Author: Ektha Vivekanand, a student at School of Excellence in Law, The Tamil Nadu Dr Ambedkar Law University
Abstract:
Corporate Accountability is a concept closely governed by ESG practices at present. There is a confluence between ESG and CSR policies and compliances in India. This article delves into the concept of ESG legal regulations and elaborates upon the challenges in compliance and enforcement and concludes with certain recommendations or solutions to the challenges addressed.
Introduction:
A large portion of revenue generated by businesses today are being directed towards socially beneficial activities. Corporate accountability has, by and large, become a significant focal point for all corporations, irrespective of their size of operations. The intention behind mandating Corporate Social Responsibility (CSR) activities, is to hold corporations accountable to give back to a society whose resources they are using for their production purposes. Companies today, need to make profits in an ecologically balanced manner, i.e. they need to generate profits while balancing the needs of the environment. Production practices that deplete nature’s non-renewable resources are strictly frowned upon or even legally prohibited to ensure that corporations shift their energies towards the use of alternative, renewable resources. There is also an increasing amount of pressure on corporations to be socially responsible.
In the face of these drastic shifts in production practices and the overall expectations from corporate houses, a noteworthy accelerator of such change is the Environmental, Social and Governance (ESG) framework. While CSR responsibilities were previously voluntary, charitable expeditions companies opted to venture towards, they have now been emphasised upon and the overall awareness on CSR activities has increased by such an exponential rate that it has become a mandatory activity that business houses have to perform if they earn a certain amount of profits.
The idea of the ESG framework is more closely concomitant with the idea of corporate accountability. The general connotation of corporate accountability is that it involves a company being ethical and responsible in its practices; while also taking into consideration the impact its activities are having on society and the environment. Within the ESG framework, the “Environmental” aspect is used to denote how a company affects the planet. This can be by way of the carbon emissions of the company or through its use of natural resources. The “Social” aspect designates how a company affects the people involved. This can be both within and outside the company as it can be identified by how a company treats its workers or employees, how it deals with its stakeholders, how it addresses customer concerns or its overall engagement levels with the community it exists in. The “Governance” standpoint is for how the company is managed as a whole. This can be seen by whether a company is managed with openness, honesty, integrity and if it is run in a manner that is legally upright. Although ESG is typically seen as driven by the market, regulatory bodies for corporations and securities globally are starting to influence the focus on ESG through legal or regulatory measures, particularly regarding ESG reporting.
A Brief Account of ESG Compliance Requirements:
Indian corporate policy has seen deep roots of corporate accountability for over 50 years. Notions of “public interest” and it being an aspect of concern for corporations has been seen even in the Companies Act 1956, which was later repealed and replaced by the Companies Act 2013. Moreover, the judiciary has also, in multiple instances, signified the necessity for corporations to be held accountable for their actions. It is believed that ESG compliances have an increased amount of alignment with shareholder and stakeholder interests in the long run. In this scenario, businesses and their leaders have an obligation to safeguard the long-term sustainable value for a wider array of stakeholders, not just shareholders.
Section 166(2) of the Companies Act 2013 outlines the duties of a director and emphasizes that a company’s director bears a responsibility to society at large. Hence this section is in consonance with the idea of the imposition of financial accountability by way of ESG compliances.
A clearly defined regulatory process for ESG compliance was introduced by the Securities and Exchange Board of India (SEBI) in the year 2009. The change that took place in this year was that the Ministry of Corporate Affairs introduced specific guidelines for CSR compliance. Since then, the framework for reporting has advanced considerably with the launch of business responsibility reports (BRRs), national guidelines for responsible business practices, and business responsibility and sustainability reports (BRSRs).
The SEBI has mandated that the 100 largest listed companies based on market capitalization provide a Business Responsibility Report (BRR) that reflects their non-financial performance in relation to ESG factors. In May 2021, the SEBI updated the BRR and replaced it with a new BRSR, effective from the fiscal year 2022–2023. Additionally, the SEBI has mandated that the top 1,000 listed firms by market capitalization include a BRSR in their annual report. The BRSR Core, which started operating from FY2023, demonstrates the SEBI’s commitment to fostering transparent and sustainable business practices. This framework sets forth specific criteria for ESG reporting. The reporting structure is categorized into three sections – general disclosures; management and process disclosures and principle-wise performance disclosures.
