“The Role of ESG Regulations in Reshaping Corporate Governance in India: A Post-Budget Analysis”
AUTHOR: FARHAN LYAQAT STUDENT AT PRESTIGE INSTITUTE OF MANAGEMENT AND RESEARCH GWALIOR
Abstarct:
As India embarks on its sustainable development journey, Environmental, Social, and Governance (ESG) considerations have become a strategic imperative for corporate governance. This article delves into the evolving ESG landscape in India, highlighting key regulatory developments, judicial precedents, and emerging trends. With the Securities and Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA) strengthening ESG enforcement, companies must prioritize transparency, accountability, and sustainability to avoid reputational and financial risks. As India navigates the complexities of sustainable development, this article provides valuable insights into the country’s ESG journey, its implications for corporate governance, and the road ahead for Indian businesses.
Introduction:
The ESG imperative in corporate governance
Rise of ESG as a global governance standard: In 2004, a report called “Who Cares Wins”—a collaborative effort of financial firms at the UN’s invitation—was the first to use the acronym ESG. With over US$30 trillion in assets under management, the ESG movement had expanded from a UN corporate social responsibility program to a worldwide phenomenon by 2023.
India’s commitment to sustainability and corporate responsibilit:
In recent years, Environmental, Social, and Governance (ESG) considerations have gained paramount importance in the national economic policy frameworks. India, with its growing economy and ambitious sustainability objectives, is increasingly aligning its development agenda with ESG principles
India’s corporate governance and sustainability initiatives demonstrate a striking shift in the country’s business environment. The country has established lofty environmental goals, such as the audacious objective of reaching net-zero emissions by 2070 and the remarkable target of 500 GW of renewable energy capacity by 2030. Corporate giants like Tata, Reliance, and Adani are driving this green revolution by allocating significant funds to sustainable projects.
India has achieved great progress in corporate governance because to strong legislative frameworks and forward-thinking initiatives. Businesses are being urged to adopt Environmental, Social, and Governance (ESG) principles by the Securities and Exchange Board of India (SEBI), which has required thorough Business Responsibility and Sustainability Reporting (BRSR) for the top 1000 listed companies. The foundation of corporate governance is the Companies Act of 2013, which established necessary standards such as the presence of women on boards and the enhanced responsibilities of independent directors.
The role of recent budgetary announcements in reinforcing ESG compliance.
The expectations are clear as the Union Budget for 2025 approaches: India must develop policies that support its global sustainability objectives while guaranteeing inclusive growth and responsible governance. The primary ESG-related areas listed below are probably going to be given top priority in the next budget.
1. Environmental (E): Sustainable Development at the Core
India’s environmental strategy is anticipated to be given top priority in the 2025 Budget, with significant investments made in green and climate-resilient infrastructure, circularity, and renewable energy and transportation.
2. Social (S): Inclusive Growth and Social Welfare
Green Job Creation: As sustainable industries and renewable energy grow, there will be a greater need for qualified workers. In order to ensure equitable growth, the government is anticipated to implement upskilling measures for the green economy.
Networks of Social Safety: Social welfare will be strengthened by focused interventions in poverty reduction, healthcare, and education. Since the majority of workers are employed in the unorganised sector, programs like apprenticeships and Skill India will improve employability. However, labour diversity and sustainable urbanisation can be overlooked in the budget.
3. Governance (G): Strengthening Accountability and Transparency
Enhanced ESG Reporting Standards: Although large-cap listed businesses are required to provide ESG disclosures under the BRSR framework, more stringent rules may be introduced in Budget 2025, which might lead to an expansion of value chain disclosures.
Public Sector Governance: To ensure consistency with long-term development objectives, the budget should include measures to improve the efficiency and transparency of government spending on sustainability programs.
ESG Regulations: A Legal Perspective
Regulatory Framework: The Indian ESG regulations are changing how companies consider their impact rather than being just another set of corporate requirements to fulfil. The 2021 introduction of SEBI’s BRSR framework has teeth: it requires publicly traded corporations to disclose information about everything from worker welfare to their carbon footprint. Consider it an alternative to profit margins for a company’s report card.
Companies Act, 2013: The Companies Act is now a sustainability compass rather than just a checklist for compliance. The CSR requirement under Section 135 was only the first step; businesses now have to deal with comprehensive environmental disclosures and social impact analyses. The Act requires tangible action and open reporting; big players can no longer get away with greenwashing.
Environmental and Labour Laws: In the ESG era, India’s labour and environmental regulations have gained strength. Modern sustainability objectives are increasingly entwined with traditional factory norms. Businesses must negotiate a complicated web where environmental obligations and worker rights coexist, thanks to the Air Act and new labour laws.
The Proof: ESG’s Impact on Corporate Governance
1. Boardroom Dynamics: *A New Era in Sustainable Development With a rising focus on sustainability committees and the roles of independent directors, ESG has established itself as a permanent fixture in the boardroom. A greater comprehension of the complex interrelationships among business, society, and the environment is reflected in this change. Boards must also deal with the following issues as they prioritise ESG:
1. Increased scrutiny: Boards must prove their ESG commitments because stakeholders demand responsibility and transparency.
