Central idea: Regulators and corporations worldwide now measure businesses on ESG criteria. ESG criteria is crucial for investors to assess a company’s risk profile accurately. India is still in the nascent stage of ESG laws and regulations.

What is ESG?

• ESG Regulations are a set of standards used by investors to evaluate a company’s environmental and social impact, as well as its corporate governance practices.
• They require companies to be transparent about their environmental and social performance, as well as their governance structure.
• ESG factors are increasingly being used by investors to make investment decisions, and ESG ratings are becoming an important metric for companies seeking to attract investment.
• The ESG regulations differ by country, but many require companies to disclose information on environmental and social issues, as well as on their governance practices.
• ESG regulations are becoming increasingly important as investors and consumers demand greater transparency and accountability from companies.Top of FormBottom of Form

Features of ESG Mechanism

• Environmental factors: These include a company’s impact on climate change, greenhouse gas emissions, pollution, waste management, and natural resource conservation.
• Social factors: These include a company’s impact on society, such as labor practices, human rights, community relations, customer satisfaction, and product safety.
• Governance factors: These include a company’s management structure, board diversity, executive compensation, shareholder rights, and business ethics.
• ESG ratings and metrics: Companies are evaluated based on ESG ratings and metrics, which can help investors assess a company’s overall sustainability and ethical impact.
• ESG investing: ESG investing refers to investing in companies that meet certain ESG criteria, with the aim of generating financial returns while also having a positive impact on society and the environment.
• ESG reporting: Many companies are now required to disclose their ESG performance and report on their sustainability practices, in order to meet regulatory requirements and respond to growing investor demand for transparency and accountability.Top of FormBottom of Form

Corporate Social Responsibility: ESG-like mechanism in India

• India has a robust corporate social responsibility (CSR) policy that mandates that corporations engage in initiatives that contribute to the welfare of society.
• This mandate was codified into law with the passage of the 2014 and 2021 amendments to the Companies Act of 2013.

How ESG differs from CSR?

• ESG regulations differ from CSR regulations in their process and impact
• For example, the U.K. Modern Slavery Act requires companies with business in the U.K. and with annual sales of more than £36 million to publish their efforts in identifying and analysing the risks of human trafficking, child labour and debt bondage in their supply chain.
• It seeks to establish internal accountability procedures, evaluate supplier compliance, and train supply chain managers regarding these issues
• The EU’s Sustainable Finance Disclosure Regulation requires financial market participants to disclose how they have integrated sustainability risks into their investment decision-making processes
• There are scores of such regulations at the state, national and transnational level.

Why is ESG relevant in India?

Ans. Existing mechanisms serve ESG purpose

• India has long had a number of laws and bodies regarding environmental, social and governance issues, including the Environment Protection Act of 1986.
• It has quasi-judicial organisations such as the National Green Tribunal, a range of labour codes and laws governing employee engagement and corporate governance practices.
• These initiatives established guidelines that emphasise monitoring, quantification and disclosure, akin to ESG requirements found in other parts of the world.

ESG for Indian companies

Here are some key considerations for Indian companies in relation to ESG:

• Compliance with global ESG regulations: Compliance in the US, UK, EU and elsewhere is critical for Indian companies to take full advantage of the growing decoupling from China and play a more prominent role in global supply chains and the global marketplace overall.
• Due diligence: This will play a key role in ESG risk management, which means going beyond questionnaires and conducting deeper assessments that may include looking at company records, interviewing former employees, and making discreet visits to observe operations to ensure that measures to comply with international ESG standards are in effect.
• Revamp organizations: ESG due diligence should be supported within the company with detailed procedures for assessing risks and controls for assuring that no corners are cut. Companies that wish to maximise their opportunities in the global economy need to embrace these new requirements and adjust their organisations accordingly.

Way forward

• Encouraging and incentivizing companies: To adopt ESG practices voluntarily through education, training and awareness-raising programs.
• Developing national guidelines and standards for ESG: To promote consistency and comparability of ESG performance data among Indian companies.
• Tailor-made Policy catering to domestic needs: Implementing ESG regulations that are tailored to the specific needs and challenges of Indian companies, with a focus on promoting transparency, accountability and stakeholder engagement.
• Facilitating access to capital for companies that demonstrate strong ESG performance: By establishing ESG-focused investment funds and credit facilities.
• Promoting international collaboration and harmonization of ESG standards: To facilitate global trade and investment while ensuring that ESG risks are appropriately addressed.

Conclusion

• Overall, a comprehensive and collaborative approach is needed to ensure that Indian companies can effectively manage ESG risks and opportunities and contribute to sustainable development.

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