The Adoption of the ESG Compliance Framework by Indian Business

With the spectre of climate change looming large and the enhanced focus on social responsibility, major economies have turned their attention towards adopting environmentally and socially sustainable practices for driving economic growth.

In this regard, varied efforts are being made at global levels, in which India has been an active partaker.

In 2015, the Paris Agreement was adopted under the United Nations Framework Convention on Climate Change (UNFCCC), which provides for an overall goal to hold “the increase in the global average temperature to below 2°C above pre-industrial levels” and pursue efforts “to limit the temperature increase to 1.5°C above pre-industrial levels”. In furtherance to the Paris Agreement, at COP 26, India committed to achieve net zero emissions by 2070. By 2030, India will aim to:

• reach 500 GW non-fossil energy capacity;
• meet 50% of its energy requirements from renewable energy;
• reduce total projected carbon emissions by one billion tons from 2022 up to 2030; and
• reduce the carbon intensity of the economy by 45% from 2005 levels.

Further, as per UN General Assembly resolution, the Sustainable Development Goals (SDGs) ‒ comprising a set of 17 goals ‒ were adopted by member countries and aimed to be achieved by 2030. The goals and targets aid towards formulation of actions for human well-being and pertain to social, environmental and economic factors. India as a member country also assesses its performance for achieving the SDGs.

The UN, in conjunction with a network of investors, has also framed the Principles for Responsible Investment (PRI). PRI include investors being directed to incorporate ESG issues into investment analysis and decision-making processes and to actively seek appropriate disclosure on ESG issues by the entities in which investments are made.

Given the foregoing, there is a rapid shift towards sustainability. To this end, efforts are being made by nations (including India) to ensure that businesses ‒ in the public and private sectors alike ‒ take measures to make their operations more sustainable, especially in sectors that are responsible for high emissions (eg, oil and gas, manufacturing, transportation and automotive).

Efforts have been made by governments and businesses to adopt sustainable practices in their day-to-day functioning. This has involved businesses moving away from an approach measuring success on profit margin and instead taking a holistic approach where a businesses’ compliance with social and environmental goals is also prioritised. The new approach involves formulation of the environmental, social and governance (ESG) framework and analysing performance of businesses within such a framework.

This framework includes:

• ensuring that businesses have taken on board environmentally sustainable practices (recycling, reducing waste water, etc);
• ensuring the business is sensitive to the needs of society, including promoting diversity and inclusion in hiring, having an outreach with the local community, and transparency in the supply chain; and
• complying with robust corporate governance norms ‒ for example, timely disclosures, diversity and expertise in the board of directors, and the appointment of auditors in a timely manner.

Brief Overview of Legal Framework for ESG in India

India does not have any consolidated legislation concerning compliance with ESG. However, aspects of ESG are captured under various laws where compliance is mandatory.

The critical legislations and obligations thereunder are summarised here.

Environment

The key legislation that deals with environmental protection is the Environment Protection Act 1986 (EPA). Various rules have been framed under the EPA governing specific aspects of waste management, including the Hazardous and Other Wastes (Management and Transboundary Movement) Rules 2016, Solid Waste Management Rules 2016, E-Waste (Management) Rules 2016, Plastic Waste Management Rule 2016, and the Battery Waste Management Rules 2022. Pursuant to the EPA, the Environmental Impact Assessment (EIA) notification was also issued in 2006 to ensure that there are no adverse effects from new industrial and infrastructure projects. As per this framework, prior environmental clearance is required for projects of a certain category, which is granted pursuant to a detailed process involving public consultation and appraisal.

India also has specific legislations such as the Air (Prevention and Control of Pollution) Act 1981 and Water (Prevention and Control of Pollution) Act 1974, which deal with abatement of air pollution and water pollution, respectively.

To control emissions and pollution, India has also formulated various emission standards. These include standards for emission or discharge of pollutions from various industries and equipment (stipulated under the Environment Protection Rules 1986 framed under the EPA) and Bharat Stage standards for vehicular emissions (stipulated under the Central Motor Vehicle Rules 1989 framed under the Motor Vehicles Act 1988).

