The Securities and Exchange Board of India was formed after the Indian
parliament passed the Securities Exchange Board of India Act, 1992 in response
to the financial services assessment program, a program developed by the World
Bank and International Monetary Fund that observes and reports on the global
The Indian government wanted to establish a strong financial atmosphere and
securities market with a regulator promoting the latest in corporate governance
standards. SEBI sets standards by which the securities market must operate, and
protect the right of issuers and investors. SEBI has the power to investigate
circumstances where the market and its players have been harmed and can enforce
government standards with directives.
Now coming to ESG (Environmental, Social, and Governance), it 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 governance criteria.
While the term is often used in the context of investing, stakeholders include
not just the investment community but also consumes customers, suppliers, and
employees. ESG investing also becomes very important in a fast-growing economy
like India, allowing the government, investors, and companies to build a
sustainable business economy.
SEBI understood the rise and importance of ESG investing in India and thought it
necessary to incorporate sustainability reporting by corporates on par with
financial reporting. This would ensure the adoption of ESG as a metric to
evaluate corporate performance.
SEBI role in Corporate Governance:
To make corporate governance more effective, SEBI since its setup in 1992 has
taken up a number of initiatives, appointed various committees, and has brought
amendments to Clause 35B and Clause 49 of the listing agreement. Here the SEBI's
role in corporate governance is illustrated through norms and provisions as
stated in these two clauses; Clause 35B and Clause 49 of the listing agreement.
SEBI norms and guidelines under Clause 35B and 49 of the listing agreement for
effective Corporate Governance. Since its establishment, SEBI has taken
initiatives to align Indian corporate governance practices with the global
standards adopted in advanced economies.
The recent amendments to Clause 35B and 49 of the listing agreement make
Governance more effective and rigorous in protecting the interest of all
stakeholders. The amended Clause 49 of the listing agreement is in alignment
with the new Companies Act, of 2013. This clause is applicable to listed
companies but as per SEBI clarification, in future, this clause will be
applicable to non-listing companies also.
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
ESG compliance. ESG compliance comes from various sources of laws enforced in
India, some of which are as follows:
Companies Act, 2013:
Section 134(3)(m) of the Companies Act mandates the board's report to contain
details on the conservation of energy including any steps taken or impact on the
conservation of energy, steps taken to utilize alternative sources of energy,
capital investment in energy conservation equipment, efforts towards technology
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, the content of the CSR policy, an
explanation for any unspent amount, etc.
Section 166 of the Companies Act lays down the duty of 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
Section 149 of the Companies Act read with Rule 3 of the Companies (Appointment
and Qualifications of Directors) Rules, 2014 stipulates having Women 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
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 director.
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 independent
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
capitalization 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 capitalization 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.
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 the environmental impact of the
establishment of any industry.
Water (Prevention and Control of Pollution) Act, 1974, and Air (Prevention and
Control of Pollution) Act, 1981, impose obligations on companies for prevention,
control, and abatement of water and air pollution.
Wildlife (Protection) Act, 1972, the Forest (Conservation) Act, 1980, and the
Biological Diversity Act, 2002 ensure that companies do not interfere with the
natural ecosystems of their area of operations.
SEBI's role in mandating ESG Disclosure:
There may not yet be any single, comprehensive, and stringent enactment
governing the entire subject with all checks and balances, but SEBI (Securities
and Exchange Board of India) has taken on the role of implementing an efficient
ESG policy. As far back in November 2015, SEBI issued a circular prescribing the
format for the Business Responsibility Report (BRR) with respect to reporting on
ESG parameters by listed entities.
The top 500 listed companies in India were instructed by SEBI to disclose
indicators of business responsibility and sustainability through Business
Responsibility Reporting (BRR). Companies were mandated to include disclosures
on opportunities, threats, risks, and concerns as part of their annual reports
under Regulation 34(3) of the SEBI (Listing Obligation and Disclosure
Requirements) Regulation, 2015 (LODR Regulations).