2. Diverse skill sets: These days, boards need to have a wider breadth of knowledge, such as governance, social effect, and sustainability.
3. Active ownership: ESG practices are being actively promoted by shareholders, who are pushing boards to give these concerns top priority.
Investor Confidence: The ESG Effect: Both credit ratings and investment flows are significantly impacted by ESG compliance. ESG is now seen by investors as a crucial sign of a business’s resiliency and long-term profitability. This has resulted in:
1. ESG-themed investing: ESG-focused funds and portfolios are becoming more and more popular among investors.
2. Credit rating implications: Credit ratings are influenced by ESG performance, and higher performers pay less for borrowing.
3. Risk management: ESG In order to help investors avoid potential traps, considerations are increasingly being incorporated into risk management techniques.
Transparency and Accountability: Strengthened Reporting Mechanisms
Businesses are bolstering their reporting systems to show their ESG progress as stakeholders call for increased openness. This comprises:
1. Integrated reporting: By adding ESG indicators and narratives to their annual reports, businesses are going beyond typical financial reporting.
2. Third-party assurance: Credibility and trust are increased by the growing prevalence of independent verification of ESG data.
3. Digital disclosure: In order to promote greater openness and involvement, businesses are using digital platforms to deliver real-time ESG updates.
Corporate Litigation Trends: ESG-Related Disputes
Businesses are dealing with an increase in ESG-related issues as ESG gains relevance. These disputes frequently revolve around:
1. Disclosure and transparency: Due to plaintiffs’ claims of false or misleading information, companies are being held responsible for their ESG-related disclosures.
2. Human rights and labor practices: Businesses are coming under fire for their labour and human rights policies, especially in international supply networks.
3. Climate change and environmental impact: Businesses are facing legal action due to their environmental impact, including problems associated with climate change.
Case Laws: Judicial Approach to ESG Compliance
M.C. Mehta v. Union of India (1986)
This seminal case marked a turning point in India’s environmental jurisprudence. The Supreme Court held that the Union of India was liable for environmental damages caused by the oleum gas leak in Bhopal. This ruling established the “polluter pays” principle, which has since been a cornerstone of Indian environmental law.
Vedanta Resources Plc v. Lungowe (2019)
In this UK-based case, the Court of Appeal held that Vedanta Resources, a UK-based mining company, owed a duty of care to the residents of a Zambian village affected by its mining operations. This decision underscored the importance of corporate accountability for ESG violations, particularly in the context of international operations.
Tata Consultancy Services Ltd. v. Cyrus Mistry (2021)
This case highlighted the significance of governance and boardroom ethics in ESG contexts. The Supreme Court’s decision in this corporate governance dispute emphasized the need for transparency, accountability, and fairness in boardroom decision-making.
Recent Regulatory Orders
Recent orders from the National Company Law Tribunal (NCLT) and the Securities and Exchange Board of India (SEBI) demonstrate the growing emphasis on ESG compliance:
1. NCLT Orders
: The NCLT has been actively enforcing ESG norms, particularly in cases involving environmental and social concerns. For instance, the NCLT has directed companies to comply with environmental regulations and to provide restitution to affected communities.
2. SEBI Orders
: SEBI has been cracking down on companies that fail to disclose ESG-related information or comply with ESG norms. For example, SEBI has imposed penalties on companies for non-disclosure of environmental and social risks.
These judicial decisions and regulatory orders underscore the importance of ESG compliance in India. As the ESG landscape continues to evolve, companies must prioritize transparency, accountability, and sustainability to avoid reputational and financial risks.
Conclusion:
The integration of Environmental, Social, and Governance (ESG) considerations into corporate strategy is crucial for businesses in India. The country’s ESG landscape is evolving rapidly, with regulatory bodies like SEBI and MCA strengthening enforcement and promoting ESG-driven governance models. Landmark cases like M.C. Mehta v. Union of India, Vedanta Resources Plc v. Lungowe, and Tata Consultancy Services Ltd. v. Cyrus Mistry have established important precedents for ESG compliance. As India navigates the complexities of sustainable development, it must prioritize ESG considerations, innovation, and transparency to unlock its full potential, drive sustainable growth, and establish itself as a leader in the global ESG compliance framework.
FAQs on ESG Regulations & Corporate Governance:
1. What is ESG compliance, and why is it important for Indian companies?
2. How does SEBI’s BRSR framework impact corporate governance?
3. What penalties do companies face for non-compliance with ESGregulations?
4. How has the 2025 Union Budget influenced ESG governance?
5. Can shareholders take legal action against companies for ESG violations?
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Reference:
https://en.m.wikipedia.org/wiki/Environmental,_social,_and_governance#:~:text=The%20term%20ESG%20first,management.%5B3%5D
https://energy.economictimes.indiatimes.com/news/renewable/budget-2025-and-indias-sustainable-growth-esg-trends-to-watch-for/117777120
Companies Act, 2013.
Environmental and Labour Laws.
