Environmental, Social, and Governance (ESG)

A.??????? Meaning of ESG-?

ESG stands for Environmental, Social and Governance. ESG represents the three main areas that organisations should focus and manage to improve overall sustainability. ESG has now become centre stage and a critical requirement for an organisation’s ability to create value and nurture sustainability. More and more Boards are integrating their ESG goals and mission into the operating strategies and policies of their organisations.

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B.???????? Relevance of ESG-?

1.???????? Better Social Standing/Better Brand Image-?

A company with a concern for environment and a deep interest in improving sustainability is always better regarded in the society in which it operates. The brand image of the company is unconsciously built with every forward step it takes in the ESG arena. There is now huge pressure to get organisations work on climate change, reduce GHG emissions, limit resources usage, curb waste and improve productivity. Businesses must therefore focus their attention on their Sustainability orientation. Otherwise, the governments could make their operations uneconomical by levying additional costs.

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2.???????? Increased Business Revenue-?

With more customers looking to purchase only sustainable products, ESG focus will actually see more revenue traction for the company concerned. A product manufactured with lower carbon emissions, reduced material usage (say packaging) and better governance processes is bound to be preferred by a “sustainability conscious” customer.

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3.???????? Better Financing Options-?

ESG considerations (apart from economic returns) are a key part of an investor’s decision to financing. A Company with a better ESG track record can access easier financing at better terms.

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4.???????? Regulatory and Governmental interventions-?

There is now huge pressure to get organisations work on climate change, reduce GHG emissions, limit resources usage, curb waste and improve productivity. Businesses must therefore focus their attention on their Sustainability orientation. Otherwise, the governments could make their operations uneconomical by levying additional costs.

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C.???????? Origin of ESG?

The MCA and the Companies Act provide the responsibility requirements of Indian Boards towards ESG considerations.

In 2019 the Ministry of Corporate Affairs released the National Guidelines on Responsible Business Conduct requiring Companies to focus on ESG along with business operations.?

SEBI and the Companies Act have also mandated reporting requirements on the Board on ESG.

D.??????? Disclosure requirements under SEBI BRSR Framework with respect to role and Accountability of the Board on ESG-?

With reference to the Key Performance Indicators (KPIs) of ESG, Regulation 34(2)(f) of the SEBI (LODR) Regulations, 2015 as amended by SEBI (LODR) (Second Amendment) Regulations, 2023 dated 14th June 2023 reads as under:?

“for the top one thousand listed entities based on market capitalization, the annual report shall contain a Business Responsibility and Sustainability Report on the environmental, social and governance disclosures, in the format as may be specified by the Board from time to time.?

The consultation paper recommended a glide path approach in implementation of assurance mandates on BRSR Core as under-?

1. For FY 22-23 – BRSR Mandatory Reporting for top 1000 companies and Assurance–No mandatory Requirement.
2. For FY 23-24-Reasonable Assurance of BRSR Core –Mandatory for top 250 companies
3. For FY 24-25 - Reasonable Assurance on BRSR Core mandatory for top 500 companies
4. For FY 25-26- Reasonable Assurance on BRSR Core mandatory for top 1000 companies

Further, at present the metrics related to supply chain of a company are covered under leadership indicators in the BRSR, that may be reported on voluntary basis. It was proposed in the consultation paper to introduce a limited set of ESG disclosures i.e. BRSR Core in a gradual manner.

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For FY 24-25 – ESG disclosures as per BRSR Core, for supply chain for top 250 companies on comply or explain basis; Assurance not mandatory.

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E.???????? ESG Reporting-

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1.???????? Mandatory Reporting-?

a.???????? Sec 134(4) introduced one of the first ESG disclosure requirements for Companies. It mandated Companies to include a report by the Board on conservation of energy along with the annual financial statements.

b.???????? SEBI in the year 2021 released the Business Responsibility and Sustainability Report Framework aligning with the nine principles espoused in the NGRBC. The BRSR framework has been made applicable to the top 1000 listed companies by market capitalisation.

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2.???????? Voluntary Reporting-?

A large number of Indian Companies voluntarily report on their Sustainability performance through-?

a.????Integrated Reporting (combination of financial and non-financial reporting)?

b.????Sustainability Reporting using standards set by:

·???? The International Sustainability Standards Board

·???? The Task Force on Climate Related Financial Disclosures

·???? Carbon Disclosure Project

·???? Global Reporting Initiative

·???? B Corp Standard

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F.???????? Components of ESG-

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In order to provide a clear understanding on ESG, the factors that impact ESG are separately listed below:?