In 2017, SEBI issued a circular on 'Disclosure Requirements for Issuance and
Listing of Green Debt Securities' (also known as Green Bonds) to introduce the
regulatory framework for the issuance of green debt securities in India and
enhance investor confidence.
It supplements the SEBI (Issue and Listing of Debt Securities) Regulation, 2008,
and envisages a list of disclosures that an issuer must make in its offer
document before and after the commencement of a project financed by green debt.
These additional disclosure requirements have been prescribed to attract the
finance reserved for ESG-compliant projects, such as renewable energy and
sustainable energy, clean transportation, sustainable water management, climate
change adaptation, energy efficiency, sustainable water management, sustainable
land use, and biodiversity conversion.
To further strengthen the ESG disclosure regime in India, SEBI amended
Regulation 34(2)(f) of the LODR Regulations and on May 10, 2021, SEBI issued
another circular detailing new sustainability-related reporting requirements on
ESG parameters called the Business Responsibility and Sustainability Report (BRSR)
to replace the existing BRR and place India's sustainability reporting on par
with the global reporting standards.
The BRSR is intended to have quantitative and standardized disclosures on ESG
parameters. Such disclosures will be helpful for investors to make better
investment decisions and also enable companies to engage more meaningfully with
their stakeholders by encouraging them to look beyond financials and toward
social and environmental impacts.
The filing of BRSR after the implementation of new norms has been stipulated as
mandatory for the top 1000 listed companies (by market capitalization) for the
financial year 2022-23 but voluntary for the financial year 2021-22, to provide
the companies with sufficient time to get used to new reporting
The BRSR seeks continuous disclosures from listed entities on their performance
and is aligned with the nine principles of the 'National Guidelines for
Responsible Business Conduct' (NGBRCs). The adoption of BRSR is yet to pick up
the pace because of the detailed nature of disclosures required in BRSR. To
speed up the process, in a Press Release on May 6, 2022, SEBI constituted an
advisory committee on ESG matters in the securities market to create faster
In respect of non-listed companies, however, there is currently no law that
mandates that such companies be subject to mandatory ESG disclosure or reporting
requirements. However, it can be expected that once the scheme is fully
implemented where it is comparatively easier to regulate, it will certainly
cover other companies as well as industries in unorganized sectors.
ESG disclosures are highly significant and relevant for all prospective
stakeholders involved in business for reasons briefly described as follows:
If a business is not conscious of sustainability, there are chances of it
becoming redundant in the future due to legal and regulatory changes
prohibiting certain ways of doing business or decreasing demand for business
products or deteriorating services. This aspect would certainly motivate the
investor's focus while investing.
ESG disclosures identify potential transition risks, assess future
viability, and take the necessary steps to adapt to likely future changes.
Companies that are not aware run the risk of losing profit-making capacity
as well as market reputation.
ESG disclosures also help conscious consumers identify responsible
businesses that not only concentrate on profit maximization but also grow in
a responsible manner. Accordingly, the disclosures become part of a
marketing strategy to attract more consumers.
ESG goals are a set of standards for a company's operations that force
companies to follow better governance, ethical practices, environment-friendly
measures, and social responsibility. They are used by socially conscious
investors to screen potential investments. Environmental criteria consider, for
example, how a company performs as a steward of nature and safeguards the
environment, including corporate policies addressing climate change.
Companies with better ESG performance have a better track record on issues such
as human rights, climate change, environmental sustainability, social
responsibility, ethics, and transparency, and hence are more resilient against
future risks. It has become absolutely essential for companies to have
comprehensive ESG policies in place.
ESG investing is very important for an emerging economy like India as it
provides an opportunity for all stakeholders to build an economy that is
financially inclusive and measured by parameters beyond financial metrics. SEBI
is indeed a visionary to facilitate the achievement of the United Nations
Sustainable Development Goals and the Paris Agreement on Climate Change by way
of mandatorily requiring ESG reporting by Indian companies. One hopes that the
applicability of the BRSR reporting is extended to all listed companies and
large unlisted companies.
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