ESG is an acronym for Environmental, Social, and Governance. ESG takes the holistic view that
sustainability extends beyond just environmental issues.
ESG can be best explained as a framework that helps the stakeholders understand how an
organization is managing risks and opportunities related to environmental, social, and
While the term ESG is often used in the context of investing, stakeholders include not just the
investment community but also consumes customers, suppliers, and employees. All of them are
increasingly interested in how sustainable an organization’s operations are.
Significance of ‘E’, ‘S’ and ‘G’:
The first pillar of ESG focusses on the effects on the physical, natural environment. Across
the globe, how we produce, consume and discard has a significant adverse impact on the
a. Potential climate risk
b. The extraction and use of raw materials
c. The effects of human activity on biodiversity
It’s not only nature that is needed to be considered. How employees and local communities
are affected also must be taken into account.
a. Are human rights respected?
b. Is the end consumer protected from unsafe products or practices?
c. How is the personal data of individuals protected?
Governance is to do with making sure there are systems in place to ensure accountability
within a corporation.
a. Transparency of processes and procedures
b. Clear anti-bribery and corruption policies
c. Ensuring boards are composed of independent members
In a simple manner, the main objective of ESG norms is basically to ensure that businesses are
conducted in a more responsible manner. The business enterprises constitute and are considered
as critical components of the social system and they are accountable not merely to their shareholders from a revenue and profitability perspective but also to the larger society which is also its stakeholder. Hence, adoption of responsible business practices by companies to cover the ESG aspects are as vital as their financial and operational performance. Compliance with ESG norms essentially requires every business to be accountable for the responsibility it has towards the environment as well as the people who make up the entire ecosystem either as employees or customers or other stakeholders.
B. ESG REGIME IN INDIA:
Though ESG is gaining more and more importance in the corporate/business ecosystem,
unfortunately, there is no single piece of legislation laying down the ESG compliance. ESG
compliance comes from various sources of laws enforced in India, some of which are as
a) COMPANIES ACT, 2013:
i. Section 134(3)(m) of the Companies Act mandates the board’s report to contain details
on conservation of energy including any steps taken or impact on conservation of
energy, steps taken to utilise alternate sources of energy, capital investment in energy
conservation equipment, efforts towards technology absorption, etc.
ii. Section 135 of the Companies Act read with the Companies (Corporate Social
Responsibility Policy) Rules, 2014 makes it mandatory for companies with specified
net worth, turnover or net profit to constitute a Corporate Social Responsibility (CSR)
committee to oversee the CSR policy and activities. Eligible companies are required to
annually spend at least 2% of their average net profits of the last three financial years
on CSR. The board’s report shall disclose the composition of the CSR committee,
content of the CSR policy, an explanation for any unspent amount, etc.
iii. Section 166 of the Companies Act lays down duty on a director of a company to act in
good faith in order to promote the objects of the company for the benefit of its members
as a whole, and in the best interests of the company, its employees, the shareholders,
the community and for the protection of the environment.
iv. Section 149 of the Companies Act read with Rule 3 of the Companies (Appointment
and Qualifications of Directors) Rules, 2014 stipulates for having Woman directors for
certain classes of companies. Additionally, Regulation 17(1)(a) of SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 requires the top 1,000
listed entities to have an independent, Woman director on their boards.
v. Regulation 17(1)(b) of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 stipulates that one-third of the board of a listed entity shall be
composed of independent directors in case the chairperson is a non-executive director
and not a promoter or related to a promoter or a person occupying a management
position; otherwise, at least half of the board should be composed of independent
vi. Regulation 17(1)(b) of SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 provides that, with effect from 1 April 2022, the chairperson of the
board of the top 500 listed entities (except those that do not have any identifiable
promoters) shall be a non-executive director and not related to the managing director or
chief executive officer.
vii. Section 177 of the Companies Act requires the board of every listed company and
certain classes of public companies to constitute an audit committee consisting of a
minimum of three directors, with independent directors forming a majority.
