Overview of the ESG framework in India

ESG (environmental, social and governance) covers a range of methods and measurements that assess businesses in ways other than their financial achievements and performance. This, the first in a series of columns, explains its present state.

ESG comes from legal and regulatory directives, which are to be found in various statutes and regulations governing businesses. Where ESG falls outside such frameworks, it may be required by contractual commitments agreed by the parties themselves or through dealing with entities themselves complying with ESG standards. These include the US Foreign Corrupt Practices Act 1997, the UK Bribery Act 2010 and the EU General Data Protection Regulation.

ESG is now a buzzword. This is a breakdown of its details for a clearer understanding of the term. Entities must comply with several acts and regulations in relation to environmental norms. The Environment Protection Act, 1986, protects and improves the environment and empowers authorities to prevent pollution. The Air (Prevention and Control of Pollution) Act, 1981, and the Water (Prevention and Control of Pollution) Act, 1974, focus on preventing and controlling air and water pollution through state and central pollution control boards. The Hazardous Waste (Management, Handling and Transboundary Movement) Rules, 2016, set out the safe management, handling, processing, storage and disposal of hazardous waste. The Carbon Credit Trading Scheme, 2023, aims to establish a carbon credits market.

Several statutes safeguard social provisions for worker and employee benefits, including provident funds, bonuses and gratuities, safe working, sick leave, working hours and maternity leave. The government has consolidated 29 labour laws into four codes. The Code on Wages, 2019, regulates wages and bonus payments and ensures equal remuneration. The Code on Occupational Safety, Health and Working Conditions, 2020, regulates such conditions in defined establishments. The Code on Social Security, 2020, consolidates nine laws dealing with social security and maternity benefits. The Code on Industrial Relations, 2020, intends to improve the business environment by reducing industries’ labour compliance burden. The codes await implementation. The Digital Personal Data Protection Act, 2023, established a framework for data protection; it too awaits regulations and guidance.

Corporate governance is regulated by, among others, the Companies Act, 2013 (companies act), the Prevention of Money Laundering Act, 2002, the Prevention of Corruption Act, 1988, and the Securities and Exchange Board of India (SEBI) regulations.

The companies act provides for the inclusion of energy conservation in the board’s report, the number of female directors and, under section 166, the actions of the directors relating to the protection of the environment. The companies act and the Companies (Corporate Social Responsibility Policy) Rules, 2014, require compliance with corporate social responsibility provisions.

Under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, some listed entities must have an independent female director. If the chairperson of the board of a listed company is a non-executive director and is not a promoter or related to one or a person occupying a management position, one-third of the board must be independent directors. Otherwise, at least half of the board should consist of independent directors.

From FY2022-23, the SEBI required some companies to include a business responsibility and sustainability report (BRSR) with their annual report highlighting their ESG initiatives. From FY2023-24, the top 150 listed entities must comply with the nine parameters in the BRSR core framework. Guidelines for ESG rating providers are in the SEBI (Credit Rating Agencies) Regulations, 1999. ESG investment requirements were introduced by the SEBI (Mutual Funds) Regulations, 1996.

The SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, prescribe disclosure of green debt securities. The Reserve Bank of India requires disclosure under the Framework for Acceptance of Green Deposits.

Because ESG obligations are found in various statutes, regulations and contracts with a multitude of stakeholders, no uniform approach to ESG exists. The concept is still evolving and requires a comprehensive and focused framework.

Anjan Dasgupta and Ajay Shaw are partners at DSK Legal. The authors would like to thank associate Sanika Dalvi for her contribution.