfaction.
• Creating Autonomous Regulatory Bodies: Institutions can establish or hire independent oversight bodies to monitor and ensure compliance with policies, thereby preventing corruption and reducing instances of ESG-washing or greenwashing. The company’s board may consider adding experts in the field of anti-corruption to their leadership team. These individuals should possess knowledge of relevant vocabulary, red flags, and best practices to effectively assess and manage corruption risks.

This index will discourage authorities from indiscriminately granting environmental clearance to projects and industries that fail to comply with regulations and serve as a benchmark for companies to strive towards, ensuring a better future for all.

Lending can similarly embrace this pattern, wherein loan eligibility is determined by the credit scores of companies. Credit scores should serve as a guiding factor in approving loans. A favourable credit score indicates the company’s capability to meet its financial responsibilities, positioning it as a trustworthy investment choice and fostering a culture of adherence to ESG regulations, thereby ensuring their effective implementation.

Encouraging companies to adhere to ESG norms and promote sustainability and corporate responsibility can be achieved through incentivization. A viable approach is to offer tax reductions to companies that meet ESG standards. This approach holds greater effectiveness compared to monetary penalties, as it not only encourages companies to improve their ESG ratings but also enhances their attractiveness to investors.

Building a better world

Individuals employed in corporate organizations often endure significant social distress resulting from practices like hire and fire, gender inequality, and toxic work environments.  Some proposed solutions to address the aforementioned issues are:

The increasing trend of layoffs in the corporate world has created a pervasive sense of insecurity among employees as the current Companies Act, 2013, fails to provide adequate protection, allowing companies to readily adopt a “hire-and-fire” approach. There is an urgent need for reform to break this cycle by ensuring a notice period of 30-90 days, as stipulated in the Industrial Disputes Act, 1947, to ensure a smooth transition for both employees and employers. It is high time for the Companies Act to be updated and to include this crucial element for promotion of job security.

Gender inequality in the corporate sector is commonly gauged by the number of women in senior management positions. However, a significant but overlooked issue is the abysmally low proportion of women in the workforce. The primary reasons for this are women being forced to relocate after marriage or pregnancy. Instead of compelling women to leave their jobs, there should be opportunities for remote work, as has been successful during the COVID pandemic. Additionally, there should be a norm for maternity leave/paternity leave in the private sector, as in the government sector.

In this world of unending competition and hectic work schedules, the one thing that goes unnoticed is the mental health of employees. Personal problems like medical emergency, death of a family member, toxic work culture can be one of the few reasons directly impacting the mental health. The companies may have counselling sessions for employees and create a space where employees can engage in recreational activities.

Govern with Gusto: Innovative ideas for better tomorrow

Governance plays a vital role in every company, emphasizing the significance of operating legally, ethically, and transparently. In the Indian context, challenges in implementing ESG regulations in the corporate sector arise from poor governance practices such as corruption, inadequate transparency and disclosure, and the absence of board independence. Here are some proposed recommendations to tackle these challenges:

One way to minimise pervasive issue of corruption in India is to increase public awareness through the media.  By informing the public, the media plays a critical role in preventing and combating corruption. In cases where relevant information may have legal consequences or lead to stigmatization, such as corruption-related indicators and those relating to environmental sustainability and social equity, rating agencies and data providers can verify the information using reliable stakeholder data sources. This process not only boosts confidence in ESG metrics by confirming if companies genuinely act in accordance with their claims but also emphasizes the importance of transparency concerning ESG performance. An effective way is to establish a whistleblowing system with minimal potential adverse effects. The United Nations Development Programme (UNDP) recommends promoting and facilitating anonymous reporting channels to encourage citizens to report corruption. Citizens, acting as whistle-blowers can inform the media anonymously about corrupt practices within their organization, allowing the media to publish information and inform public to make informed decisions.

Indian companies also face criticism for a lack of transparency in their ESG practices, hindering the ability of stakeholders to evaluate their ESG performance. This can be improved by a credit creation scheme by which easy credit could be provided to those corporate entities which have published or released their ESG report. To prevent any false publication of such report i.e., greenwashing, which is deceptive practice of presenting sustainable initiatives by any company, a legislation similar to European Sustainable Finance Disclosure Regulation (SFDR) could be enacted.

India can also promote collaborative engagement between companies and one way to do this is to create platforms for dialogue and collaboration among companies, investors, civil society organizations, and other stakeholders. These platforms can provide a forum for stakeholders to engage with each other on ESG issues, share knowledge and best practices, and collaborate on ESG initiatives. For example, the C4RB, a multi-stakeholder initiative has developed a set of guidelines and tools for companies to improve their ESG practices and provides training and support to companies that want to improve their ESG performance.

CONCLUDING REMARKS

The analysis of corporate companies’ steps and existing laws is crucial in the formation of effective regulations for sustainable business practices. While voluntary adoption of ESG norms by companies is a positive development, it is important to note that regulatory enforcement is still necessary to ensure long-term compliance and protection of the environment and workers. India needs a distinct approach to environmental and social norms compared to Australia and the European Union. It needs to rely on stringent and defined regulations to enforce ESG norms, but it lacks strict regulatory checks for each component of the ESG, unlike these countries. Therefore, Indian policymakers should acknowledge these disparities when formulating regulations and customize them to align with the Indian market. Currently, ESG regulation is not firmly established in India, and the government must establish a more specific set of guidelines to make it a feasible choice for investors.

*The authors are third-year undergraduate students at Dr. Ram Manohar Lohiya National Law University, Lucknow.