Additionally, Regulation 18 of SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 requires that at least two-thirds of a listed entity’s
audit committee members are independent directors; however, in case of a listed entity
having outstanding SR equity shares, all members must be independent directors. It
also requires that the chairperson of the audit committee shall be an independent
viii. Section 178 of the Companies Act requires the board of every listed company and
certain classes of public companies to constitute a nomination and remuneration
committee (NRC) consisting of three or more non-executive directors, out of which not
less than one-half shall be independent directors. The chairperson of the company
(whether executive or non-executive) may be appointed as a member of the NRC but
shall not chair the NRC. Additionally, Regulation 19 of SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015 requires that in case of a listed entity
having outstanding SR equity shares, two-thirds of the NRC shall be composed of
independent directors. It also requires that the chairperson of the NRC shall be an
ix. While the Securities and Exchange Board of India (SEBI), i.e., the capital markets
regulator, made it mandatory for the top 100 listed companies by market capitalisation
to file a business responsibility report (BRR) capturing their non-financial performance
across ESG factors back in 2012, SEBI has recently, in May 2021, expanded the BRR
and replaced it with a new business responsibility and sustainability report (BRSR).
SEBI vide Regulation 34(2) (f) of SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 and its circular dated 10 May 2021 on ‘Business
responsibility and sustainability reporting by listed entities’ (BRSR Circular) made it
mandatory for the top 1,000 listed entities by market capitalisation to include, in their
annual report, a BRR describing the initiatives taken by the listed entity from an ESG
perspective. The requirement of submitting a BRR shall be discontinued after FY
2021–22 and be replaced thereafter by BRSR with effect from FY 2022–23. While the
existing BRR filing is mandatory for FY 2021–22, listed entities have been given the
option to voluntarily file the new BRSR for the present financial year in lieu of the
BRR. The remaining listed entities may voluntarily submit such reports.
b) ENVIRONMENTAL LAWS:
i. Environment (Protection) Act, 1986 entails rules in relation to e-waste management,
bio-medical waste, solid waste, ozone depleting substances, construction and
demolition waste, hazardous waste, hazardous chemicals, plastic waste, batteries and
rules to assess environmental impact of establishment of any industry.
ii. Water (Prevention and Control of Pollution) Act, 1974 and Air (Prevention and Control
of Pollution) Act, 1981, imposes obligations on companies for prevention, control and
abatement of water and air pollution.
iii. Wildlife (Protection) Act, 1972, the Forest (Conservation) Act, 1980 and the Biological
Diversity Act, 2002 ensures that companies do not interfere with the natural ecosystems
of their area of operations.
c) LABOUR LAWS:
i. Factories Act, 1948 and state specific shops and establishment acts regulate working
conditions and terms of employment of certain categories of workmen/employees.
ii. Payment of Wages Act, 1936, Minimum Wages Act, 1948 and Equal Remuneration
Act, 1976 ensure fair and equitable pay.
iii. Contract Labour (Regulation and Abolition) Act, 1970 and Child and Adolescent
Labour (Prohibition and Regulation) Act, 1986 regulates employment of contract labor
and prohibits child labour in India, respectively.
iv. Trade Unions Act, 1926, provides for registration of a trade unions and the
rights/liabilities of a registered trade union.
v. Employees State Insurance Act, 1948, Employees Provident Fund and Miscellaneous
Provision Act, 1952, Payment of Gratuity Act, 1972 and Maternity Benefit Act, 1961
are other social security laws introduced for the benefit of workforce and for their
C. SEBI’S DISCLOSURE REQUIREMENTS:
SEBI recently came out with a circular on Business Responsibility and Sustainability Reporting
by listed entities. However, the same is applicable only to the top 1000 listed companies by
market capitalization. This is a transition from the erstwhile Business Responsibility Reporting
(“BRR”) regime to Business Responsibility and Sustainability Report (“BRSR”) reporting
regime. The foundation for the same has been the MCA’s Report on Business Responsibility
Reporting. The MCA report has touted the BRSR to serve as “a single comprehensive source of
non-financial sustainability information relevant to all business stakeholders – investors,
shareholders, regulators, and public at large.”
