ESG SERIES: Heading Towards Change

Sonal Rangnekar

PART 1: Understanding the ESG Legal Framework in India

INTRODUCTION

Indian regulators, recognizing the importance of aligning with global Environmental, social, and corporate governance (“ESG”) trends, have embarked on a path to strengthen ESG reporting standards. The introduction of new ESG metrics by the Securities and Exchange Board of India (“SEBI”), expanding on the BRSR framework, underscores a commitment to transparency and accountability. This regulatory shift is not merely a compliance measure but a strategic move to position India as an attractive destination for foreign investments, where adherence to rigorous sustainability disclosures is increasingly vital.

In India, there is no consolidated legislation that codifies the regulatory framework governing ESG concerns. Rather, a multitude of regulations address ESG-related matters that apply to the operations of corporate entities in India. In this article we highlight the ESG legal framework in India and also certain notable steps/actions taken by the regulators in India and corporate India.

CURRENT LEGAL FRAMEWORK

Currently, India lacks a unified framework for reporting and disclosing ESG metrics. There is no specific legislation dedicated to ESG. and the regulatory framework related to ESG in India is spread over various laws and regulations, including but not limited to, the Factories Act, 1948, Environment Protection Act, 1986, Air (Prevention and Control of Pollution) Act, 1981, Water (Prevention and Control of Pollution) Act, 1974, Hazardous Waste (Management, Handling and Transboundary Movement) Rules, 2016, Companies Act, 2013 (“Companies Act”), Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI Listing Regulations”), Prevention of Money Laundering Act, 2002, Prevention of Corruption Act, 1988, and laws with respect to the payment of minimum wage, bonus, gratuity, welfare activities, health and safety, etc. Various aspects of ESG are covered under such laws and regulations in a fragmented manner. For instance:

(i) Companies Act

• The board of directors’ report is required include details on the conservation of energy, including any steps taken or the impact on the conservation of energy, steps taken to utilize alternate sources of energy, capital investment in energy conservation equipment, efforts towards technology absorption, etc.
• The directors of a company as part of their duty are required to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.
• Companies with a specified net worth, turnover or net profit are mandatorily required to constitute a Corporate Social Responsibility (“CSR”) committee to oversee the CSR policy and activities. Eligible companies are required to annually spend at least 2% of their average net profits of the last three financial years on CSR.
• Certain classes of companies are required to have a female director.
• The board of every listed company and certain classes of public companies are required to constitute an audit committee consisting of a minimum of 3 directors, with independent directors forming a majority.
• The board of every listed company and certain classes of public companies are required to constitute a nomination and remuneration committee (“NRC”) consisting of 3 or more non-executive directors, of which not less than half shall be independent directors. The chairperson of the company (whether executive or non-executive) may be appointed as a member of the NRC but shall not act as chair6.

(ii) SEBI Listing Regulations

• One-third of the board of a listed entity should compose of independent directors in case the chairperson is a non-executive director and not a promoter or related to a promoter or a person occupying a management position; otherwise, at least half of the board should compose of independent directors7.
• The top 1,000 listed entities (based on market capitalisation) are to have an independent, female director on their boards8.
• At least two-thirds of a listed entity’s audit committee members are required to be independent directors; however, in case of a listed entity having outstanding superior voting right equity shares, all members must be independent directors. Also, the chairperson of the audit committee is required to be an independent director9.
• At least two-thirds of the directors on the NRC of a listed entity must be independent, and the chairperson of the NRC must be an independent director10.

(iii) SEBI

• SEBI in August, 201211 introduced Business Responsibility Report (“BRR”) framework, as mandatory for the top 100 listed companies by market capitalisation to file a BRR, capturing their non-financial performance across ESG factors. Further, other listed entities could voluntarily disclose BRR as part of their annual reports. In May 202112, SEBI expanded the BRR and replaced it with a new Business Responsibility and Sustainability Report (“BRSR”) with effect from the fiscal year of 2022–2023 whereby it made it mandatory for the top 1,000 listed entities by market capitalisation to include, in their annual report, a BRSR describing the initiatives taken by the listed entity from an ESG perspective. The remaining listed entities may voluntarily submit such reports.
• In July 202313, SEBI introduced new ESG metrics, making them mandatory for certain listed Indian companies under the ‘BRSR Core.’ This regulation expands on the initial BRSR format. Starting from the financial year 2023-2024, the top 1,000 listed companies by market capitalization in India shall make disclosures as per the BRSR Core format, as part of their annual reports. This updated format is based on the nine principles stipulated in the National Guidelines on Responsible Business Conduct (“NGRBC”).

