Introduction
ESG stands for Environmental, Social, and Governance. It is a framework used to evaluate how a company performs in areas related to sustainability, ethical practices, and corporate governance. In recent years, ESG has gained importance globally as investors, regulators, and consumers increasingly expect companies to be responsible not just in profits, but also in their impact on the planet and society. In this article, we will explain ESG and discuss the ESG-related legislation and regulations in India.
What is ESG?
ESG is a non-financial metric used to assess a company’s operations and performance beyond traditional financial indicators. It focuses on three core pillars:
1. Environmental (E)
This covers how a company interacts with the environment. Key aspects include:
- Carbon footprint and greenhouse gas emissions
- Energy efficiency and use of renewable energy
- Waste management and pollution control
- Sustainable sourcing and resource conservation
2. Social (S)
This addresses how a company treats people—employees, customers, suppliers, and the community. Focus areas include:
- Employee welfare and labor rights
- Diversity, equity, and inclusion
- Human rights and ethical sourcing
- Customer satisfaction and product safety
- Community engagement and corporate social responsibility (CSR)
3. Governance (G)
Governance refers to the internal systems, leadership, and rules that guide company behavior. Elements include:
- Board structure and independence
- Executive compensation
- Anti-corruption policies
- Shareholder rights and transparency
- Audit and risk management practices
Importance of ESG
- Improves company reputation and trust among stakeholders
- Helps attract socially conscious investors
- Encourages long-term sustainability and risk management
- Contributes to compliance with regulatory standards
- Promotes innovation and responsible business practices
ESG Legislation and Regulation in India
India has taken significant steps to integrate ESG principles into its legal and regulatory framework. Some of the key developments include:
1. Business Responsibility and Sustainability Reporting (BRSR)
In 2021, the Securities and Exchange Board of India (SEBI) introduced the BRSR framework, replacing the earlier Business Responsibility Report (BRR). BRSR mandates ESG disclosures for the top 1,000 listed companies in India (by market capitalization).
- Covers 9 core principles under the National Guidelines on Responsible Business Conduct (NGRBC)
- Mandatory from FY 2022–23 for top listed entities
- Disclosures include climate risk, energy usage, employee benefits, community initiatives, etc.
2. Companies Act, 2013 – Section 135 (CSR Law)
This section mandates companies meeting certain criteria to spend at least 2% of their net profits on Corporate Social Responsibility (CSR) activities. It encourages social and environmental responsibility.
- Applicable to companies with a net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more
- Activities include education, health, sanitation, environment, and gender equality
3. SEBI Regulations
- SEBI has mandated ESG disclosures under its Listing Obligations and Disclosure Requirements (LODR) Regulations.
- Mutual funds must classify ESG schemes clearly and disclose ESG-related risks and investments.
4. RBI Initiatives
The Reserve Bank of India (RBI) has begun including ESG risks in financial sector guidance. It encourages banks to factor in climate risk and social lending norms into credit decisions.
5. Green Bonds and Sustainable Finance
India has an active green bond market regulated by SEBI. These bonds are used to raise capital for environmental projects like renewable energy, clean transportation, and water conservation.
6. Other ESG Standards and Frameworks
- ISO Certifications: ISO 14001 (Environmental Management), ISO 26000 (Social Responsibility)
- Global Reporting Initiative (GRI): Many Indian companies follow GRI standards for sustainability reporting
- CDP and TCFD: Companies voluntarily disclose climate-related risks under these international frameworks
Challenges in ESG Implementation
- Lack of awareness and expertise in ESG reporting
- Insufficient data and inconsistent reporting formats
- ESG often treated as a compliance formality rather than a core business value
- Smaller companies may lack resources to adopt full-scale ESG frameworks
Conclusion
ESG is a vital framework that helps companies become more sustainable, ethical, and accountable. In India, ESG compliance is gradually becoming a standard requirement, especially for listed companies. Laws like BRSR and CSR under the Companies Act are pushing businesses toward greater environmental and social responsibility. Moving forward, a strong focus on ESG will be essential for long-term success, risk management, and reputation building in a competitive global economy.