As businesses increasingly recognize the environmental consequences of their supply chains, the BRSR Core prompts organizations to disclose their ESG metrics related to the value chain (which consists of the main upstream and downstream partners of a listed firm, together representing 75% of its purchases and sales by value).
The requirements of the BRSR Core will be implemented in phases, outlined as follows:
FY2023–2024 – applicable to the top 150 listed corporations based on market capitalization;
FY2024–2025 – applicable to the top 250 listed corporations based on market capitalization;
FY2025–2026 – applicable to the top 500 listed corporations based on market capitalization; and
FY2026–2027 – relevant to the leading 1,000 corporations listed according to market capitalization.
In addition to SEBI’s compliance regulations, several other statutes also include provisions for ESG requirements, such as the Companies Act 2013 and the National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business. There are various other sector-specific ESG compliance regulations such as the Reserve Bank of India’s regulations for banks, the Ministry of Environment, Forest and Climate Change’s (MoEFCC) compliance regulations for certain specific industries and the Insurance Regulatory and Development Authority of India’s (IRDAI) guidelines for corporations in the insurance industry.
Challenges in Compliance:
Considering the concept of an ESG framework is still evolving, there are various challenges involved in compliance that are faced by companies which needs to be addressed. Compliance procedures are not simple and easy to assimilate and require considerable efforts on the parts of companies in effectuating the requirements put forth by law. Although, SEBI’s regulations have made considerable strides in facilitating compliance, there are still multiple challenges that persist.
- Data Collection and Verification – Collecting trustworthy and pertinent information for sustainability reporting can be difficult, particularly for businesses with intricate supply chains or operations. Maintaining data accuracy and uniformity across various departments and locations is essential.
- Reporting Standards and Frameworks – Selecting suitable reporting standards and frameworks can be daunting. Organizations need to conform to globally accepted frameworks such as the Global Reporting Initiative (GRI) or Integrated Reporting (IR) to maintain consistency and enable comparability.
- Materiality Assessment – Assessing material ESG concerns pertinent to the company and its stakeholders necessitates thorough examination and interaction with stakeholders. Recognizing the most significant effects is essential to concentrate reporting on what genuinely matters.
- Corporate Strategy Integration – Sustainability reporting ought to be consistent with the company’s comprehensive business strategy. For certain organizations, incorporating ESG factors into fundamental decision-making processes may require a significant amount of time.
- Inconsistency in Legal Provisions – A major obstacle in India is the lack of a standardized framework for ESG reporting. This lack of consistency hinders investors from assessing the ESG performance of companies, which in turn obstructs well-informed investment decision-making. One of the primary obstacles in ESG reporting is the absence of standardization. Unlike financial reporting, which adheres to well-established accounting standards, ESG reporting varies among different frameworks and guidelines, such as the Global Reporting Initiative (GRI)[i], Sustainability Accounting Standards Board (SASB)[ii], and Task Force on Climate-related Financial Disclosures (TCFD)[iii]. This variety can cause inconsistencies and challenges in evaluating ESG performance among different companies and sectors.
- Insufficient Disclosure – Many businesses, particularly small and medium-sized enterprises, encounter significant difficulties concerning adequate ESG disclosures. Consequently, evaluating the ESG performance of these companies can be complicated, and they often lack the resources to dedicate to thorough ESG reporting.
- Lack of a Single Consolidated Legislation – India lacks a single legislation that has consolidated rules on ESG compliance. ESG requirements span the course of various enactments. For example, the Energy Conservation Act of 2001 (amended in 2022) addresses important elements of ESG, including energy efficiency and carbon emissions, among others.
- Existence of Regional Legislations – Both the central and state governments have rolled out various ESG policies that impact multiple sectors. Consequently, a cohesive legislation will improve regulatory efficiency and help foster a sustainable and transparent business landscape in India.
- Lack of standard metrics – Another challenge on the agenda for India and many other nations involves the standardization of ESG metrics, as international metrics and regulations continue to develop. The International Organisation of Securities Commissions emphasized the importance of reliable and measurable metrics in its sustainable finance agenda. This would not only streamline compliance but also promote uniformity in reporting standards.