The new BRSR seeks disclosure from listed entities of their performance against the nine
principles of the ‘National Guidelines on Responsible Business Conduct’ (NGRBC), which were
issued by the MCA in the background of emerging global concerns, the Sustainable
Development Goals (SDGs), and the United Nations Guiding Principles on Business and Human
Rights. These principles require that businesses should:
i) conduct and govern themselves with integrity, and in a manner that is ethical, transparent
ii) provide goods and services in a manner that is sustainable and safe;
iii) respect and promote the well-being of all employees, including those in their value
iv) respect the interests of and be responsive to all stakeholders;
v) respect and promote human rights;
vi) respect and make efforts to protect and restore the environment;
vii) when engaging in influencing public and regulatory policy, do so in a manner that is
responsible and transparent;
viii) promote inclusive growth and equitable development; and
ix) engage with and provide value to their consumers in a responsible manner
The foundation for the same has been the MCA’s Report on Business Responsibility
Reporting. The MCA report has touted the BRSR to serve as “a single comprehensive source of
non-financial sustainability information relevant to all business stakeholders – investors,
shareholders, regulators, and public at large.” Reporting under the BRSR format is divided into
three parts: general disclosures; management and process disclosures; and, principle-wise,
performance disclosures. The key features of the circular are discussed below:
To adhere with the BRSR reporting requirements, the following disclosures are mandated by
a) The companies need to not only disclose the ESG risks faced by them but also the
mitigation strategy for such risks. The financial implications of the same must be reported as
b) The sustainability goals of the company and how it has performed in this regard.
c) Environment related aspects such as green-house gas (“GHG”) emissions, waste
management practices, quantum of waste generation, biodiversity, etc.
d) Social related disclosures with respect to workforce of the company such as gender
diversity, social diversity which is inclusive of measures for differently abled workers and
employees, median wages, turnover rates, occupational health and safety, welfare benefits
e) Disclosures on social impact assessments, corporate social responsibility, rehabilitation and
f) Consumer related disclosures such as product labelling, product recall and consumer
complaints related to data privacy, cyber security, etc.
The ESG model proposed by SEBI is in line with international standards such as Global
Reporting Initiative, Task Force on Climate related Financial Disclosures and Sustainability
Accounting Standards Board.
Beyond the above disclosures, ESG reporting largely remains voluntary in India, depending on
the initiative of a business (except for the top 1,000 listed entities). Generally, disclosures are
based on well-accepted global sustainability frameworks and standards, such as GRI, SASB,
TCFD, IIRC, etc. Moreover, SEBI’s BRSR Circular also permits inter-operability of reporting. In
2018, the Bombay Stock Exchange published a guidance document for all corporates listed on it,
to provide a comprehensive set of voluntary ESG reporting recommendations along with 33 key
performance indicators. Separately, under SEBI’s new BRSR, leadership indicators are to be
disclosed on a voluntary basis.
D. RELEVANCE OF ESG DISCLOSURE:
ESG disclosures are highly relevant for all stakeholders involved in a business process:
a) Investors –ESG disclosures are highly consequential for investors for the following reasons:
i) including climate-related considerations in asset valuation and finance allocation
ii) determining the environmental and social impact of a company’s business processes;
iii) assessing how climate change could affect a company’s financial stability in the future.
b) Businesses – ESG disclosures allow companies to identify potential transition risks, self-
assess its ability to sustain in the future, and undertake necessary steps to adapt to the likely
future changes. In case companies are not conscious of this exercise, they not only stand the
risk of losing profit-making capacity, but also market reputation. At the same time, ESG
disclosures help companies in identifying certain opportunities for innovation that might
yield high results in the future. They also help companies in reassuring their stakeholders
about their values and respect towards responsible business. The introduction of the
Companies Act, 2013, has codified the stakeholder model of governance and mandated
companies to think beyond their shareholders by addressing the concerns of the larger group
of stakeholders. For instance, Section 166(2) of the Companies Act states that ‘a director of
a company shall act in good faith in order to promote the objects of the company for the
benefit of its members as a whole, and in the best interests of the company, its employees,
the shareholders, the community and for the protection of the environment.’
c) Consumers – ESG disclosures aid consumers in identifying responsible businesses, which
not only concentrate on maximizing profits, but also on growing in a responsible manner.
Businesses could also use their disclosures as a part of their marketing strategy to attract
This demonstrates that ESG disclosures are significant from the perspective of all
stakeholders involved in the business processes. Therefore, special focus must be given to
preparing the foundational principles and framework for such disclosures. As part of a two-
parts blog-series, this first part will focus on the journey of ESG disclosure frameworks in
India and provide a general overview of the newly BRSR framework, while discussing its
implication on businesses.
