Written by: Shivangi Pandey
Edited by: Nadia Ho
Boergen Project
India’s Companies Act 2013 made it mandatory for certain listed companies in s.135 of the act to incorporate Corporate Social Responsibility (“CSR”) policies into their framework. This requires investment of 2% of the companys’ net profit earned in the previous three years into CSR related activities that contribute to the wellbeing of the society they function in. In line with this is the increasing importance being given to Environmental, Social and Governance (“ESG”) policies across the world. There are various provisions to empower companies to act sustainably and in a socially responsible manner such as s.135 of the Companies Act, but the incorporation of ESG regulatory practices still leaves something to be desired. Not only is there a lack of awareness but as a result, there has been a lack of a central regulatory framework for ESG policy compliance as well. While the CSR policies have covered some ground in place of ESG regulatory framework in India, it cannot continue to replace the universal value of ESG policies as an analysis framework to quantify the extent to which an organisation is carrying out its operations in a sustainable and ethical manner.
In the wake of ESG conscious investing, many firms in India are becoming aware of their responsibility towards sustainability, ethical business practices etc. Moreover, the Securities and Exchange board of India (“SEBI”) has launched a Business Responsibility and Sustainability report for the top 1000 listed companies, replacing the previous Business Responsibility Report (“BRR”) reporting format, applicable from the 2023 financial year. More recently a BRSR Core was launched which added 9 new comprehensive ESG metrics known as ‘Key Performance Indicators’ (KPI)on which certain listed companies in India shall have to report. While legal initiative in the said direction may be beneficial, awareness regarding the importance of ESG policies must precede this.
CSR implies an ethical and moral responsibility on corporations to invest in positive climate action to uplift society, whereas ESG has conveyed the message in a way that is more understandable to the corporate world. Instead of explaining ESG policies as something companies ought to follow, it is painted in a more utilitarian light wherein ESG policies have said to improve business/profit/success outcomes for companies. An ESG disclosure report would make it easier for investors to compare companies on their ESG ratings before making the decision to invest. It also implies a commitment towards the planet and the people, boosting their image in front of potential investors because companies that fail to perform on the ESG front face losing investor confidence. It is this feature of the ESG policy that makes the ESG framework a self-reinforcing mechanism in India.
While this a strength of ESG over CSR, India currently lacks a standardised reporting format and it has been left to companies to decide what they choose to report on. Moreover, due to ignroance of ESG reporting, many companies don’t have adequate resources, expertise and systems in place for ESG reporting. If even with legal provisions, top firms struggle, it would be even more difficult to mobilise smaller firms.
The CSR regime in India has been instrumental in making companies accountable to the societies they function in, but the direction in which the corporate world is moving in today necessitates incorporating ESG frameworks to ensure the engagement of investors with sustainability activities. It transforms temperamental altruism of companies into data that can be evaluated by investors as well as consumers. Nonetheless, CSR has the implementational advantage of punitive measures which were added to the CSR provision in the Company Act 2019. The amendment is punitive in two distinct ways: monetarily and personally. According to the monetary measure, the unutilised funds shall be transferred to any one of the organisations mentioned in Schedule VII of the Companies Act 2013 within six months of the end of the financial year. Failure to comply with the aforementioned will entail a fine of rupees 25,000 to 25 lakhs. On the other hand, the personal penalty entails a prison term of up to three years or both.
Currently an ESG regime does not exist in India. The provisions for ESG are scattered across various acts, none of which specifically address the concept of an ESG framework. For instance, s.166 of the Companies Act makes directors of companies duty bound to uphold the aims of the company in a way that is beneficial for its members, shareholders, community and for environmental protection ; the mandatory BRSR stipulated by SEBI etc. In absence of proper legislation, disclosure of ESG metrics remains largely voluntary and ESG Rating Providers, a significant cog in the machine of the ESG implementation framework, lacks regulatory oversight.
A fivefold growth in internet searches since 2019 for ESG and the decline of searches for CSR is representative of the simultaneous popularity of ESG amongst consumers and investors and the replacement of CSR by ESG. This indicates that to keep pace with the global economy and market, India must begin building a national ESG regime. A leap taken in this direction has come from SEBI in the form of the ‘Consultation Paper on introducing disclosure norms for ESG Mutual Fund Schemes’ to ensure consistency in the application of ESG policies on 26 October 2021. Another sign of progress is the ‘Consultation Paper on ESG Rating Providers for Securities Markets’, which proposes a central regulatory framework and to develop a more standardised ESG rating system.
The Millennium Development Goals, Sustainable Development Goals (“SDG”), Green Climate Fund, CSR, ESG are policies that have attempted to address the recent climate crisis and the historical societal inequality . While additional issues have been addressed in each (e.g. SDGs brought about the concept of sustainability and ESG introduced the environmental and social component that addressed the regulation of executive functioning through governance), they have required significant time and effort to propose, launch, implement and sustain. CSR is considered to be the parent concept of ESG, but instead of amending and further developing CSR, the system created a novel concept that required new legislation. In the next few years, in keeping with the trend, we may see a new abbreviation that promises to tackle the biggest issues of our time. Alternatively, I would argue that in the interest of efficiency and conserving institutional resources, India’s law makers should develop a solid/centralised ESG regulatory framework, which will have the threefold benefit of making ESG more accessible to firms of different sizes, help keep pace with corporates globally who are utilising the ESG rating system, make ESG rating in India easily comparable and provide regulatory oversight to ESG Rating Providers.
REFERNCES
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