(iv) Environment Protection Act, 1986

• Under the Environment Protection Act, 1986, industries are classified based on their pollution load, categorized as Red, Orange, Green, or White, in descending order. Industries with higher pollution loads face more stringent regulations, and those categorized as Red are restricted from operating in ecologically sensitive areas.
• The framework recognizes the diversity of entities by tailoring obligations to their specific characteristics. This approach ensures that regulatory requirements align with the scale and impact of each entity, promoting a more targeted and effective ESG implementation.
• The classification of industries according to pollution load emphasizes environmental considerations. This approach aims to prevent industries with significant pollution impact, especially those classified as Red, from operating in ecologically sensitive areas, safeguarding environmental integrity.

(v) ESG Disclosure

• The BRSR seeks disclosure from listed entities of their performance against the nine principles of the NGRBC, which were issued by the Ministry of  Corporate Affairs (“MCA”) in the background of emerging global concerns, the Sustainable Development Goals (“SDGs”), and the United Nations Guiding Principles on Business and Human Rights. These principles require that businesses should:

(a) conduct and govern themselves with integrity, and in a manner that is ethical, transparent and accountable;
(b) provide goods and services in a manner that is sustainable and safe;
(c) respect and promote the well-being of all employees, including those in their value chains;
(d) respect the interests of and be responsive to all stakeholders;
(e) respect and promote human rights;
(f) respect and make efforts to protect and restore the environment;
(g) when engaging in influencing public and regulatory policy, do so in a manner that is responsible and transparent;
(h) promote inclusive growth and equitable development; and
(i) engage with and provide value to their consumers in a responsible manner.

• Reporting under the BRSR format is divided into three parts: general disclosures; management and process disclosures; and, principle-wise, performance disclosures. Reporting under each principle is divided into essential indicators and leadership indicators. The essential indicators are expected to be mandatorily disclosed while leadership indicators may be voluntarily disclosed. Some of the disclosures sought in the BRSR are:

(a) An overview of the entity’s material ESG risks and opportunities, and the approach to mitigate or adapt to the risks along with financial implications of the same.
(b) Sustainability-related goals and targets, and performance against the same.
(c) Environment-related disclosures covering aspects such as resource usage (water and energy), greenhouse gas emissions, air pollutant emissions, biodiversity, waste generated, waste management practices, etc.
(d) Social-related disclosures covering the workforce, value chain, consumers and communities including: (a) employees/workers – disclosures on gender diversity, social diversity including measures for differently abled persons, wages, turnover rates, welfare benefits, training, occupational health and safety, etc.; (b) consumers – disclosures on product recall, product labelling, complaints by consumers regarding cyber security, data privacy, etc.; and (c) communities – disclosures on social impact assessments, CSR, rehabilitation and resettlement, etc.
(e) Governance-related disclosures covering aspects such as training and awareness programmes, anti-corruption or anti-bribery policies, fines and penalties imposed on the entity, directors or key management personnel, complaints with respect to conflicts of interest, affiliations with trade and industry associations, any corrective actions taken by authorities on issues related to anti-competitive conduct, etc.
• The BRSR also provides for inter-operability of reporting, i.e., entities that prepare sustainability reports based on internationally accepted reporting frameworks (such as the Global Reporting Initiative (“GRI”), Sustainability Accounting Standards Board (“SASB”), Task Force on Climate-Related Financial Disclosures (“TCFD”) and the International Integrated Reporting Council (“IIRC”)) may cross-reference the disclosures made under such frameworks to the disclosures sought under the BRSR.
 

VOLUNTARY ESG REPORTING AND COMPLIANCE

It must be noted that other than certain mandated disclosures and compliances ESG reporting largely remains voluntary in India. Companies are voluntarily embracing ESG compliance and disclosure frameworks which are generally based on well-accepted global sustainability frameworks and standards, such as the GRI, SASB, TCFD, IIRC, etc. This strategic choice is driven by the recognition that a strong ESG track record enhances their appeal as long-term investment opportunities. Investors, in turn, are increasingly channeling capital into environmentally conscious projects, relying on robust ESG reporting as a key indicator of sustainable business practices. Further investors holding a significant stake in an Indian company may also require such company to disclose ESG matters (as part of the investors’ information rights which are usually contractually negotiated between the investors and the company).
In tandem with regulatory prescriptions, the Indian government has also been implementing soft measures to promote sustainable business practices. These initiatives, are aimed at fostering environmental responsibility, incentivize companies to prioritize renewable energy and sustainable operations through policies, subsidies, and favorable tax treatments. For example:

• The Bombay Stock Exchange in 2018 has published a guidance document for all corporates listed on it, to provide a comprehensive set of voluntary ESG reporting recommendations along with 33 key performance indicators14.
• As per SEBI’s new BRSR, leadership indicators are to be disclosed on a voluntary basis15. ESG LEGISLATIONS IN THE WORKS

