Everything you need to know about ESG framework in India

Environmental, Social, and Governance, or ‘ESG’, is a framework designed to allow organisations and countries to track their development toward their sustainability goals. A variety of non-financial metrics are used to evaluate an organization’s ability to manage its social and environmental effects as well as the effectiveness of its governance structure. The goal of ESG is to encompass all non-financial advantages and risks that are a part of a company’s routine business activities. Investors are increasingly using these non-financial factors as part of their analytical process to identify key risks and growth opportunities.

The need for investing in ESG has been increasing globally. In the previous five to six years, there has been a significant increase in the demand for ESG products. Even though the word “ESG” is frequently used in relation to investing, stakeholders also include the consumer, supplier, and employee communities. They are all growing more and more interested in an organization’s sustainability practices. Since the COVID outbreak, ESG issues including socioeconomic inequality and climate change have gained importance.

Investors are seeking more environmentally friendly places to park their capital. By 2020, there will be $35 trillion in managed assets for sustainable investing worldwide. Sustainable products are being released in India by businesses and the government. The first Indian corporation to issue a green bond was Yes Bank in 2015. The Securities and Exchange Board of India has tightened ESG regulations in the nation in light of these tendencies.

Meaning of the ESG

1. “E”

• The repercussions on the natural environment are the primary emphasis of the first ESG pillar. The natural world is significantly harmed by the way we make, consume, and discard things around the planet. Potential climate risks, raw material extraction and use, deforestation, carbon footprints, energy efficiencies, waste management and the impact of human activities on biodiversity are among the factors to be taken into account.

2. “S”

• Not just the natural world needs to be taken into account, social things such as human rights, equal pay, wages of workers, labour standards, privacy and other human capital as well as social justice issues also need to be considered. 

3. “G”

• Governance is the process of ensuring that processes are in place to provide responsibility inside an organisation.

Which Includes: –

• Risk management
• Bribery and corruption
• Transparency and disclosure of processes
• Making sure independent members are on boards

Simply stated, the primary goal of ESG rules is to make sure that corporate operations are carried out more responsibly. The business corporations are made up and are seen as essential elements of the social system, and they are responsible to the greater society, which is also a stakeholder, in addition to their shareholders in terms of income and profitability. As a result, adopting ethical business practices by organisations to address ESG issues is just as important as their operational and financial performance. Every firm must be accountable for its obligations to the environment and the people that make up the ecosystem whether they are employees, customers, or other stakeholders in order to comply with ESG guidelines.

ESG Framework of India

In the year 2021, the Conference of Parties (CoP26) addressed climate change in Glasgow, where it was guaranteed by the international community that the measures being discussed would not have an impact on living standards, work opportunities, or food security. India also made a commitment at this meeting to reach net-zero emissions by 2070. In order to do this, the Indian government’s legislature has put in place a number of laws, one of which is Environment, Social, and Governance (ESG) Reporting, which encourages businesses to explore alternatives to the conventional finance-centric approach.

Despite the fact that ESG is becoming more and more significant in the corporate and commercial environment, there is sadly no specific piece of legislation defining ESG compliance. ESG compliance is derived from a number of laws that are implemented in India, including The Environment Protection Act of 1986, the Water (Prevention and Control of Pollution) Act of 1974, the Air (Prevention and Control of Pollution) Act of 1981, the Hazardous Waste Rules of 2016, and the Factories Act of 1948.

The Ministry of Corporate Affairs (“MCA”) has already been offering recommendations to ensure that businesses act responsibly since 2009 and introduced National Voluntary Guidelines on Social, Environment and Economic Responsibilities of Business.

After that, SEBI implemented the Business Responsibility Report (“BRR”) requirement for the top 100 listed firms by market capitalization to include in their annual report so that the pertinent listed entities could detail the activities done by them from an ESG viewpoint which was later extended to 1000 companies recently according to market capitalization, the act replaced from BRR to Business Responsibility and Sustainability Report (“BRSR”).

The 2013 Indian Companies Act formalised the responsibilities of directors with regard to their obligations to the society and environment. According to the Companies Act, the annual board report must outline the actions the board of directors has made to conserve energy, use alternative energy sources, and make financial investments in energy-saving machinery.

In May 2021, the Reserve Bank of India (RBI) established a “Sustainable Finance Group” (SFG) to coordinate with other national and international bodies on issues related to climate change and with their goals. Additionally, the Indian Banks Association has developed a set of National Voluntary Guidelines for Responsible Finance, which calls on its members to consider their commitment to ethical business practices while making lending and investing decisions.

Overall, It won’t be shocking if the Indian regulatory authorities soon work to establish a universal disclosure system for all enterprises in India as these tendencies continue to emerge.