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G.??????? Sustainability Audit-?

Sustainability Audit is a comprehensive assessment of an organization’s environmental, social and economic impacts. The purpose of the audit is to identify areas where the organization can improve its sustainability performance and minimize its negative impacts on the environment, society and economy.?

Companies are no longer only evaluated from an economic perspective, but also from a societal and environmental one. The rising importance of sustainability is illustrated by the number of standard-setting initiatives that have been developed over the years. Some well-known examples include:?

1. the ISO 26000 standard on Social Responsibility
2. the Global Reporting Initiative
3. the implementation guidelines developed by Sustainability Accounting Standards Board, and the universal sustainability development goals (SDG’s) set by the UN Global Compact.

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H.??????? ESG Rating-?

An ESG rating measures a company’s exposure to long-term environmental, social, and governance risks.

A good ESG rating means a company is managing its environment, social, and governance risks well relative to its peers. A poor ESG rating is the opposite -- the company has relatively higher unmanaged exposure to ESG risks.

The ESG Rating agencies are organisation that examine a company’s environmental, social, and corporate governance policies to determine its sustainability. ESG ratings help to bridge this gap by collecting the myriad ESG data, analysing and diluting it to a single score/rating.?

The performance indicators for the purpose of ESG Rating are divided into nine primary categories-

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1. Material
2. Energy
3. Water
4. Biodiversity
5. Emissions, effluents, waste
6. Products and services
7. Compliance
8. Transport
9. Overall

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I.?ESG Reporting in India-

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1.??The Companies Act, 2013 introduced one of the first ESG disclosure requirements for companies. Section 134(m) mandates companies to include a report by their Board of Directors on conservation of energy, along with annual financial statement. This requirement is further detailed under Rule 8(3)(A) of the Companies (Accounts) Rules, 2014, which mandates the board to provide information regarding conservation of energy.?

2.?Companies are 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”)?

3.?On 10 May 2021, SEBI introduced new reporting requirements on ESG parameters called the Business Responsibility and Sustainability Report (“BRSR”) by amending regulation 34 (2) (f) of SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 (“LODR Regulations”).?

4.??The BRSR seeks disclosures from listed entities on their performance against the nine principles of the ‘National Guidelines on Responsible Business Conduct’ (NGBRCs) and reporting under each principle is divided into essential and leadership indicators. ?The essential indicators are required to be reported on a mandatory basis while the reporting of leadership indicators is on a voluntary basis. Listed entities should endeavour to report the leadership indictors also.

It is mandatory for the top 1,000 listed companies to annually disclose ESG-related information from financial year 2022-23.

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J.????????? GRI Standards of Reporting-?

The GRI Standards are a modular system of interconnected standards. They allow organizations to publicly report the impacts of their activities in a structured way that is transparent to stakeholders and other interested parties.

Three series of Standards support the reporting process: the GRI Topic Standards, each dedicated to a particular topic and listing disclosures relevant to that topic; the GRI Sector Standards, applicable to specific sectors; and the GRI Universal Standards, which apply to all organizations.

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The segregated standards are shown in the table below

Conclusion:

?Integrating Environmental, Social, and Governance (ESG) reporting into bookkeeping practices is no longer just a trend; it has become a necessity for businesses seeking to thrive in today’s socially conscious market. By understanding the importance of ESG metrics and adopting strategies that align financial reporting with sustainability goals, companies can enhance transparency, build trust with stakeholders, and promote a positive brand image. As regulation and investor expectations continue to evolve, companies that proactively implement strong ESG reporting practices will be better positioned to succeed and contribute positively to society and the environment. Embracing sustainability is not just about compliance; it’s about contributing to a more sustainable future while driving business growth.

Authors: I Abhishek Bansal , Partner ([email protected]) I Laxmi Sinha Principal Associate ([email protected]) I Tiya Agarwal ([email protected]) l ACUMEN JURIS , LAW OFFICE l

Practice Areas: Corporate M&A, Private Equity, Venture Capital | Joint Ventures and Strategic Alliances | Corporate and Commercial | Foreign Investment and Exchange Control | Capital Market and Securities Law | Transaction Advisory Services | Start up Support Services | Dispute Resolution including ADR | Insolvency Resolution | Competition/Antitrust | Employment and Labour Laws | NBFC Services | Data Protection | Shareholder Rights and Disputes

Disclaimer- This Article is for information purposes only, and the views stated herein are personal to the author and shall not be rendered as any legal advice or opinion to any person, and accordingly, no legal opinion shall be rendered by implication.