In addition to the above legislations primarily governing curbing of pollution, legislations have also been formulated to advance energy conservation, promote renewable energy, etc. In this regard, the Electricity Act 2003 promotes the concept of renewable purchase obligations (RPOs), which has been adopted by various states ‒ whereby electricity distribution entities, captive users and open access consumers have been mandated to purchase a percentage of electricity from renewable energy sources.

Furthermore, in 2022, the Energy Conservation Act 2001 was amended to include provisions empowering the Indian government to:

• specify carbon credit trading schemes, mandate certain consumers (including those in the mining, steel, cement, textile, chemicals and petrochemicals industries, as well as the transport sector);
• consume a minimum share of energy or feedstock from non-fossil sources; and
• comply with the energy consumption norms and standards.

Social

In terms of currently applicable laws, there are various legislations governing employee benefits and social security aspects for businesses. These include the Factories Act 1948 and state-specific shops and establishment laws that contain provisions concerning safety and working conditions for employees, as well as specific employee benefit legislations for the provision of employee provident funds, employee state insurance, bonuses, gratuity, etc.

To ensure there is no gender-based discrimination in places of employment, the Equal Remuneration Act 1976 has been enacted, whereby the employer is obligated to ensure that there is no discrimination when recruiting women workers for the same work or work of a similar nature. In order to provide maternity benefits to women, the Maternity Benefit Act 1961 has been enacted, whereby the employer is mandated not to employ a woman in any establishment during the six weeks immediately following the day of her delivery or miscarriage and to pay maternity benefits and a medical bonus to such woman.

Recognising inclusion and diversity, the Rights of Persons with Disabilities Act 2016 and rules thereunder have been formulated. This seeks to provide equal opportunity to persons with disabilities and, in that regard, establishments (inter alia) are required to formulate an equal opportunity policy with provisions for facilities and amenities for persons with disabilities.

The government has recently formulated four consolidated labour codes, which would govern:

• wage security, payment of wages and bonuses, minimum wages and equal remuneration;
• occupational safety, health and working conditions for employees;
• social security benefits for employees, which include payments of various contributions by businesses for their employees (eg, contributions towards pension or provident funds and state insurance); and
• industrial relations, including settlement of industrial disputes.

It is proposed that these labour codes will be adopted in a phase-wise manner alongside the adoption of relevant rules by the states. Upon adoption, these would repeal multiple labour legislations in the country.

Further, in the greater social interest, the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act 2013 has also been enacted to establish a transparent process of land acquisition. This includes provisions for conducting social impact assessment (SIA).

Governance

The primary legislation dealing with corporate governance by companies is the (Indian) Companies Act 2013. Some of the key provisions in relation to ESG compliance are highlighted here.

As per Section 134 (3)(m) of the statute, the board of directors is required to furnish ‒ during a meeting of shareholders ‒ a report highlighting the steps taken for conservation of energy. This report must contain details such as steps taken by the company to conserve energy and utilise alternate sources of energy, as well as the amount of capital investment in energy conservation equipment.

Under Section 166, every director is obliged to act in good faith in order to promote the objects of the company for the benefit of all its members and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.

The statute also includes the concept of Corporate Social Responsibility (CSR) under Section 135 read with the Companies (Corporate Social Responsibility Policy) Rules. As per the provision, the board of directors of a company with a net worth of INR500 crores or more or turnover of INR1,000 crore or more or a net profit of INR5 crore or more during the immediately preceding financial year shall ensure that at least 2% of the average net profits of the company made during the three immediately preceding financial years is spent in pursuance of its CSR policy.

Section 149 prescribes that listed companies and certain public companies will be required to have at least one female director. Furthermore, the provision goes on to state that every listed public company shall have at least one-third of the total number of directors as independent directors and certain specified classes of companies will be required to have at least two independent directors.

The Securities and Exchanges Board of India (SEBI) has also prescribed certain disclosure obligations in relation to ESG. Under the provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, SEBI introduced the concept of Business and Sustainability Reporting (BRSR) in 2021, whereby the top 1,000 listed Indian companies by market capitalisation must mandatorily make certain disclosures in relation to ESG compliance from financial year 2022‒23 onwards.

India also has statutes dealing with anti-corruption, with the primary legislation being the Prevention of Corruption Act 1988. Along with the foregoing, India also has the Prevention of Money Laundering Act 2002 and rules framed thereunder, which prohibit and criminalise money laundering activities in India.

