As global consciousness towards sustainable and socially responsible operations grows, businesses are increasingly gauged on the Environment, Social, and Governance (ESG) scales. Even though the concept of ESG is still in its infancy in India, there is a burgeoning need for such measures, given the significant environmental and social challenges that the country faces.
The Concept of ESG
ESG standards form a set of guidelines for a company’s operations. These dictate the adoption of better internal governance, ethical practices, environmentally-friendly measures, and a sense of social accountability. The environmental criteria gauge how well the company acts as a steward of nature. Whereas, the social criteria assess how it manages relationships with employees, suppliers, customers, and the communities where it operates.
Governance-related issues include a company’s leadership, executive pay, audits, internal controls, and shareholder rights. Unlike the traditional business model, ESG focuses on non-financial factors as a metric for guiding investment decisions. These came into existence with the introduction of the United Nations Principles for Responsible Investing (UNPRI) in 2006.
ESG vs CSR in India
India has a robust Corporate Social Responsibility (CSR) law, requiring companies to engage in initiatives that contribute to societal welfare. This law was formally incorporated into the Companies Act of 2013 and is amended periodically. Unlike CSR, which is more philanthropic, ESG integrates the principles of sustainable development into the company’s core functioning.
Importance of ESG in India
India’s environmental and social challenges, including air and water pollution, deforestation, climate change, poverty, inequality, discrimination, and human rights abuses call for prudent ESG investments. Given India’s complex legal and regulatory environment, companies often grapple with challenges related to corruption, regulatory compliance, and corporate governance, thus making it imperative to promote companies with strong governance practices.
ESG Compliance Challenges in India
Limited awareness, lack of publicly available data, a weak regulatory environment, diverse cultural factors, and limited ESG-focused investment options are the major hurdles to ESG compliance in India. Many Indian companies are either unaware of the benefits of ESG or do not have the resources to adopt ESG principles. Moreover, traditional business practices may oppose ESG principles, posing a challenge for companies attempting to implement these policies.
Steps to Ensure ESG Compliance
Several initiatives have been taken to ensure ESG compliance in India. These include the release of the National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business in 2011, the formulation of the Business Responsibility Reports in 2012, and the introduction of the Business Responsibility and Sustainability Report in 2021.
Way Forward
Promoting awareness about the importance of ESG factors among companies, investors, and regulators is necessary for sustainable and responsible investing in India. Companies should provide more comprehensive and standardized disclosures on ESG factors, and the regulatory environment should be strengthened to encourage greater ESG compliance. This could involve introducing more robust reporting requirements, establishing clearer ESG standards, and enforcing regulations more rigorously.