Recommendations & Solutions:
In order to effectively tackle these challenges, on a strictly legal perspective, the first and foremost requirement would be to ensure consistency in the laws. Consistency is vital for investors to make well-informed choices, effectively evaluate ESG performance, and consistently assess risks. The degree to which SEBI applies and adapts ESG regulations, as well as its efforts to guarantee adherence, is yet to be determined. It is important for SEBI to maintain its initial advantage and uniformly implement globally accepted ESG standards in India, as this guarantees that Indian firms comply with internationally acknowledged standards and ESG guidelines.
To address this challenge, organizations can pinpoint and implement the frameworks that are most applicable to their sector and stakeholders. Coordinating reporting methods with established standards can improve clarity and facilitate comparisons. Furthermore, businesses may collaborate with industry counterparts and standard-setting organizations to promote increased consistency in ESG reporting standards.
Investing in sophisticated data management systems and technologies can optimize data collection and enhance precision. Organizations can implement well-defined data governance policies, encompassing routine audits and validation procedures, to maintain data integrity. Educating staff on the significance of precise data collection and reporting can further improve data quality.
Organizations can set up a specialized ESG compliance team to track regulatory changes and guarantee prompt adherence. Utilizing outside expertise, like consulting agencies or legal professionals, can assist in managing intricate regulatory landscapes. Ongoing training and briefings for pertinent staff can help the organization stay aligned with existing and upcoming regulations.
Carrying out comprehensive materiality evaluations that include stakeholder participation can assist in recognizing and ranking significant ESG matters. Businesses should articulate transparently how they establish materiality and respond to stakeholder issues in their reports. Ongoing conversations with stakeholders can further align reporting methods with their changing expectations.
Organizations can incorporate ESG objectives within their broader corporate strategy, making sure that ESG factors are included in decision-making processes at every level. This requires establishing specific ESG targets, aligning them with business goals, and consistently monitoring advancements. A commitment from leadership and promoting a sustainability-focused culture throughout the organization are essential for effective integration.
Establishing specific metrics and key performance indicators (KPIs) for ESG initiatives can assist in assessing and showcasing their impact. Organizations can utilize both quantitative and qualitative information to offer a complete perspective on their ESG performance. Being open about achievements and areas needing improvement can also enhance credibility and foster trust with stakeholders.
To prevent greenwashing, businesses should make sure that their ESG reporting is accurate, truthful, and backed by reliable data. Having independent verification and third-party assurance of ESG reports can increase credibility. Organizations should also be open about the difficulties and limitations they encounter on their ESG path, showing a true dedication to ongoing improvement.
Conclusion:
Although ESG reporting poses various difficulties, organizations that take the initiative to tackle these challenges can improve their sustainability efforts and strengthen their connections with stakeholders. By establishing consistent reporting methods, enhancing data accuracy, adhering to regulations, finding a balance in materiality, embedding ESG into their strategic planning, showcasing impact, and steering clear of greenwashing, companies can effectively manage the intricacies of ESG reporting and support a more sustainable and responsible business landscape.
The merging of Corporate Social Responsibility (CSR) and Environmental, Social, and Governance (ESG) principles is transforming the international business environment. As legal regulations develop and public expectations grow, companies are increasingly required to reconcile their profit-driven goals with their social obligations.
The idea of reconciling profit with social responsibility has undergone considerable change over time. While earlier economic theories prioritized profit maximization as the exclusive aim of business, contemporary perspectives highlight that ethical practices can align with sustainable growth and profitability.
To promote effective CSR and ESG practices, organizations should commit to transparency, set definitive reporting benchmarks, and synchronize their business strategies with sustainable development objectives. An effective internal system for tracking and assessing CSR efforts is crucial for maintaining accountability and achieving significant results. Furthermore, companies should partner with government entities, non-governmental organizations, and global institutions to keep pace with changing regulations and leading practices.
FAQs:
Q. What are ESG practices?
A. ESG practices imply Environmental, Social and Governance framework that governs corporate practices and ensures they are performing in a manner beneficial to the environment and society.
Q. Does India have a single legislation for ESG compliance?
A. No, India has multiple compliance requirements spread across various legislations such as the SEBI regulations, the Companies Act 2013 and various other regional and sectoral legislations to govern ESG practices.
