ESG Reporting is a disclosure made by companies on the basis of three major
factors Environment, Social and Governance. Where companies take lot from
society, ESG factors requires companies to grow as a community whole. These
factors have their origin from three P's of Triple Bottom Line. People, Planet,
Profit (3 P's) are supplementary to growth of business and cannot be taken as
substitute of each other.
The Indian Regulatory system presently mandates ESG
Reporting by only top 1000 listed companies by Market Capitalisation. Investors
of Contemporary world are more conscious about their investee's contribution in
these three factors primarily. It is thus, not the top 1000 companies but, for
every company to look for this reporting to ensure its longevity and
sustainability. One might consider CSR and ESG similar; this article
distinguishes and further highlights the idea of replacing CSR with ESG.
Companies need ceaseless flow of funds for expansion and modernization of their
businesses. They are the significant contributor to the economic growth of the
country. Where companies using resources of society, creating both positive and
negative impact of its operations and the World changing its focus to
sustainable development, it is good time companies adopt for this comprehensive
disclosure in its reporting.
The Three facets of ESG
The environmental reporting assists companies analyse how
efficiently company uses the resources and the environmental impact on it. It
helps organization highlight its commitment towards environment protection. The
Indian Legislature through its diversified laws ensured regulation of companies
and protection of environment most important being Environment Protection Act,
1986. Some of the other significant environmental rules and regulation framed
includes Hazardous Wastes (Management and Handling) Rules (1989), Public
Liability Insurance Act (1991), Bio-Medical Waste (Management and Handling)
Rules (1998), Manufacture, Storage and Import of Hazardous Chemicals Rules
(1989),The Ozone Depleting Substances (Regulation and Control) Rules (2000),
Noise Pollution (Regulation and Control) Rules (2000). Companies in order to
oblige them meet various legislative requirements and install an environment
management system (EMS) have obtained ISO 14001 certification. Nevertheless
pollution is growing at rapid rate and soon its either the executive or
judiciary shall have to respond. 'The Indian Supreme Court has actively
intervened in many environmental issues on public complaints.
In such a
situation, industries ﬁnd their investment most threatened. Therefore, for a
country such as India, it is in the industry's own interest to adopt a proactive
role in environmental management.'
Social reporting is defined as reporting of some relevant, segment of
a business enterprise's activities that have social impact. Keeping it another
way, social reporting implies the reporting of, information concerning the
impact of activities of business whether internal or external on society. Human
Resource Contribution, Net Income Contribution, Development of Nearby Areas,
Product Contribution are some of the factors of Social Reporting. Contribution
hereby does not only imply benefits but also financial contribution in terms of
costs too. The report signifies where the company has been, where the company is
and where the company aims to be but, 'Improving corporate citizenship
performance is not about having a good social report. Instead, a social report
must reflect what is going on within a company.'
This element is the least paid attention compared to the
aforesaid factors. Governance involves reporting of corporate governance, legal
compliances, policies and practices, organizational structure of its board etc.
It informs stakeholders about the company duly fulfilling its legal obligations.
Understanding the "G" in ESG reporting is paramount, as many of the Indian
Companies face legal challenges due to deficiency or improper governance
reporting. This will drive away governance risk and create opportunity.
'The three components of ESG are profoundly interrelated and demand a cohesive
methodology to amplify overall benefits and synergies. Environmental and social
concerns are ultimately interconnected, and good corporate governance is the
structure that links them together'.
Existence of ESG Standards in India
It was in year 2012 when SEBI issued guidance note on disclosure which required
companies to provide ESG Disclosure in their Annual Reports. It was further
updated in year 2015. In 2020, SEBI took a major step towards mandating the top
1,000 listed companies to disclose their ESG-related information in their annual
reports from the financial year 2021-22 onwards and introduced new Business
Responsibility Sustainability Reporting Framework. Thought, ESG Standards are
undergoing evolution but, there are no specific standards of ESG in India
currently but few provisions to guide reporting.
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. Section
134(m) requires Board of Directors to include in Board Report, content on
conservation of energy, along with annual financial statement. This is further
explained under Rule 8(3)(A) of the Companies (Accounts) Rules, 2014.
are also mandated to disclose opportunities, threats, risks in their annual
reports under Regulation 34(3) of the SEBI (Listing Obligation and Disclosure
Requirements) Regulation, 2015, yet, such disclosure requirements do not seek
details about processes adopted for such charting such disclosure and its
progress. The lack of standardization of ESG in India makes it inconvenient for
investor to compare and difficult for companies to report.
Corporate Social Responsibility u/s 135 of CA, 2013
The scope of CSR started extremely precarious manner, but has since widened to
include many more issues. What started as a movement for businesses to give to
charity has transformed into an initiative that changed the way business is
done. Due to greater deregulation of business, meaning corporations had to
engage in more self-regulation and take responsibility for the social impact of
Section 135 of Companies Act, 2013 provides for Corporate Social Responsibility.
