[Vaanya and Vidhi are students at Institute of Law, Nirma University.]
This article explores the emerging transition from corporate social responsibility (CSR) to the broader framework of environmental, social, and governance (ESG) practices in India. It highlights the global trend towards sustainable development and India's role in embracing ESG principles. ESG encompasses environmental stewardship, social responsibility, and effective governance practices, providing investors with insights into responsible business conduct. The article acknowledges the limitations of traditional CSR in addressing complex sustainability challenges and emphasizes the need for a comprehensive ESG framework in India. While some companies have adopted ESG principles, overall adoption is still in its early stages. The Ministry of Corporate Affairs (MCA) and the Securities and Exchange Board of India (SEBI) have taken steps to promote ESG integration. However, challenges remain, including the absence of standardized reporting and clear regulations. The article concludes by highlighting India's commitment to sustainable development and the potential for businesses to drive positive social and environmental impacts through ESG practices.
Background
In recent years, India has witnessed a significant advancement in corporate governance which is aimed at promoting sustainable business practices, cultivating investor confidence, and protecting of various stakeholders.
As our planet grapples with increasingly severe environmental calamities, climate change has emerged as a pressing global concern making it essential to also consider the ‘environment’ among the stakeholder. According to the “Brown to Green Report 2019”, India is among the top 5 G20 countries suffering huge economic losses due to extreme weather conditions. In response, companies initially turned to CSR activities as a means to mitigate their impact on the environment. However, a new paradigm shift is underway as the world recognizes the limitations of CSR and embraces the broader framework of ESG for sustainable development.
For decades, CSR was seen as an obligation for businesses to give back to society. While these philanthropic efforts were aimed at addressing social issues, they often failed to adequately address the complex challenges of environmental degradation, however, the present is changing, wherein now, the need for a comprehensive approach to sustainability is given significance rather than the traditional system.
ESG framework promotes this sustainable development and encompasses a broad spectrum, going beyond philanthropy to include environmental stewardship, social responsibility, and good governance practices Globally, this transformational shift from the "obligation" of CSR to an integrated approach to ESG is gaining momentum. Companies and stakeholders understand that sustainability is not an optional change but a key to long-term success. As the world moves towards sustainable development, ESG is emerging as a new measure of corporate responsibility However, the shift towards ESG in India is still in its infancy stage. While some forward-thinking companies have already adopted ESG principles, overall adoption is very limited. In this blog, we understand the concept of ESG and critically analyze the trend of the shift from CSR to ESG in the Indian scenario.
Understanding ESG
ESG refers to a set of standards that assess how well a company safeguards the natural environment, manages stakeholder relationships, and maintains internal control over management, leadership, decision-making, and shareholder rights. These criteria aid investors in evaluating a company before investing by ensuring it follows responsible business practices. Although establishing and adhering to a comprehensive ESG framework may initially incur costs for a company, it ultimately yields long-term benefits. Neglecting ESG considerations can result in financial, reputational, and legal repercussions due to non-compliance.
Section 134(39)(m)) of the Companies Act 2013 (Companies Act) mandates the inclusion of specific statements presented in a company's general meeting. These statements encompass various areas such as energy conservation, technology, foreign exchange earnings and expenditure, and other specified matters. The requirement is to attach these statements to the company's records in a similar manner as specified.
Indian companies are gradually taking steps towards ESG practices, driven by investor awareness. However, there is still a significant distance to cover for Indian companies, considering their past negligence towards ESG. As a result, the Indian Government has decided to establish a suitable "policy framework" to encourage sustainability reporting among Indian companies. The MCA has released the national voluntary guidelines (NVG) on the social, environmental, and economic responsibilities of businesses. These guidelines assist companies in anticipating environmental and social risks, allowing them to inform their shareholders and emphasize the importance of the company's environmental and social reporting. This ensures that the company's activities are focused on enhancing long-term sustainable value.
In 2012, there was a shift from voluntary practices to regulatory requirements implemented by the SEBI. This mandate made it obligatory for the top 100 listed companies, determined by market capitalization, to publish Business Responsibility Reports (BRR) alongside their annual company reports. These reports aimed to provide investors with comprehensive information about the company's adherence to the principles outlined in the NVG.
Further, in 2015, SEBI issued a mandate stating that the "top 500 companies by market capitalization" were required to release BRRs, thereby extending the scope of BRR's applicability.
