Authored By: Aditi Abhinav Dass
Bhagat Phool Singh Mahila Vishwavidyalaya
Abstract
Environmental, Social, and Governance (ESG) factors have become pivotal in redefining corporate responsibility worldwide. In India, ESG compliance is transitioning from being voluntary to a mandatory legal and regulatory requirement. This article critically examines ESG compliance in India, analyzing its legal framework, regulatory mandates, judicial interpretations, and the role of stakeholders. It identifies challenges such as greenwashing, inadequate enforcement, and compliance burdens on smaller enterprises. A comparative perspective with global ESG regimes in the EU and US highlights lessons for India. The article concludes by proposing reforms to strengthen ESG governance and align India’s practices with global sustainability standards.
Introduction
Environmental, Social, and Governance (ESG) principles reflect the shift from profit-driven corporate models to sustainable and responsible business practices. Globally, ESG compliance is recognized as a determinant of long-term corporate success, risk management, and investor confidence. In India, ESG is gaining traction due to rising investor activism, climate change risks, and regulatory reforms initiated by the Securities and Exchange Board of India (SEBI). The Companies Act, 2013, particularly the introduction of mandatory Corporate Social Responsibility (CSR), marked the first legal step in integrating ESG obligations. The subsequent introduction of Business Responsibility and Sustainability Reporting (BRSR) by SEBI in 2021 made ESG disclosures mandatory for the top 1,000 listed companies, cementing ESG’s role in India’s corporate governance framework.
Research Methodology
This article follows a doctrinal and analytical research methodology. Primary sources such as statutes, regulations, SEBI circulars, and judicial precedents are examined. Secondary sources including scholarly articles, reports of international organizations, and comparative legal frameworks are used to provide a holistic understanding of ESG compliance. The approach is both evaluative and critical, highlighting gaps in India’s ESG regime while drawing lessons from global best practices.
Legal Framework of ESG in India
The foundation of ESG compliance in India lies in statutory, regulatory, and policy measures. Key components include: 1. Companies Act, 2013: Section 135 mandates Corporate Social Responsibility (CSR) expenditure for companies meeting prescribed thresholds. India became the first country to legislate CSR as a legal duty. 2. SEBI Regulations: SEBI introduced the Business Responsibility Report (BRR) in 2012 and replaced it with the Business Responsibility and Sustainability Report (BRSR) in 2021. The BRSR framework requires listed companies to disclose ESG-related information, covering environmental footprint, workforce policies, and governance standards. 3. Environmental Legislation: Laws such as the Environment Protection Act, 1986, the Water (Prevention and Control of Pollution) Act, 1974, and the Air (Prevention and Control of Pollution) Act, 1981 form the environmental pillar of ESG compliance. 4. Labour and Social Welfare Laws: Provisions relating to minimum wages, workplace safety, gender equality, and diversity policies are central to the social component of ESG. Together, these frameworks establish ESG as a critical compliance and governance requirement in India.
Judicial and Regulatory Developments
Indian judiciary has historically reinforced corporate responsibility towards society and the environment. Notable cases include: – Union Carbide Corp. v. Union of India (Bhopal Gas Tragedy): The Supreme Court emphasized corporate liability for environmental disasters. – Vellore Citizens’ Welfare Forum v. Union of India: The Court recognized the ‘precautionary principle’ and ‘polluter pays principle’ as part of Indian environmental jurisprudence. – M.C. Mehta v. Union of India: Multiple rulings highlighted the duty of corporations to ensure sustainable industrial practices. Regulators have also contributed significantly. SEBI’s 2021 circular on BRSR institutionalized ESG disclosures, while the Ministry of Corporate Affairs issued the National Guidelines on Responsible Business Conduct (NGRBC). Additionally, the introduction of ESG rating agencies and sustainability indices reflect the growing role of market-based instruments in promoting ESG accountability.
Critical Analysis of ESG Compliance in India
Despite progress, India’s ESG framework faces multiple challenges: 1. Greenwashing: Companies often misrepresent ESG achievements to attract investors and improve public image. 2. Enforcement Gaps: Regulators like SEBI lack adequate resources to monitor and penalize false ESG disclosures effectively. 3. SME Burden: Compliance costs and lack of expertise create barriers for small and medium enterprises. 4. Lack of Standardization: ESG metrics vary widely, undermining reliability and comparability of disclosures. 5. Investor Skepticism: Global investors demand greater transparency and third-party verification of ESG data, which India is still developing. These limitations suggest that while India has laid down an ESG framework, its implementation remains weak.
Comparative Perspective
A comparative study of ESG compliance regimes highlights lessons for India: – European Union: The Corporate Sustainability Reporting Directive (CSRD) mandates uniform sustainability disclosures, requiring independent audits. The EU Taxonomy provides detailed classification of sustainable activities. – United States: The Securities and Exchange Commission (SEC) has proposed mandatory climate-related disclosures. Although still debated, these proposals reflect a move towards stricter accountability. – Asia-Pacific: Countries such as Japan and Singapore have adopted robust ESG disclosure frameworks, linking them to corporate governance codes. Compared to these jurisdictions, India’s ESG framework is less stringent and lacks independent verification mechanisms.
Suggestions / Way Forward
To strengthen ESG compliance, India should consider: 1. Independent ESG Audits: Mandatory third-party verification of ESG disclosures will improve credibility. 2. Incentives for SMEs: Subsidies, tax breaks, or technical assistance can encourage smaller businesses to adopt ESG practices. 3. Penalties for Greenwashing: A regulatory framework should explicitly penalize false ESG claims. 4. Harmonization with Global Standards: Alignment with EU and US frameworks will enhance India’s competitiveness in global markets. 5. Stakeholder Engagement: Shareholder activism and civil society participation should be encouraged to ensure accountability. 6. Capacity Building: Training and awareness programs can help companies integrate ESG principles into core business strategies.
Conclusion
ESG compliance in India has evolved from voluntary guidelines to a legally recognized corporate responsibility framework. The Companies Act, SEBI’s BRSR, and judicial precedents provide the foundation for this evolution. However, India must address enforcement gaps, prevent greenwashing, and provide incentives for smaller enterprises to achieve meaningful ESG compliance. Learning from global practices such as the EU’s CSRD and the US SEC’s proposals can help India strengthen its ESG ecosystem. Ultimately, ESG should be understood not merely as a compliance requirement but as an ethical and strategic necessity for businesses in the 21st century.
Reference(S):
- The Companies Act, 2013, § 135 (India).
- Securities and Exchange Board of India, Business Responsibility and Sustainability Reporting (BRSR) Framework, Circular No. SEBI/HO/CFD/CMD-2/P/CIR/2021/562 (May 10, 2021).
- Environment Protection Act, 1986, § 3 (India).
- Union Carbide Corp. v. Union of India, AIR 1990 SC 273 (1989) (India).
- Vellore Citizens’ Welfare Forum v. Union of India, (1996) 5 SCC 647 (India).
- M.C. Mehta v. Union of India, (1987) 1 SCC 395 (India).
- European Union, Directive (EU) 2022/2464 of the European Parliament and of the Council (CSRD).
- U.S. Securities and Exchange Commission, Proposed Rule on Enhancement and Standardization of Climate-Related Disclosures, 87 Fed. Reg. 21334 (proposed Apr. 11, 2022).
- Ministry of Corporate Affairs, National Guidelines on Responsible Business Conduct (2019).
