Incorporating Environment, Social And Governance Norms Into Indian Corporations

Present Framework

Currently, SEBI by amending Regulation 34(2) (f) of the LODR Regulations introduced the Business Responsibility and Sustainability Reporting (BRSR) as the new regulatory framework in the need to integrate ESG norms in India’s regulatory framework this replaced the existing framework of the Business Responsibility Reporting (BRR). BRSR is aligned with the 9 principles of the National Guidelines for Responsible Business Conduct.

BRSR which has mandated the top 1000 companies by market capitalisation to make disclosures regarding their ESG practices is broader than the BRR. BRSR is a data-heavy framework and is said to draw its inputs from the global sustainability framework.

Further BRSR reporting which is a compliance mandate for the companies adopts United Nations Sustainable Development Goals and is also benchmarked with other ESG frameworks like GlobalReporting Initiative. This present framework is better than the earlier one since it is now ensured that companies report on the gender ratio among their employees mandatorily now the companies have to conduct human rights reviews, and disclose the impact assessments further the BRSR has made changes in Environmental reporting.

ESG Norms: In Present Time

Shift From CSR to ESG

CSR was a precursor to ESG. While CSR aims to make the business accountable but the ESG comes with the quantifiable indicators to measure accountability and deals with numerical figures. Since ESG is a quantifiable measure of the company’s sustainability and social impact, the same is being taken into account by the investors. The shift is also taking pace due to the stakeholder demand especially investor and consumer wants the companies to make a difference for the greater good. Another reason for the shift is seeing the deleterious consequences of the Covid-19 pandemic investors have started rushing towards the ESG-compliant companies. Further, after the pandemic companies were in dire need of funds and with investors becoming increasingly selective, this accelerated the pace of transition towards ESG policies.

ESG practices are now also resulting in better operational performances for the companies. According to TheOxford University Metastudy: From Stockholder to Stakeholder ESG practices in companies lead to better operational performance in 88% of the companies and better stock performances in 80% of the companies at the same time it lowered the cost of capital for 90% of the companies. Even if you see in stock indices, the ESG index companies have performed better than the other index companies to supplement this the study conducted by the RBI based on the Morgan Stanley Capital International (MSCI's) ESG indices found that the Indian domestic companies with ESG framework have performed better than their global peer's further companies which managed and made the ESG disclosures are associated with the higher stock prices. Thus complying with ESG standards can boost employee productivity, and companies’ reputation and lead to long-term sustainable growth.

Investors would prefer companies that follow ESG norms since these companies are environment-oriented and have high governance standards. One example to demonstrate that investors prefer the ESG complying companies is Norway Bank Investment Management seeing Page Industries alleged human rights violations it was excluded from its portfolio. Even ESG disclosures would help these companies too since by these disclosures they can assess their ability to sustain in future, and adapt to future changes.

Ignoring The ‘S’ & ‘G’ in ESG

While there is a need to focus on E in ESG but at the same time S & G can’t be ignored. In recent times, issues like layoff that employees faced after the pandemic and the increased exposure to Covid-19 has brought attention to the ‘S’ in the ESG that is social and demand for the employee's safety and health has risen further as the pandemic has revealed the need for responsibility towards the workforce. India is facing a growing wealth and income inequality problem as evidenced by the report titled “IndiaInequality Problem”. Thus now the responsibility lies upon big corporates. Growing income disparities can generate social unrest thus for the long-term survival need is to give equal importance to the ‘Social’ in ESG.

Now coming to ‘G’ which is another important element in the ‘ESG’. Governance plays an important role and oversees the company’s operations, ensuring ethical decision-making & transparency. While mostly the governance is driven singularly by the shareholders with the aim to maximize their returns and at best they can produce incremental changes in issues like climate change but not going to solve these issues. By having wider board representation businesses would be more innovative and make better decisions. Also, stakeholder capitalism cannot be achieved without stakeholder governance thus better governance is the need of the hour since it lays the foundation for the long-term value.

ESG norms which are becoming global norms are not something like checklist compliance. It is creating conscious corporates and preserving the planet for future generations while at the same time ensuring long-term returns.

Challenges In ESG Reporting

Some businesses abuse sustainability reporting as a means to create misleading information about their product being more environmentally sound which brings up the problem of Green Washing. Green Washing is defined by the SEBI as “making false, misleading, unsubstantiated, or otherwise incomplete claims about the sustainability of a product, service, or business operation.” With Companies making increasing claims of environmentally sustainable business and lack of a legislative framework to regulate the same, this becomes a significant issue. In February 2023, SEBI issued a circular which lays down the instructions for the companies to restrain from Green Washing through green debt securities. This circular stated that companies should not use misleading labels, make untrue claims and provide accurate details about the environmental impact. Subsequently, anothercircular issued by the SEBI on February 6, 2023, provided for the appointment of a third-party agency to review the project and ensure that proceeds from green-labelled securities are used for the intended purpose.

While these circulars dealing with green debt securities are a step in the right direction but still, the problem of green washing is present. Even ForbesReport has highlighted that "Green washing has become a big problem for ESG."

BRSR which is the new regulatory framework, lacks comprehensiveness and the disclosure requirements are generic and minimal when compared to the International frameworks of the EU. While a sector-specific approach is the need but the BRSR framework is silent on the specific sector requirements. The sector-specific approach should be taken into account since industries affected varies on ESG matters.

At the same time, there is a lack of governance standards in ESG and it is complex and subjective. Since these standards vary across industries, and regions therefore it becomes difficult to establish universal benchmarks for the governance practice. Apart from this lack of qualified internal resources is another challenge in effectively implementing the ESG initiatives since ESG integration requires a huge talent pool.

The corporates can’t do away with their responsibility towards the environment. Now the mind-set has changed it is not only the mere creation of wealth but the focus is now on sustainable growth for future generations and concerning that aspect the ESG norms would be playing a very crucial role. The Covid-19 Pandemic has brought the focus on building a sustainable business model with this the renewed focus will also be transparency and accountability thus again ESG standards will play a role in achieving them. Thus in the end commitment to the ESG norms will help benefit society, the economy and businesses.

Views are personal.