Navigating the complexities of ESG compliance in India

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There is a growing interest in ESG funds in the Indian mutual fund industry.

By Rajesh Narain Gupta

The perceived character of businesses as simple income-generating and lucrative entities is changing. The modern business ecosystem is deemed to have a social character with an added layer of moral duty and responsibility to the environment, society and the community within which it operates. This gave birth to the concept of environmental, social and governance (ESG), with investors and other stakeholders demanding greater transparency and accountability in the functioning of business organizations.

The environmental aspect assesses the efficiency with which companies reduce their carbon footprint, institute best practices in pollution and waste management and adopt the circular economy. The social aspect deals with creating propositions of fair value for society, employee health and safety, gender equality in the workplace, social and economic integration of disadvantaged communities and engagement with clients of fair and transparent way. The governance aspect deals with a company’s corporate governance structure, timely financial audits, business ethics, and opposition to practices such as corruption.

The first date India had with ESG compliance was when it became the first country to enforce the practice of CSR with the Companies Act 2013. Market regulator Sebi has played a proactive role in making Indian companies responsive to the implementation of an effective ESG policy mechanism. New standards for ESG disclosures were introduced in 2020 by the market regulator for the country’s top 1,000 listed entities by market capitalization. It has become mandatory for these entities to comply with disclosure standards by fiscal year 22.

The ESG concept gives credit to the fact that companies are accountable to their stakeholders. This principle was anchored in the National Voluntary Guidelines (NVGs) on the social, environmental and economic responsibilities of companies published in 2011 and incorporated into the Companies Act 2013. NVGs oblige a company and its directors to try greater responsibility towards internal stakeholders such as employees and external parties. like the environment and the community. NVGs were subject to further upgrades and updates as National Guidelines for Responsible Business Conduct (NGRBC) in 2019. The top 500 listed companies in India by market capitalization have been tasked by the regulator to disclose business responsibility and sustainability indicators through Business Responsibility Reporting (BRR). Based on the NGRBCs, the existing BRR has been updated to facilitate the inclusion of current global practices in non-financial sustainability reporting. The report of the Committee on Corporate Responsibility Reports was released by the Ministry of Corporate Affairs on August 11, 2020.

There is a growing interest in ESG funds in the Indian mutual fund industry. An increasing number of companies will adopt this concept under social and regulatory pressure to attract private equity. Banks and financial institutions are required to offer better interest rates to companies that comply with ESG standards.
Millennial investors have been the driving force behind the boom in ESG investing; most of these investors favor investing in companies that not only generate a substantial return on investment, but also have clearly defined ESG objectives.

Banks and financial institutions are likely to increasingly consider green finance, to ensure the flow of funds in ESG compatible projects like electric vehicles, solar energy, etc. Organizations like the World Bank would focus on reviewing countries’ ESG credentials while providing long-term loans and development assistance to them.

ESG has moved from the sidelines to the center of the stage. With ESG compliance becoming a political imperative, companies must demonstrate ethical leadership and collective wisdom to meet expectations under the global ESG theme.

The author is Managing Partner, SNG & Partners

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