Navigating the complexities of ESG compliance in India

June 21, 2021 6:15 AM

Environmental, social and governance norms have moved from the margin to the centre-stage

ESG funds are witnessing growing interest in the Indian mutual fund industry.ESG funds are witnessing growing interest in the Indian mutual fund industry.

By Rajesh Narain Gupta

The perceived character of businesses as mere revenue-generating and profit-earning entities is undergoing a transformation. The modern-day corporate ecosystem is deemed to have a social character with an added layer of moral duty and responsibility towards the environment, society and community within which it operates. This has given rise to the environmental, social and governance (ESG) concept, with investors and other stakeholders demanding greater transparency and accountability in the functioning of business organisations.

The environmental aspect assesses how effectively companies reduce their carbon footprint, institute best practices for pollution and waste management, and embrace circular economy. The social aspect deals with creating fair value propositions for society, health and safety of employees, gender equality at work, social and economic mainstreaming of disadvantaged communities, and engaging with customers in a fair and transparent manner. The governance aspect deals with a company’s corporate governance structure, timely financial audits, business ethics and opposition to practices like bribery and corruption.

The earliest tryst India had with ESG compliance was when it became the first country to mandate the practice of CSR with the Companies Act 2013. Market regulator Sebi played a proactive role in making corporate India responsive to the implementation of an efficient ESG policy mechanism. New norms for ESG disclosures were introduced in 2020 by the market regulator for the country’s top 1,000 listed entities by market-cap. It became mandatory for these entities to comply with disclosure norms by FY22.

The concept of ESG lends credence to the fact that businesses are accountable to their stakeholders. This tenet was ingrained in National Voluntary Guidelines (NVGs) on Social, Environmental and Economic Responsibilities of Business released in 2011 and incorporated in the Companies Act 2013. NVGs mandate a company and its directors to essay greater responsibility towards internal stakeholders like employees and external ones like the environment and community. NVGs were subjected to further upgrades and updated as the National Guidelines for Responsible Business Conduct (NGRBC) in 2019. The top 500 listed firms in India by market-cap have been instructed by the regulator to disclose indicators of business responsibility and sustainability through Business Responsibility Reporting (BRR). Based on NGRBCs, existing BRR has been updated to facilitate the inclusion of current global practices in non-financial sustainability reporting. The Report of the Committee on Business Responsibility Reporting was unveiled by the Ministry of Corporate Affairs on August 11, 2020.

ESG funds are witnessing growing interest in the Indian mutual fund industry. An increasing number of corporates will adopt this concept under social and regulatory pressure to attract private equity. Banks and financial institutions are bound to give better rates of interest to companies following ESG norms.
Investors belonging to the millennial generation have been the driving force for the surge in ESG-driven investments; most such investors prioritise investing in companies that not only generate a substantial return on their investment, but also have clearly defined ESG goals.

Banks and financial institutions are likely to consider Green Finance more and more, to ensure flow of funds into ESG-compatible projects like EVs, solar, etc. Bodies like the World Bank would focus on screening ESG credentials of countries while offering long-term loans and developmental assistance to them.

ESG has moved from the margin to the centre-stage. With ESG compliance becoming policy imperative, companies need to demonstrate ethical leadership and a collective wisdom to achieve expectations under the global theme of ESG.

The author is Managing Partner, SNG & Partners

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