It mandates the responsibility on companies eligible as per the provision. What
distinguishes ESG from CSR is that it provides for quantitative measure of
sustainability and is more data intensive. The activity of CSR is undertaken
only when there is profit. This implies that company having losses no
responsibility towards society or should not fulfill it despite it exploits the
same resources as profitable one!
The ESG reporting provides for more
comprehensive and detailed view of measures taken, policies formed,
responsibilities fulfilled by company no matter whether it is profitable or not
which aids investors to conduct meaningful analyses. The objective of ESG
reporting is often to satisfy the information requirements of investors and key
stakeholders. On the other hand, CSR activities (and even reporting based on
these activities) is often designed to engage employees, and build a positive
corporate reputation in the eyes of consumers and invested communities.
Furthermore, the activities of CSR are restricted to ethical and moral
responsibilities of company more particularly described in Schedule VII of
Companies Act, 2013. Since ESG reports summarize the qualitative and
quantitative benefits of a company's ESG activities, investors can screen
investments, align investments to their values, and avoid companies with the
risk of environmental damage, social missteps or corruption.
Substituting Section 135 of Companies Act, 2013
It is often said that 'It is burden to be Responsible.' It is something you can
always withdraw yourself from, substitute it or transfer it to others. Creating
Responsibility on Corporate is one of the lacunae of CSR benefits not being
implemented in society. In addition to this lack of effective enforcement is a
major reason. Simply mandating provision does not ensure its enforcement.
hindrance is finding credible projects that companies can support under its CSR
requirements. Amount of 2% of profit mandated by section 135 is seen as another
way of burning their pockets but not as contribution for development of society.
Moreover, geographical bias is also an obstacle for implementation of CSR. It is
because company tend to distribute their funds to the locations where they are
located i.e. the location of headquarters. Where companies have units at
different areas of nation the contribution is made by headquarter at one place
leading to development of area that is already developed.
The resources are
extracted from several areas and parts of nations which are in ardent need of
those resources but development of only few selected ones. Thus, CSR has now
reduced to mere collection of projects, a source for advertisement of their
little and mandated contribution without any social benefit.
Social Contribution should considered equivalent as contribution in monetary
terms along with protecting the interest of stakeholders and being accountable
to those from whom resources are extracted from. Stakeholders and Capital
Providers should have upper hand. ESG Reporting bumps of these setbacks of CSR.
It allows companies to identify potential transition risks, assess its ability
to sustain in the future. In case companies are not conscious of this reporting,
they not only lose their profit-making ability, but also market reputation.
Simultaneously, ESG disclosures help companies in identifying innovative
Many organizations are rejigging their business models,
re-organizing corporate structures, and spending substantial time, money and
resources to embed sustainability into core strategies. As a result of this
investment, many have come to see ESG Reporting, not as a regulatory burden, but
as a tool to attract investors and financing.
Thus, where legislature is
repealing, amending, replacing well framed Colonial laws, it should consider
replacing few other corporate laws before it hampers society in large and
hinders the target of 1trillion economy. Substituting Section 135 with ESG
Reporting will widen the current perspective of Corporate Social Responsibility
and provide companies with standardised framework on ESG.
It is CSR only that helped society and environment being recognized as
stakeholders of company, but a lot need to be done because achieving CSR
objectives still remains a dream. Obviously, companies want to be ethical and
responsible but also want to attract investors, build reputation and stand above
their competitors. It is highly recognized that companies that has momentum with
sentiment of stakeholders are one level up in winning their trust and putting up
the reputation of organization.
Government initiatives will all be in vain if
the longing to work for benefit of environment and society does not come from
innate. This is viable when company perceive this as profit making opportunity
as it is human tendency to act for others only when they think it is in their
best interest to do so. ESG disclosures thrive towards achieving these
objectives of company and prioritizing the interest of stakeholders.
- Arunaditya Sahay, Environmental Reporting by Indian Corporations, Corporate Social Reponsiblity And Environment Management (Aug 13, 2023, 11:00 AM),
- Belinda Richards David Wood, The Value of Social Reporting Lessons learned from a series of case studies documenting the evolution of social reporting at seven companies, Boston College Centre For Corporate Citizenship (Aug 14, 2023, 2:50 PM),
- Anonyms, Governance in ESG Reporting, (Aug 14, 2023, 3:20 PM),
- Casey Schoff, The Evolution of Corporate Social Responsibility, ECOLYTICS (Aug 13, 2023, 10:02 AM),
- Novisto, What's the difference between CSR and ESG?, NOVISTO (Aug 16, 2023, 11:54 AM),
- Fabrizio Tocchini & Grazia Cafagna, The ABCs of ESG reporting: What are ESG and sustainability reports, why are they important, and what do CFOs need to know, Wolters Kluwer (Aug 16, 2023, 12:32 PM),
Award Winning Article Is Written By: Ms.Anukriti Jawandhia
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