1. SEBI:

• On October 26, 2021, SEBI released a ‘Consultation Paper on introducing disclosure norms for ESG Mutual Fund Schemes’. This paper proposes a set of measures to ensure that ESG schemes remain true to their designated labels. The proposal underscores the importance of maintaining coherence in the scheme's nomenclature, stated objectives, documented investment policy and strategy, as well as the nature of investments. Furthermore, it suggests a limitation on investments by asset management companies to securities that provide BRSR disclosures16.
• Currently there is no regulatory oversight governing the activities of ESG rating providers (“ERPs”). On January 24, 2022, SEBI introduced the ‘Consultation Paper on Environmental, Social and Governance (ESG) Rating Providers for Securities Markets’. The consultation paper inter alia proposes to formulate a regulatory framework with a view to develop a more reliable and comparable ESG rating system, and to streamline and standardise ESG ratings across companies in line with emerging global practices17. Further, on 22 February 2023, SEBI released another consultation paper and through this document SEBI has proposed that ERPs may register with SEBI under the SEBI (Credit Rating Agencies) Regulations, 1999, and the same shall be amended to include a chapter for ERPs18. SEBI aims to establish a regulatory framework to create a more dependable and comparable ESG rating system.
• In May 2022, SEBI established an advisory committee dedicated to ESG matters. The committee’s mandate includes the development of a comprehensive approach, indicators, and disclosures for ESG ratings, expanding the scope of BRSR and improving disclosures and other norms for ESG funds.
• On 4 August 2022, SEBI released the ‘Consultation Paper on Green and Blue Bonds as a mode of Sustainable Finance’19. The purpose of this paper is to explain the definition of green debt securities, introduce ‘blue bonds’, and reduce compliance costs for issuers of such securities. The proposals aim to bring alignment to the Indian regulatory framework with the updated Green Bond Principles (GBP) set forth by the International Capital Market Association (“ICMA”).

2. Reserve Bank of India (“RBI”):

• The RBI, as the central bank of the country, has actively participated in a consultative process to evaluate the progress of entities under its regulation in managing climate risks. In this pursuit, the RBI became a member of the Central Banks and Supervisors Network for Greening the Financial System (“NGFS”) on 23 April 2021, aiming to contribute to global initiatives promoting green finance.
• The RBI established a Sustainable Finance Group (“SFG”) in May 2021 to address financial risks associated with climate change. Collaborating with national and international agencies, the SFG plays a crucial role in proposing strategies, formulating a regulatory framework, and advocating for appropriate ESG disclosures. These measures are intended for banks and other regulated entities to adopt sustainable practices and mitigate climate-related risks. In January 2022, the SFG conducted a survey on 34 public, private, and leading foreign banks in India to assess their approach, preparedness, and progress in managing climate risk. The survey revealed that while many entities acknowledge climate-related financial risks, not all have integrated ESG principles into their business or aligned their climate-related financial disclosures with globally accepted standards.
• In July 2022, the RBI released a ‘Discussion Paper on Climate Risk and Sustainable Finance’, underscoring the significance of uniform and comparable financial disclosures related to climate risk. The paper advocates that regulated entities, at a minimum, should strive to align their climate-related disclosures with the recommendations of the TCFD under a comply-or-explain approach.

3. MCA:

In November 2018, the MCA established a Committee on Business Responsibility Reporting to finalize reporting formats for business responsibility for both listed and unlisted companies. This framework was based on the guidelines provided by the NGRBC. The committee's report, unveiled on 11 August 2020, served as the basis for the new BRSR format introduced through the BRSR Circular. The committee's recommendations included the proposal that MCA extend the reporting requirement to unlisted companies surpassing specified thresholds of turnover and/or paid-up capital. Additionally, it suggested that smaller unlisted companies below this threshold could adopt a simplified version of the reporting format. Whether the government and regulators will implement regulatory changes based on these recommendations remains to be seen.

4. Government of India (“GoI”):

The GoI has streamlined 29 labour laws into four comprehensive codes: the Code on Social Security, 2020; the Industrial Relations Code, 2020; the Code on Wages, 2019; and the Occupational Safety, Health, and Working Conditions Code, 2020. These codes aim to simplify and modernize the complex web of statutes and amendments that previously governed these domains. They encompass provisions such as the right to minimum wage, social security, and overall worker security in various scenarios. Despite being officially notified, the implementation of these codes has been postponed until major industrial states formulate the necessary rules under the respective codes.

