The Securities and Exchange Board of India (SEBI) has introduced a regulatory framework for Environmental, Social, and Governance (ESG) disclosures by top listed companies. Read here to learn more about ESG.
People all over the world are embracing the notion that businesses should be judged on the Environment, Social, and Governance (ESG) criteria.
But ESG legislation and regulations are still in their infancy in India, and there is still much progress to be made in this area.
Global Environmental, Social, and Governance investing got traction after the pandemic as investors viewed COVID-19 as the first “sustainable” catastrophe of the century.
What is Environmental, Social, and Governance (ESG)?
Environmental, Social, and Governance (ESG) refer to a set standard for a company’s behavior used by companies to follow governance, ethical practices, environment-friendly measures, and social responsibility.
It is a framework used to evaluate an organization’s operations and performance on many ethical and sustainable concerns.
It also offers a tool to gauge the potential and hazards for businesses in certain fields.
- Climate change, greenhouse gas emissions, biodiversity loss, deforestation and reforestation, pollution abatement, energy efficiency, and water management are just a few of the environmental issues included in the data.
- Information on employee safety and health, working conditions, diversity, equity, and inclusion, as well as conflicts and humanitarian crises, is reported.
- This information is relevant in risk and return assessments because it has an impact on how satisfied customers and engaged employees are affected.
- Aspects of corporate governance are covered in the data, including management structure, executive salary, diversity on the board of directors, and cybersecurity and privacy policies.
- Based on the 1980s research, the United Nations has increased pressure to integrate ESG data with the Sustainable Development Goals (SDGs) since 2020.
- In less than 20 years, the ESG movement has grown from a corporate social responsibility initiative launched by the United Nations into a global phenomenon representing more than US$30 trillion in assets under management.
Based on the 1980s research, the United Nations has increased pressure to integrate ESG data with the Sustainable Development Goals (SDGs) since 2020.
In less than 20 years, the ESG movement has grown from a corporate social responsibility initiative launched by the United Nations into a global phenomenon representing more than US$30 trillion in assets under management.
- Many mutual funds and brokerage firms now offer investment products that employ ESG principles.
- ESG investing can also help portfolios avoid holding companies engaged in risky or unethical practices are held accountable.
- The rapid growth of ESG investment funds in recent years has led to claims that companies have been insincere or misleading in touting their ESG accomplishments.
While the term ESG is often used in the context of investing, stakeholders include not just the investment community but also customers, suppliers, and employees, all of whom are increasingly interested in how sustainable an organization’s operations are.
Evolution of ESG
The ESG aids in evaluating how a company handles the risks and opportunities brought on by alterations in social, economic, and environmental factors.
Several of these factors were noted in earlier attempts at strategic and/or regulatory frameworks with a sustainability focus, such as:
- EHS (Environmental, Health, and Safety): It sought to improve employee labor and safety standards along with the reduction of pollution in pursuit of economic growth.
- Corporate sustainability emerged when companies wanted to focus on reducing their firm’s environmental impacts beyond the reductions that had been legally mandated. This was also misused- as in greenwashing.
- CSR (corporate social responsibility) began to integrate ideas around how companies should respond to social issues.
Ultimately, ESG started to become a much more proactive trend by the late 2010s and into the 2020s.
The term has developed into a broad framework that covers important topics including environmental and social impact as well as how governance structures may be changed to enhance stakeholder well-being.
ESG in India
India faces significant social and environmental problems, such as poverty, inequality, discrimination, and violations of human rights.
These issues are worsened by environmental challenges including air and water pollution, deforestation, and climate change.
As a result, it is important to invest in businesses that are dedicated to resolving these problems and advancing social justice.
India has a complicated regulatory and legal framework, and businesses operating there may run into problems with corporate governance, regulatory compliance, and corruption.
To reduce these risks, it is becoming more important to recognize the businesses that have effective governance systems. But, in India, ESG is still in its infancy.
India pledged to achieve net zero emissions by 2070 in the Paris Agreement of the United Nations Climate Change Conference in 2021.
- To protect the environment, the interests of numerous stakeholders, and business sustainability as a whole, corporate organizations must include ESG principles.
Companies in important sectors like industry and energy face stringent scrutiny by the Government.
- The Securities and Exchange Board of India (SEBI) also made ESG disclosures mandatory for the top 1,000 listed companies under its Business Responsibility and Sustainability Reporting (BRSR) initiative.
India has a defined mandate for Corporate Social Responsibility (CSR) for companies with Rs 5 billion net worth, Rs.10 billion turnover, or Rs.50 million net profit.
- These companies must spend at least 2% of their net profits on CSR endeavors and disclose their ESG profiles to attract capital from global ESG investors and financiers.
- Many Indian businesses might not completely understand the significance of ESG elements or could lack the means to incorporate them into their operations.
- Investors may find it challenging to assess ESG performance and make wise investment decisions because there may not be much publicly available information on ESG variables for firms.
- To ensure ESG compliance by businesses, India’s regulatory environment may not be completely created or enforced. This could result in a lack of openness and accountability in business activities.
- In India, there may not be many investment alternatives available to investors that concentrate primarily on ESG aspects, making it challenging to completely incorporate ESG factors into investment decision-making.
The relevance of ESG aspects for sustainable and responsible investment has to be better understood by businesses, investors, and regulators to encourage ESG adoption in India.
To better enable investors to assess their ESG performance, companies in India should disclose ESG indicators more thoroughly and consistently.
To encourage more ESG compliance by businesses, India’s regulatory framework has to be reinforced. This may entail defining clearer ESG standards, adopting more strong reporting requirements, and applying legislation more strictly.
-Article written by Swathi Satish