When it comes to the banking and finance sector, the Reserve Bank of India (RBI) has instituted its Sustainable Finance Group (SFG) in order to lead regulatory initiatives in relation to sustainable finance and climate risks. In July 2022, the SFG issued a report highlighting certain key concerns when it comes to compliance with ESG norms in the banking sector. These concerns include the fact that many banks did not have a separate business unit for ESG-related initiatives, the lack of board-level engagement with ESG issues, and banks not aligning their ESG-related disclosures with any internationally accepted framework.

Standards and Reference Documents for Building ESG Toolkits

Documents issued by Indian regulators

As previously noted, SEBI has prescribed a format for making BRSR disclosures ‒ specifically, in relation to the top 1,000 listed Indian companies. The disclosure format includes nine core principles that companies/businesses should respect, abide by and report under ‒ according to which, entities must:

• conduct and govern themselves with integrity and in a manner that is ethical, transparent and accountable ‒ eg, disclose the number of training and awareness programmes held for key managerial personnel and employees, as well as disclose fines and penalties paid in proceedings with regulators, law enforcement agencies, etc;
• provide goods and services in a manner that is sustainable and safe ‒ eg, report the percentage of R&D and capital expenditure on technologies to improve the environmental and social impacts of the product and processes, as well as disclose whether the company has procedures in place for sustainable sourcing;
• promote the well-being of all employees, including those in their value chains ‒ eg, disclose the percentage of employees and workers covered under health insurance, accident insurance, maternity benefits, etc (along with the retirement benefits granted to employees) and also disclose whether the entity’s premises or offices are accessible to differently abled employees and workers (as per Rights of Persons with Disabilities Act 2016);
• respect the interests of and be responsive to all its stakeholders ‒ eg, disclose stakeholder groups identified as key stakeholders and the frequency of engagement with each of these stakeholder groups;
• respect and promote human rights ‒ eg, disclose the employees and workers who have been given training on human rights issues and company policies, as well as details of minimum wages paid to employees and workers and details of remuneration/salary/wages;
• make efforts to protect and restore the environment ‒ eg, provide details of total energy consumption and energy intensity, quantum of water withdrawal and usage, details of greenhouse gas emissions, and details of environmental impact assessments of projects undertaken;
• engage in influencing public and regulatory policy in a manner that is responsible and transparent ‒ eg, list the trade and industry chambers the entity or its managerial personnel are members of or affiliated with, as well as details of corrective action taken on any issues related to anti-competitive conduct by the entity as determined by the regulator;
• promote inclusive growth and equitable development ‒ eg, disclose the number of SIAs for projects undertaken by the entity and provide information on projects for which rehabilitation and resettlement is being undertaken; and
• engage with and provide value to their consumers in a responsible manner ‒ eg, describe the mechanisms in place to receive and respond to consumer complaints, disclose the number of consumer complaints received in a financial year, and detail instances of product recalls on account of safety issues.

In addition, through the issuance of a master circular, SEBI introduced the BRSR Core concept (a subset of the existing BRSR compliance parameters) on 12 July 2023. The BRSR Core includes KPIs for nine ESG attributes, which must be complied with. The master circular clarifies that ‒ even though the top 1,000 listed companies must comply with BRSR from financial year 2023‒24 onwards ‒ compliance with the BRSR Core KPIs would be undertaken in a phased manner, with only the top 150 entities having to comply in financial year 2023‒24.

The nine ESG attributes for which BRSR Core KPIs have been formulated are as follows:

• greenhouse gas footprint;
• water footprint (ie, total water consumption);
• energy footprint (ie, total energy consumption and percentage of energy from renewable sources);
• embracing circularity (details related to waste management by the entity);
• enhancing employee well-being and safety;
• enabling gender diversity in business;
• enabling inclusive development;
• fairness in engaging with customers and suppliers; and
• openness of business.

The BRSR framework has been adopted from the guidelines issued by the Ministry of Corporate Affairs (MCA) in 2019 and titled as National Guidelines on Responsible Business Conduct. These guidelines contain certain key principles of ESG compliance.

International standards

Globally, there are also certain ESG reporting standards that are being followed by Indian businesses, including the following.