E. ESG REGULATORS:
In India, the principal regulators with respect to ESG are MCA, which supervises corporates
incorporated under the Companies Act, and SEBI, which supervises publicly listed companies as
well as asset managers. SEBI’s BRR goes the furthest in promoting ESG disclosures on a
mandatory basis. Separately, MCA has imposed mandatory reporting on CSR under the
Companies Act. In addition, enforcement authorities under labour laws and environmental laws
(including the Ministry of Environment, Forest and Climate Change and the Central and State
Pollution Control Boards) play a meaningful role in ESG compliance in their respective spheres.
The Ministry of New and Renewable Energy plays an important role in establishing goals and
benchmarks for the renewable energy business in India. A ‘Sustainable Finance Group’ (“SFG”)
has been set up in the Reserve Bank of India (“RBI”) in May 2021 to co-ordinate with other
national and international agencies on issues relating to climate change and with an objective to
suggest strategies and introduce a regulatory framework, including appropriate ESG disclosures,
which could be prescribed for banks and other regulated entities to propagate sustainable
practices and mitigate climate related risks in the Indian context. Further, in 2021, the RBI
highlighted in a paper that ‘green finance’ is emerging as a priority for public policy, and that
reduction in the asymmetric information regarding green projects through information
management systems and enhanced coordination between stakeholders could pave the way
towards sustainable economic growth. Furthermore, SEBI has also made the new BRSR format
mandatory from 2022–23.
Further, the courts play an important role in India with respect to environmental issues. The Apex
Court of India pioneered public interest litigation (PIL), making access to courts easier through
the well-settled principle of locus standi. PIL enables public-spirited citizens or social action
organisations to mobilise a judicial concern before the Supreme Court and High Courts on behalf
of vulnerable sections of the community or to raise matters of common concern. There is also a
constitutional basis for the courts to look into environmental issues, in particular, Article 21,
which has been expanded by judicial interpretation over the years to include the right to a
healthy and pollution-free environment, amongst others. Moreover, in 2010, the Government
established a specialised body, i.e., the National Green Tribunal, a quasi-judicial body, for
effective and expeditious disposal of cases relating to environmental protection and conservation
of forests and other natural resources including enforcement of any legal right relating to the
environment and giving relief and compensation for damages to persons and property.
F. ESG INVESTORS:
ESG investing, in simple terms, means investing based on not just traditional financial factors but
also non-financial environmental, social and governance (or ESG) factors. An important part of
the contemporary debate of shareholder versus stakeholder capitalism, ESG investing continues
to gain momentum today, as a growing number of institutional investors (and their clients, in
particular) look to align financial returns with ethical and other non-financial considerations. This
momentum is further supported by increasing empirical evidence of a positive correlation
between rates of return and higher ESG scores as well as policy and regulatory actions by
governments and regulators aimed at combating climate change and economic and social
Like most investors, ESG investors also seek and depend on reliable information before choosing
how to allocate capital and where to invest. This explains the current emphasis on ESG disclosure and reporting, not just by investors and lenders but by governments and regulators as
For the reason that ESG is gaining an important position at international level, the investors,
specially the foreign investors, acquire inspection and information rights under the transaction
agreements to receive from the target company the ESG report and of any serious incidents that
result in loss of life, material effect on the environment, or material breach of law connected with
– (a) environment and social requirements, such as environment and social risk assessment and
management, working conditions and labour rights and providing grievance mechanism for its
workers; and (b) business integrity requirements such as implementing anti-corruption and anti-
bribery policy, proper recording, review and reporting of financial and tax information,
compliance with government norms, rules and regulations, including international laws, as
applicable and implementing whistleblowing policy.
ESG reporting in India is still being driven by foreign investors and we hope that Indian
institutional investors would catch up soon. Like most developing countries, India has to contend
with a number of ESG issues, which are further compounded by the scale of the country’s
population, its socio-economic diversity, and its growth ambitions.
As ESG reporting is getting more and more global recognition and utmost importance among
international investors, the Indian companies may consider to conduct ESG due diligence and
draw an ESG action plan, which would include obtainment of applicable licenses, drafting
policies on anti-corruption, environment and social, etc., waste disposal process, maintaining a
healthy environment for workers, fire safety/precautionary measures, etc. based on the findings
of ESG due diligence.
Author: Abhishek Gupta, Senior Associate
Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at firstname.lastname@example.org.