Environment, Social, and Governance Parameters – Mandatory or Directory?
[Stuti is a student at Jindal Global Law School.]
Sustainability is becoming a key priority for businesses across the globe, not just for their legal compliance and branding strategies, but also from a stakeholder welfare perspective. Gone are the days when profitmaking was the only objective of businesses. In view of new regulations, companies are now required to invest in social good while being guided by good corporate governance and ethical business practices. The primary objective of profit-making is visibly being overhauled, even investors realize the value of social impact and public welfare as a core outcome tied to their investments.
ESG for Listed Companies
Particularly, listed companies are required to prepare sustainability reports that disclose information pertaining to their performance on the social, environmental, and governance (ESG) parameters. This extends the meaning of sustainability beyond preserving the environment, by adopting a more holistic approach that requires stakeholders to expand their duties to the social and corporate governance aspects as well. Regulation 34(3) read with Schedule V of the SEBI (Listing Obligation and Disclosure Requirements) Regulations 2015 requires companies to submit disclosures on risks, threats, and concerns pertaining to ESG parameters in their annual reports
The concept of ESG subsumes within it other stakeholders such as customers, suppliers, and employees – and by default, the company’s investors (or, shareholders). It may be noted that while ESG reporting was not mandated for the financial year 2023 – 2022, it was nonetheless encouraged as a monitoring and accountability mechanism for all stakeholders. However, ESG reporting is a mandatory requirement for all listed entities from the financial year 2022-23 onwards, by way of the Business Responsibility and Sustainability Report (BRSR).
The BRSR outlines mandatory guidelines and requirements for the top 1000 (one thousand) listed companies, based on the nine main principles from the National Guidelines on Responsible Business Conduct (RBI Guidelines). These guidelines revolve around key sustainability matters such as business ethics, transparency, fair labour practices, human rights, and so on. They are framed under the aegis of international standards including the UN Guiding Principles on Business and Human Rights, UN Sustainable Development Goals, Paris Agreement, and the International Labour Organisation Core Conventions. The BRSR aims to secure transparent and uniform disclosures in relation to companies’ ESG-related risks. This would aid in providing guidance to organisations who strive to demonstrate better sustainability aims, increase ability of investors to make informed ESG-driven decisions, and result in long-term value and profit creation.
Examining the BRSR
Good governance is demanded in Principle 1 of the BRSR itself, which states “Businesses should conduct and govern themselves with integrity, and in a manner that is ethical, transparent and accountable”. This statement itself lays down the broad expectation for businesses to display prudent and ethical behaviour.
Further, Principle 6 of the BRSR imposes a duty on businesses to preserve the environment. The disclosures pertain to, among others, resource usage, air pollutant emissions, greenhouse gas emissions, and impact on biodiversity. The ‘social’ section has been divided into disclosures pertaining to 3 (three) primary stakeholders, that are employees, consumers, and communities envisaged in Principles 3, 9, and 8, respectively.
Principle 5 pertains to the duty of businesses to protect all human rights. Therefore, by expanding the ambit of sustainability, it may be said that SEBI seeks to ensure that all universal rights are also preserved. It extends to larger communities affected by business practices.
It may be argued, therefore, that BRSR is a welcome step in the right direction. This new mandate compels companies to rethink their actions and be more mindful of the effect their business practices have on society at large. It also encourages investors to re-think their investment goals – along with where they would like to channel their money. As a result, most companies have now even started including ESG targets when computing variable pay for their employees. This emanates from investors pushing firms to allocate their funds not just to economic profit, but to non-monetary ends.
A Note on ESG History in India
It is pertinent to highlight that this is not the first time ESG has been incorporated within the Indian corporate framework. It was first introduced in the Companies Act 2013 under Section 134(3)(m) which mandated companies to include a report on the conservation of energy, along with their financial statements, drafted by their board of directors, taking guidance from the National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business released in 2011. Rule 8(3)(A) of the Companies (Accounts) Rules 2014 also mandated the board to provide information on energy conservation, including among other disclosures, steps taken towards using alternative energy sources and capital investment towards energy conservation. However, it is important to note that while these provisions mandate ESG disclosures and reporting, they do not demand companies to reveal any processes adopted by them to ensure adherence, nor does it mandate companies to record their progress over time. However, as the Securities and Exchange Board of India (SEBI) plays a key role as the securities market regulator, it is also bound to protect the interests of stakeholders, and hence, further practical guidance may also be expected from the SEBI on the effective implementation of ESG policies.
Is India Moving towards ESG Adoption?
In view of an evolving regulatory ESG landscape, prominent Indian companies such as Marico have made ESG a part of their key result areas for top management. Other big names like Tech Mahindra, Infosys, and Wipro are now included in the Dow Jones Sustainability Index, which uses global assessment criteria for ESG parameters. In principle, companies that are a part of this index are considered to follow best ESG practices and inclusion is a clear sign of good ESG practices from an investor and consumer perspective.
While India has pioneered the mandate for businesses to lead ethical and responsible practices, other countries continue to develop varying ESG perspectives. In the United States, the US Securities and Exchange Commission mandates all listed companies to disclose environmental compliance expenses. China has seven regulations that govern the ethical practices of companies. The Environmental Information Disclosure Act 2008 mandates corporations to disclose data pertaining to pollution levels, disposal methods, waste generation, and so on. In the European Union (EU), the European Commission (EC) Directive on Disclosure of Non-Financial and Diversity Information is the primary governing instrument. It requires large and public-interest companies to submit disclosures on environmental, social, and employee-related matters. The EC constantly modifies the regulations based on changing market practices and human rights considerations.
Based on the EU standards, there are some modifications that the Indian BRSR may consider. The SEBI may conduct further market studies (on a sample basis) for the top 1000 companies bound to conduct BRSR reporting, to enable further specificity in regulation-making.
The above could enable the SEBI to provide a more standardized framework. Lastly, the most striking aspect is that BRSR does not seek too many explanations for non-compliance with the ESG framework. This might discourage companies from abiding by it, as they are not strictly held responsible for their actions. India may adopt the ‘comply or explain’ model from Singapore, mandating companies to provide bona fide reasons for not complying with ESG requirements. In conclusion, while India has revolutionized the definition of sustainability by widening its ambit to hold companies responsible for not just their financial charts, but even ethical practices, there is a multitude of factors that could enable further improvement and efficiency in the extant framework.