The IFRS Sustainability Disclosure Standards of the International Financial Reporting Standards Foundation, which publishes the widely used International Financial Reporting Standards (IFRS), have recently been published. It has been recommended that businesses include a description of the current and anticipated effects of climate-related risks and opportunities on the entity’s business model and value chain.

The Sustainability Accounting Standards Board (SASB) issues standards tailored for each sector. By way of example, in the automotive sector, the entity must disclose the percentage of vehicle models rated by National Car Assessment Programmes with an overall five-star safety rating. Meanwhile, in the upstream oil and gas sector, businesses have to disclose the amount of emissions from flared hydrocarbons, process emissions, other vented emissions and fugitive emissions.

The Global Reporting Initiative (GRI) issues reporting formats, with the most recent set of consolidated standards being issued in 2022. The GRI also has sector-specific standards and reporting formats, such as those for the oil and gas sector, agriculture, aquaculture and fishing sectors.

Guidelines and recommendations provided by the Task Force on Climate-Related Financial Disclosures (TFCD) is another standard that is widely used. This assists businesses in disclosing steps that have been taken to secure their business against the risk of climate change.

The Carbon Disclosure Project (CDP) disclosure framework encourages cities and companies to make disclosures under the sub-topics of climate change, forests and usage of water resources. Based on these disclosures, the CDP grants a score and this score is used by investors to assess the entity’s ESG compliance.

At present, for ESG reporting in India, the top 1,000 listed companies are required to adhere to the SEBI BRSR reporting requirements described earlier. Meanwhile, other companies (to which specific BRSR requirements are not applicable) strive to be ESG compliant on the basis of global standards such as those of the GRI and the SASB, as well as the MCA’s National Guidelines for Responsible Business Conduct. Given the shift towards sustainability being the core for future of the businesses, the need of the hour is to have a uniform set of ESG standards akin to a toolkit with which businesses of different scales and sizes across corporate India can easily comply.

Positive Impacts of Robust ESG Compliance on Businesses

The benefits of having a robust ESG compliance strategy are summarised here from various perspectives.

Business perspective

Higher chances of attracting investments

Potential investors are well aware of the threat of climate change and have increasingly focused on making investments in businesses that are actively focusing on sustainability. Therefore, a business that has a robust ESG policy pivoting towards production of sustainable products, undertaking green projects and adopting more sustainable methods of production would be more attractive. ESG frameworks instil confidence in an investor when it comes to recouping their investments.

Compliance with legal and regulatory framework

In an era where sustainability has become a watch-word for all businesses, governments and regulators have increased the responsibilities of businesses in terms of compliance with ESG rules and regulations. A comprehensive ESG framework coupled with timely reporting ensures that a business complies with laws reducing the legal and regulatory risk.

Increase in business productivity

One of the core principles of ESG is that employees and personnel are to be treated in a humane manner and provided with employee benefits. If a business incorporates and prioritises ESG, the chances are that enhanced employee satisfaction will reduce the risks of labour agitations and strikes, thereby leading to increased productivity.

Reduction of costs

Adoption of ESG norms can even result in cost reduction ‒ for example, the reduction of operational costs by effective waste management policy.

Availing institutional financing

Banks and financial institutions also favour ESG-compliant businesses by offering lower rates of interest on loans earmarked for green projects. This is because the risk perception for financial institutions in relation to these projects is lower.

Investor perspective

From an investor’s perspective, the chances of investing in a business that has a robust and effective ESG policy in place will be higher. A robust ESG strategy ensures that the investor feels assured that the business is in compliance with all legal and regulatory requirements, is focusing on sustainable products that will have use in the future, and has taken (or is taking) steps to foolproof the business against risks arising from climate change.

Consumer perspective

There has been a shift in consumer behaviour, whereby consumers are focusing on businesses that are environmentally and socially responsible. Consumers have the freedom of choice when it comes to usage of products and services, and consumer preferences are moving towards goods/services that are safe and sustainable. The consumers are also looking to contribute towards the larger goals of sustainability, environmental preservation, diversity and inclusion, fair working conditions, etc, and ‒ as part of the consumer decision-making process ‒ are leaning towards businesses that contribute to these larger goals.