ESG CONTROVERSIES AND ENFORCEMENT CASES

India has long had a number of laws and bodies regarding environmental, social and governance issues, including the Environment Protection Act of 1986, quasi-judicial organisations such as the National Green Tribunal, a range of labour codes and laws governing employee engagement and corporate governance practices. The regulators and authorities in India have also been taking serious actions in cases of alleged non-compliances in relation to ESG laws and matters, with the substantial penalties being imposed. Further various State Pollution Control Boards have also taken action against defaulters by way of fines, closure of plants and seizure of materials, among others. Some well-known cases are set out below:

• Due to fraud committed by its promoter-shareholders, Satyam Computers (a listed company) became the focus of multiple legal proceedings. The fraud involved extensive book falsification, financial misstatement, fundraising, and share trading while in possession of confidential, price-sensitive information. Serious regulatory action against the perpetrators of the fraud included disgorgement and a temporary ban from the securities market. It must be noted that the Satyam scandal led to the introduction of Section 245 in the Companies Act, which gives right to creditors of all class to club all their claims under a class action suit.
• The Supreme Court of India ordered Sterlite Industries (India) Ltd. to pay compensation of INR 100 crore (USD 13.42 million) over a period of 5 years for having polluted the environment and for operating its copper smelting plant in Tamil Nadu without a valid permit renewal for a certain time period. In 2018, the Government of Tamil Nadu and Tamil Nadu Pollution Control Board ordered the closure of the plant, and in 2020, the Madras High Court upheld the validity of these orders. Presently, an appeal is pending before the Supreme Court against the judgment of the Madras High Court.
• The Maharashtra Pollution Control Board completely banned certain plastic products, such as carrier bags, single-use disposable cups, straws, etc., issued closure of large scale plastic and thermocol manufacturing units and imposed heavy fines20. However, the state government later relaxed the ban by allowing the use of disposable items such as spoons, straws, plates, cups, glasses, forks and containers made of compostable material21.
• In June 2022, the National Green Tribunal imposed a 520 million (USD 63.7 million) penalty on the Udupi Power Corporation Ltd., a subsidiary of a major Indian conglomerate, for violating environmental laws and polluting its surroundings.

ESG CONSCIOUSNESS AMONG CORPORATES IN INDIA: LEADING EXAMPLES

Corporate India has been demonstrating strong interest towards aligning with the ESG metrics and are taking initiatives relating to ESG. Some notable initiatives are :

• Tata Consultancy Services (“TCS”) (BSE: 532540, NSE: TCS), a leading global IT services, consulting and business solutions organization, has announced its plans to reduce its absolute greenhouse gas emissions across Scope 1 and Scope 2 by 70% by 2025 (over 2016 base year), and to achieve net zero emissions by 203022.
• HPCL has collaborated with Indian Army to undertake the initiatives ‘Kargil Ignited Minds’ and ‘Kashmir Super 50 – Medical’ (i) Kargil Ignited Minds’23 will provide a learning platform ‘for coaching and mentoring aspiring but less-privileged girl students of Kargil Region in UT Ladakh; and (ii) Kashmir Super 50 – Medical24 will provide residential learning platforms at 4 locations, Srinagar, Kargil, Ladakh & Rajouri for aspiring and less-privileged students of Jammu & Kashmir and Ladakh Union Territories.
• Infosys Foundation, the philanthropic and CSR arm of Infosys has undertaken to launch of 4 mobile laboratories—called ‘Lab Built on Wheels’—to provide cost effective diagnostic solutions and curb the spread of communicable diseases primarily among the rural population of Karnataka25.
• The Flipkart Group has announced its commitment to take measures in its own operations to reduce 100% of emissions by 2030 by increasing energy efficiency at its corporate office, supply chain facilities, and powering its energy requirements through renewable sources such as solar. To this effect Flipkart is participating in initiatives such as the Climate Group’s EV100 initiative to deploy 25,000 electric vehicles across the country by 2030. It will also work with its sellers, consumers, and partners to achieve Net Zero emissions by 204026.

CONCLUSION

India is still in the early stages of developing a coherent and comprehensive ESG regulatory framework. Due to lack of consistent laws or a well-organized structure investors and other stakeholders will need to manage and deal with a variety of complex compliances requirements, disclosure laws and industry specific issues.

Having said that in an effort to align India’s sustainability report requirements with international best practices, regulators in India are working progressively to enhance the existing laws. The regulatory support for sustainable development is not only a testament to compliance but a broader endorsement of India's economic growth strategy.

There is also a noticeable shift in the thinking and approach of the Indian corporate sector; as they are eager to draw in capital from overseas in their home country. Leading Indian corporates are stepping up as exemplars of ESG consciousness. Companies like Tata Group, Infosys, HDFC Bank, Reliance Industries, Mahindra Group, Wipro, and ICICI Bank are setting benchmarks in sustainable practices, ranging from holistic approaches to transparent ESG reporting, green energy transitions, rural development initiatives, and governance excellence.

The journey towards a more comprehensive ESG framework in India is not just a regulatory shift but a collective endeavor to foster a greener, more equitable future.