Legal Regime for Regulating ESG Framework in India – Legal framework for ensuring ESG in India

The ESG landscape is witnessing the rise of global recognition and ESG compliance-driven companies are attracting huge numbers of foreign investments.

Introduction

ESG has been gaining traction recently and the impact of financial and economic risks all across the world has caused the emergence of the need to address the concerns relating to ESG. In fact, investors these days are giving due importance to ESG as a metric for guidance related to financial decisions. The acronym ESG stands on three core pillars, i.e., E- Environmental, S- Social, and G- Governance.

The significance of ESG is evident from the emergence of ESG Investing in India. ESG Investing strategy is a culture wherein people invest funds in companies whose management is working towards the achievement of corporate governance causing favourable effects on society and its environment. A leading number of companies in India have been including environmental, social, and governance targets as a part of their key result areas (KRAs) for top management when computing their goals and pay scale levels. ESG-compliant companies look forward to aligning financial returns with ethical and other non-financial considerations.

ESG: Regulatory Framework in India

The law of ESG compliance in India is evolving manifolds. The principal regulators for Governance legislations in India are the Ministry of Corporate Affairs (“MCA”), which supervises the laws of companies and Securities and Exchange Board of India (“SEBI”), which regulates the conduct of companies listed on any stock exchange of the country.

Numerous legislations were introduced in the country at different times for the protection of environment in which we operate, the equitable treatment to employees and labour, contributing to their overall well-being, and adoption of corporate governance practices.

SEBI, whilst updating the erstwhile Business Responsibility Report (“BRR”) which was supposed to be voluntarily filed by Companies in 2021, issued new guidelines mandating Business Responsibility and Sustainability Report (“BRSR”) to be filed by Top 1,000 listed companies in the country basis the market capitalization rate. This goes very far in promoting the ESG framework and promote the interest of investors and other stakeholders in drawing a better perception of the Company’s overall growth and stability basis the ESG consciousness of the company.

A report was issued in July 2022 by the ‘Sustainable Finance Group’ (“SFG”) setup by the Reserve Bank of India (“RBI”), to help in shaping the regulatory and supervisory approach of the RBI to climate risk and sustainable finance SFG which suggested strategies and study evolving a regulatory framework to mitigate climate related risks in the Indian context, which can be adopted by banks and other financial institutions. The banks will move towards the development of a robust ESG strategy that is integrated into their overall business strategy to address the risks and tap the opportunities arising from climate change. To address the need for greater attention to ESG concerns, the Board of Directors should discuss the climate and sustainability-related risks and opportunities at the decision-making level and oversee their climate and sustainability-related initiatives and scale them up, and further, contribute to raise awareness on climate-related financial risks within their banks.

The regulatory framework governing the ESG concerns in India is not imbibed in any specific legislation but can be found in fragments in numerous laws and statutes including but not limited to the environmental laws, SEBI Regulations, Companies Laws, Prevention of Corruption Act, Prevention of Money Laundering Act, and other employment laws.

Environmental legislations, under the name of Environment (Protection) Act, 1986, Water (Prevention and Control of Pollution) Act, 1974 and Air (Prevention and Control of Pollution) Act, 1981, Wildlife (Protection) Act, 1972, the Forest (Conservation) Act, 1980 and the Biological Diversity Act, 2002, are in place to ensure that the entities work in harmony with the environment and imposes obligations on the entities for prevention, control and abatement of water and air pollution, thereby regulating the “E” under the acronym of ESG.

Social factors involve the employees and local communities which get affected due to the operations of entities. India has a variety of labour legislations to promote the demands of workers for better working conditions, and to promote the dignity of labour. The legislations that pertain to industrial regulations are The Industrial Disputes Act, 1947, The Trade Union Act, 1926, The Minimum Wages Act, 1948, The Payment of Bonus Act, 1965, The Payment of Wages Act, 1936, The Maternity Benefit Act, 1961 and the Child Labour (Prohibition and Regulation) Act, 1986 are few legislations pertaining to women and children. Sexual Harassment of Women at Work Place (Prevention, Prohibition and Redressal) Act, 2013 (POSH Act) has propelled organizations to comply with its mandate and make the workplace safer for its female employees.

The main substantive “G” or Governance-related regulations can be found in fragments as under -

• Section 134(3) (m) of the Companies Act, 2013 (“Companies Act”) requires the board’s report to contain details on the conservation of energy including any steps taken or impact on the conservation of energy, steps taken to utilize alternative sources of energy, capital investment in energy conservation equipment, efforts towards technology absorption, etc.

• Section 135 of the Companies Act read with CSR Rules, 2014 mandates that Companies falling under certain specified limits, to spend at least 2% of their average profits of the last three financial years on CSR activities and to constitute a committee known as CSR committee to oversee such spends. Further, the Directors have to disclose in their board Report the composition of the committee, the amount spent and on which activity, any explanations unspent amount etc.

• The Companies Act also casts a duty on the Directors of the company under Section 166 to promote the objects of the company and work for the benefits and best interest of the company, employees, stakeholders, etc.

• SEBI vide Regulation 17(1) (b) of SEBI (Listing Obligations and Disclosure Requirements), 2015 promoting the involvement of Independent Directors and Non- Executive Directors, mandating 1/3rd of the Board to be independent directors in case the chairman is Non- executive director and not a promoter, in case not, then half the composition of the board to be of independent directors.

• Section 149 (1) of the Companies Act provides for at least one woman director on its Board in certain class of companies.

• Several Committees are to be formulated by the Companies falling under specified limits namely- Nomination and Remuneration Committee (NRC), Stakeholders Relationship Committee (SRC), Corporate Social Responsibility (CSR) Committee.

There is a need to provide for some interlinkages between these committees for effective governance practices.

Closing thoughts

While India steadily progresses towards the inculcation of ESG regulatory framework, the present BRSR mandate applicable on the top 1000 entities has brought in standardization and benchmarking for ESG compliance and ESG Investing, further indicating that it will soon loop in more and more companies in the coming years in adopting ESG compliant business practices. The ESG landscape is witnessing the rise of global recognition and ESG compliance-driven companies are attracting huge numbers of foreign investments. The Indian entities should catch up with global trends by way of conducting ESG Due Diligence and ESG Audits to attract international investment. Listed entities should appoint a BRSR Qualified professional to coordinate such compliance reporting framework. Sustainability-related policies should be formulated by the Board in the terms of reference of their Corporate Social responsibility. The companies need to realize that the ESG norms will no longer be limited to discretionary conduct in the times ahead and it is advised for the top management of all the companies to take a proactive approach in contributing towards the rising ESG activism in India.

Disclaimer: This article is only intended to provide general guidance on the captioned subject and should not be treated as a piece of legal advice in any manner whatsoever. Specialist advice is required to be sought concerning any specific circumstances.