Further, transparency and accountability become key when it comes to gaining customer confidence. To this end, formulation of ESG metrics, compliance, implementation, reporting and information dissemination ‒ in the form of appropriate measures such as labels, certifications, and active disclosure and communication mechanisms (including reports and websites) ‒ are important factors in the businesses creating an impact on customers.

Employee perspective

As previously discussed, one of the core elements of the ESG framework is that businesses should respect and promote the well-being of all its employees.

Accountable businesses that have an ESG framework and can demonstrate regular compliance with regulatory requirements pertaining to its employees, provision of social security benefits, provision of equal opportunities, fair wages, practices of diversity and inclusion, etc, are making the ecosystem more conducive for the employees ‒ thereby increasing retention of the workforce, along with productivity. A safe working environment that focuses on the health and safety of workers and provides good working conditions is also likely to lead to a reduction in labour actions, disputes, etc.

Community at large

Lastly, as a natural consequence of the adoption of an ESG framework, the ESG practices followed by companies contribute to the community at large through their benefits to the environment, employees and all stakeholders (including local communities).

Conclusion

Noting the above-mentioned impacts, having a robust ESG framework will play a pivotal role in shaping the future of Indian businesses. ESG practices enable and foster conducive growth of businesses both by contributing internally (business compliances, employees, working conditions) and externally (community, consumers, investors).

Given these positive implications, sincere efforts should be made by businesses so that ESG practices can actually be implemented in order to achieve the larger sustainability goals. Businesses should not be engaged in greenwashing, whereby they cherry-pick compliances and data to demonstrate that they are ESG-compliant. Greenwashing can render the entire ESG framework futile; therefore, from a regulatory perspective, the government and regulators in India should consider having a robust regulatory mechanism in place that detects and weeds out attempts at greenwashing or similar practices so as to avoid this. That being said, ensuring ESG compliance at a wider level in corporate India will go a long way to ensure the success of India’s commitment to achieving decarbonisation at a more rapid rate.

ESG Framework: A Path to Sustainable Governance

ESG principles are slowly but gradually assuming significant importance in India, both within private-sector operations and within the public sector. ESG standards and principles within India (and within the international facilitative frameworks) are developing in sync with the modern-day business environment but, at the same time, challenging corporations to evolve and consider the impact of their operations on the environment, society and governance. India, as a rapidly growing economy, stands at a pivotal juncture where sustainability underpins the creation of a new green economy – with India leading the way. This article delves into the challenges and gaps faced in implementing ESG practices, explores potential solutions, and outlines the way forward for businesses navigating this intricate landscape.

Understanding ESG Frameworks

Any ESG framework comprises three key factors – namely, environmental sustainability, social responsibility, and governance – that measure a company’s impact and sustainability efforts.

Environmental sustainability

Environmental factors encompass how a company performs in terms of its ecological responsibilities (eg, carbon emissions, waste management, and resource conservation). India faces pressing environmental challenges such as air pollution, water scarcity, and deforestation, which emphasise the urgency of sustainable practices. The Paris Agreement, to which India is a signatory, aims to keep “the increase in the global average temperature to below 2°C above pre-industrial levels” and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels. Further, in August 2022, India submitted its updated Nationally Determined Contribution under the Paris Agreement – whereby India now stands committed to reducing the emissions intensity of its GDP by 45% by 2030, from the 2005 level, and achieving about 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030.

Furthermore, in recent years, the Indian government has also introduced environmental tax on various activities and products to mitigate environmental pollution, conserve natural resources, and promote sustainable development. Some studies suggest that taxes on energy represent 50% of the total environmental tax revenue in the country.

Social responsibility

Social factors evaluate a company’s engagement with its communities – for example, diversity, equity and inclusion, as well as labour practices and philanthropy. In this respect, sustainable digitisation principles have been developed to focus on digitalisation that is responsible, ethical and sustainable, thereby providing ESG benefits while carefully managing the risk of harm. In the Indian context, various legislations have been enacted to this end, including:

• the Factories Act 1948, which contains provisions for the safety and working conditions for employees;
• the Equal Remuneration Act 1976, which aims to ensure no-gender based discrimination in places of employment; and
• the Rights of Persons with Disabilities Act 2016, recognising inclusion and diversity, etc.

