ESG Norms In Indian Corporate Scenario: Navigating Through Uncharted Waters

In ESG, “E” or the environmental criteria encompass the energy consumption company does and the waste discharged by it, the resource requirement, and the spillover effects it has on the living organisms. It encompasses CO₂ emissions and climate change; “S” or the social criteria include the relationships of the company with the people and society, labor relations, diversity, inclusion, etc. and “G” or the Governance is the practices, procedures, and controls a company follows to govern itself.

ESG reporting has gained a considerable attraction over the years by the Indian regulators. This is evident from the various steps taken in the direction of sustainable development and ESG reporting. There has been two significant developments w.r.t ESG/sustainability. The first is reporting of CSR and mandatory spending included in the Companies Act, 2013, and the second is the SEBI making Business Responsibility and Sustainability Report (“BRSR”) mandatory from FY2022-23 for the top 1,000 listed companies by market capitalization.

Is India ESG Ready?

ESG is a step in right direction by all means for sustainable development, but imposition of mandatory compliance by the companies is where the problems start to pop up. Given the trajectory that has been followed by the regulators in the last years, regulations around ESG reporting will be more and more strengthened. The mandatory nature of compliance will increase the compliance cost on the companies. Every company is not in a situation to invest such large amount of money, especially the medium and small scaled companies. The issues with ESG reporting in Indian scenario are multi fold and often no heed is given to solve the problems coming in the way of such compliance. Some of the main issues with the ESG compliance in India are:-

1. No definition of ESG- Regulatory bodies have failed to properly define the term ESG. The loose use of the term ESG in sustainable development by corporations, regulatory bodies has have led to unclear meaning of the term as to how ESG is calculated and what are the embodiments of the term.
2. Regulatory overreach- The regulatory bodies in India were established with the aim to protect investor’s capital, and compliance with the corporate governance. The aim and domain of the regulatory bodies do not encompass regulating environment disclosures and sustainable reporting. ESG mechanism goes against the domain of these regulatory bodies as these affect profitability and investments returns. This goes against the primary objective of regulatory bodies like SEBI whose aim is to regulate financial fair play and not the environmental aspect.
3. One size doesn’t fit all - How climate change is perceived in Europe or USA is quite different from the how it is perceived in India. India is a developing country having different environmental standards than developed countries like the US. Universal ESG norms remain a challenge as mandating environment standards’ reporting under ESG that is beyond a country’s commitments amounts to negating the efforts made for equity and climate justice.
4. Governance problems- India is already plagued with the mass problem of lack of proper corporate governance. Even after having various rules and regulations in place for the corporate governance, the deep root of problem is already there. Without solving that problem, the current purpose behind the ESG reporting will not be solved as there will no way to determine whether the sustainable development is actually taking place or is just a hoax.
5. Cost of implementation- Environmentally friendly measures are often costly and increase costs(e.g., installations of solar energy panels, installations and operating cost of effluent treatment plant) of the companies. The main aim of the companies is profit garnering and this additional cost impacts the financial viability, which goes against the interests of shareholders. Especially for small companies, the reporting costs would likely outweigh financial returns.

New disclosure requirements such as BRSR which are quite voluminous and comprehensive, can cause companies to incur new costs and will burden them in collecting, collating, calculating, and presenting the new information which will divert the resources and workforce. The company will have to hire new experts in ESG reporting for audit which will result in extra costs.

6. Lack of transparency, consistency and materiality in ESG norms - There are challenges relating to transparency, consistency, and materiality of ESG norms. A company may choose to disclose data that is ESG norms compliant and not disclose the unfriendly practices it indulges in. The quality of data reported by the companies is not adequate. Lack of transparency leads to greenwashing and misallocation of assets consequently resulting in a lack of trust. Greenwashing means incorrectly conveying that a company, product, or service cares for the environment. For instance, a company that promotes racial equity, non-discrimination, or good governance may still have a huge carbon footprint. The company can choose to disclose its social and governance data and probably gain a tag of ESG compliant. Reliance is placed on self-disclosure and self-certification by the companies which can lead to exaggerated claims.

7. Overreach of the EU regulations- Companies in business with the EU based companies will surely will be impacted by the EU regulations. Export-oriented businesses engaged in business with the EU countries must take into account any supplier chain and value chain disclosures that the EU undertakings may mandate. Businesses that provide financial products to EU financial market players must be aware of the disclosures that these participants are obligated to make and make the necessary preparations. It is not feasible for the Indian companies to follow the EU regulations which are at very much higher pedestal than the Indian regulations and it will be difficult for them to survive in the market.

The effect of ESG norms isn’t quantifiable unlike the financial metrics(like return on assets) currently in use. This makes it difficult to compare the performance of different organisations using substantiality criteria. ESG concerns are complex, and identifying the most important ones can have a significant effect on stakeholders. The problems of compliance with ESG norms become more complex when the supply chain of a particular company is located in different countries or states who have different mechanism and process to calculate the ESG ratings and the final product is used in a different country, making recall and recycling financially prohibitive.

The Tumultuous Road Ahead

It is witnessed that much focus is on “E” and “S” however we must keep in mind that they cannot fulfil their intent without “G”. Simply put, an efficient framework for corporate governance must be in place, requiring the management of company to support ethical business practises, encourage ethical research initiatives, adopt environmentally friendly business practises, implement worker/employee-centric benefits etc., and make corporate governance as the fundamental aspect of ESG reporting.

All the countries aim to be net zero economies someday. For India to achieve this, it has to overcome the challenges associated with ESG and extend it beyond the top1000 listed companies by market capitalization. Government can take steps like providing subsidies for implementing ESG norms to small companies, and setting up independent third parties for verification of data provided by the companies, coming up with a standard method of ratings etc. Reporting on ESG norms will be a step in resolving social problems like gender discrimination, caste system, homophobia, and governance issues like corruption, etc. The BRSR mandatory disclosure requirement by the SEBI is the right step towards making companies ESG-friendly and attracting more investments however the above challenges need to be overcome for the norms to be successful in India.

Although the road to ESG is filled with ample of challenges and roadblocks, it is a non-negotiable reform that has to take place especially in a country like India which is much vulnerable to Climate change.

The authors are students at National Law University, Jodhpur. Views are personal.