Later, in 2017, SEBI also introduced a system allowing companies to voluntarily embrace integrated reporting, which would provide stakeholders with comprehensive information on financial and non-financial aspects, management, and control. This initiative aimed to ensure transparent communication about the company's strategy, governance, and performance. In 2020, the BRR was replaced by the Business Responsibility and Sustainability Report (BRSR). The BRSR is now applicable to the top 1000 listed companies based on market capitalization and is mandatory for the financial year 2022-23, starting from 1 April 2022. This update aims to encourage companies to go beyond focusing solely on their financial performance and also consider the environmental conditions in which they operate. It emphasizes the impact of companies on the environment, their social responsibilities without discrimination, and the governance practices of both the company and the authorities they engage with. The BRSR seeks to promote sustainable development, improve economic efficiency, and contribute to the restoration and enhancement of ecological systems.
Shift from CSR to ESG
Even though the Companies Act originally stated that the responsibility was to be carried out on a "comply-or-explain" basis, changes to the law in 2019 have changed its position to one of legal compulsion. At present CSR in India has bottomed down to “contributing” a fix compulsion in the name of corporate philanthropy which fails to focus on the negative externalities generated by the regular business operation of the companies. Amidst global environmental concerns, particularly, the post-COVID era has witnessed a significant emphasis on the interconnections between climate change, the imperative of good governance, and the protection of the interests of diverse stakeholders. These pressing issues have taken centre stage in various dialogues, underscoring the escalating environmental consciousness prevailing worldwide. India during the COP 26 had also committed to achieving net zero emissions by 2070 along with 196 other countries. The commitments combined with the dissatisfaction surrounding CSR in India have led to the emerging trend of ESG in India.
ESG norms guide organizations to achieve sustainable growth that benefits all stakeholders, including the environment, within the investment ecosystem. Directors have a responsibility, as outlined in Section 166 of the Companies Act, to act in good faith and in the best interest of the company, which includes considering the interests of various stakeholders. Judicial pronouncements, such as the case of MK Ranjitsinh v. Union of India, have emphasized the importance of directors' duty to protect the environment, placing it on par with duties to other stakeholders. (emphasis supplied)
However, there are challenges in implementing ESG practices. Firstly, there is a lack of a standardized reporting framework and regulations surrounding ESG, making it difficult for companies to demonstrate their adherence. Additionally, integrating ESG into company practices can be costly, which may be more feasible for large corporations than for small or new companies. Moreover, many MSMEs, especially after the pandemic, face financial constraints and may lack the necessary expertise to comply with ESG guidelines.
Overall, while ESG principles provide a framework for sustainable growth and stakeholder benefits, their implementation faces challenges such as the absence of standardized reporting, high costs, and limitations for MSMEs.
Conclusion
In conclusion, the importance and need for ESG practices in India have become increasingly evident. The recognition of ESG as a comprehensive framework to address sustainability challenges has prompted a shifting focus from traditional CSR initiatives. Recent years have witnessed positive developments, with regulatory bodies such as the MCA and the SEBI taking action to promote ESG integration in the country. However, it is crucial to acknowledge that despite these initial steps, there is still a lack of a well-defined and comprehensive framework for the widespread implementation of ESG practices in India. While the intent is there, the absence of clear guidelines and standardized reporting mechanisms poses challenges for businesses striving to align with ESG principles.
Given the urgency and scale of sustainability issues faced by India, it is imperative that the nation realizes the significance of ESG for long-term growth sooner rather than later. The potential benefits of ESG, including enhanced risk management, improved reputation, and access to responsible investments, can contribute not only to the prosperity of businesses but also to the overall development and well-being of society.
Moving forward, it is essential for regulatory bodies, businesses, and stakeholders to collaborate and establish a robust framework that promotes ESG integration across sectors. This framework should encompass standardized reporting requirements, guidelines for performance measurement, and mechanisms for ensuring transparency and accountability.
By embracing ESG practices, Indian businesses have an opportunity to drive sustainable development, foster innovation, and create positive social and environmental impacts. It is high time for India to fully realize the potential of ESG and embrace it as a vital driver for long-term growth and prosperity. The journey towards a sustainable future begins now, and by taking decisive action, India can emerge as a global leader in ESG implementation and pave the way for a more sustainable and inclusive world.