The Indian government has also recently formulated four consolidated labour codes to govern wage security, occupational safety, social security benefits for employees, and industrial relations (including settlement of industrial disputes). It is proposed that these labour codes are adopted in a phased manner.

Governance

Governance factors focus on the quality of a company’s leadership, transparency, and ethical decision-making. To ensure the same, various frameworks and legislations have been enacted in India, including:

• the Business Responsibility and Sustainability Reporting (BRSR) framework introduced by the Securities and Exchange Board of India in 2021 – of which, a subset comprising key performance indicators/metrics under nine ESG attributes (the “BRSR Core”) was introduced in July 2023 and will initially be effective for the top 150 listed companies;
• corporate social responsibility (CSR) activities for companies meeting specific criteria under the Companies Act 2013 – ie, businesses falling within the defined parameters are obligated to spend a portion of their profits on CSR initiatives; and
• the National Guidelines on Responsible Business Conduct (NGRBC), which was introduced to encourage responsible business conduct and takes into account the national and international developments in the field of sustainable business since 2011 and aligning itself with the United Nations Guiding Principles on Business and Human Rights, UN Sustainable Development Goals, the Paris Agreement on Climate Change, etc.

In addition, the Indian government is taking several steps to facilitate doing business in the country while incorporating ESG factors, resulting in India’s ranking in the World Bank Group’s ease of doing business index jumping from 142 to 63 in just seven years.

Overview of International ESG Frameworks

In the ever-evolving landscape of sustainable business practices, various international frameworks have emerged, each offering unique perspectives and guidelines to assess a company’s ESG performance. Key global ESG frameworks include:

• the Global Reporting Initiative, which sets out guidelines that organisations can use to measure and report their economic, environmental, and social performance;
• Sustainable Development Goals, which are a collection of 17 global goals set to address various societal challenges, including poverty, inequality, climate change, environmental degradation, peace, and justice;
• the United Nations Principles for Responsible Investment, which is a globally recognised initiative that encourages investors to incorporate ESG factors into their decision-making process;
• the Task Force on Climate-Related Financial Disclosures’ recommendations, which concentrate on climate-related risks and opportunities, urging companies to disclose their climate-related financial information;
• the Carbon Disclosure Project, which aims to measure and disclose environmental data (eg, carbon emissions, water usage, and deforestation), thereby allowing companies to benchmark their performance;
• the Sustainability Accounting Standards Board’s industry-specific ESG standards, which allow companies to report financially material sustainability information tailored to their sector; and
• the European Sustainability Reporting Standards, which are a set of compliance and disclosure requirements that cover a range of ESG issues, including climate change, biodiversity and human rights.

ESG Integration in Investment and Business Decisions and the Cost of ESG Non-compliance

In recent years, ESG criteria have become central to investment decisions worldwide. Investors are recognising the importance of sustainable business practices. As a result, companies failing to meet ESG standards face many challenges in availing funding. Globally, investors are moving away from businesses that do not prioritise ESG factors.

As a result of ESG non-compliance, investors are becoming more selective and focusing on companies with strong ESG profiles. Non-compliant companies face decreased interest from ethical investment funds, pension funds, and socially responsible investors. Many large institutional investors are also divesting from non-compliant companies, selling their holdings to eliminate exposure to ESG risks. This divestment trend further reduces the market value of non-compliant businesses, thereby making it challenging for them to attract new investors and maintain stock prices.

It may be noted that ESG non-compliance can also lead to a higher cost of capital for businesses. Investors demand higher returns to compensate for the increased risk associated with companies lacking sustainable practices and, as a result, such businesses also face higher interest rates on loans. Additionally, mutual funds and investment firms in India are launching ESG-focused funds to cater to the growing demand for responsible investments. Non-compliant companies find it challenging to access these funds.

Further, Indian regulatory bodies are increasingly putting emphasis on ESG compliance. Companies not adhering to these standards face scrutiny, potential fines, and reputational damage, making it difficult to attract investors. Moreover, Indian consumers and stakeholders are becoming more socially conscious. Companies that disregard ESG factors risk losing customers and facing public backlash, which deters potential investors and impacts their revenue streams.

In order to integrate ESG principles into business strategies and decisions, companies may consider engaging with stakeholders to understand their concerns and expectations regarding environmental, ethical and social issues. Companies may wish to create a specific board committee or appointing responsible executives to ensure ESG factors are considered in decision-making. Further consideration should be given to the inclusion of ESG factors in risk management processes – ie, assessment of environmental risks, social risks, and governance risks should be assessed alongside financial risks. Moreover, with climate change becoming a global concern, Indian companies may need to focus on climate-related disclosures such as reporting on carbon emissions, energy efficiency measures, renewable energy usage, and strategies to mitigate climate risks.

Recent Challenges in ESG Implementation

The growing awareness of ESG factors has led to significant progress in sustainable business practices globally and in India. However, the effectiveness of the current ESG framework faces certain challenges. One of the primary challenges is the absence of standardised metrics. Different frameworks use varying criteria, leading to inconsistencies and making it difficult for investors to assess companies’ ESG performance accurately. The voluntary nature of ESG reporting allows companies to choose what and how much they disclose. This can result in inconsistent reporting practices, whereby companies often highlight positive aspects of their operations while neglecting areas that need improvement.

In recent years, greenwashing – the practice of exaggerating or misrepresenting a company’s sustainable initiatives – has also become a concern. Without proper verification mechanisms, companies can make false claims about their ESG practices and thereby mislead stakeholders. Further, while there are regulations in India that touch upon certain ESG aspects, a comprehensive regulatory framework specific to ESG standards is lacking.

Limited education and awareness are also a growing concern. Many Indian companies (especially SMEs) lack awareness about ESG principles and their impact on long-term sustainability; this obstructs integration of sustainable practices into business strategies. In the case of large-scale companies with complex supply chains, implementing ESG practices throughout the entire network is also a difficult task. Ensuring sustainable practices across suppliers and subcontractors requires significant effort, which presents challenges for many businesses.

Emerging Trends in ESG Implementation

Despite the above-mentioned issues, owing to the increased focus on sustainability, India is witnessing a rise in innovative approaches towards integrating ESG factors. The Indian market has witnessed a rise in green bonds and sustainable financing options. These financial instruments are specifically earmarked for eco-friendly and socially responsible projects. There has been a similar rise in “impact investing”, whereby investors support companies with the intention of generating measurable social or environmental impact alongside financial returns.

Another recent trend has been a growing focus on diversity and inclusion within corporate structures. ESG reports now include data on gender diversity, equal employment opportunities, and efforts to create an inclusive workplace. Further, there has been a focus on capacity-building and training programmes to enhance the understanding of ESG concepts among corporate professionals.

Additionally, the adoption of technology (such as big data analytics and AI) has facilitated more accurate and efficient ESG reporting. Companies are using these tools to gather, analyse, and report ESG data in real-time, thereby enabling them to respond swiftly to emerging trends and stakeholder concerns.

Strengthening ESG Implementation

As corporations recognise the importance of sustainable practices, it is important to improve implementation of the ESG framework. To do so, standardising ESG metrics across industries and geographies is essential. Creating universally accepted reporting formats ensures consistency, which enables investors and stakeholders to compare companies’ ESG performance accurately. Industry-specific standards should be developed, providing detailed guidelines for companies to report their sustainability efforts transparently.

Engaging with stakeholders is also essential. As previously mentioned, companies should actively seek feedback from stakeholders, understanding their concerns and expectations regarding ESG initiatives. It is also pertinent to note that investors have a powerful role in driving ESG implementation. Responsible investment practices, such as integrating ESG factors into investment decisions and active engagement with companies, may encourage businesses to improve their sustainability performance. Investors can exert pressure on companies to adopt ethical practices and thus influence corporate behaviour in a positive way.

Governments should also establish clear regulations in relation to ESG reporting. Stricter enforcement of existing regulations, coupled with penalties for non-compliance, creates a strong incentive for companies to adhere to ESG standards. Companies should also adopt transparent reporting practices in order to provide clear information about their ESG initiatives. Independent audits and certifications can also validate ESG claims, thereby adding credibility to sustainability efforts.

The Outlook

The effective implementation of an ESG framework requires a collective effort involving all stakeholders. Adopting standardised metrics, increasing transparency, fostering a culture of responsibility and strengthening regulatory frameworks will help create a robust framework for India.

As businesses and societies embrace these strategies, ESG frameworks will not only become a guideline but a driving force. They will help shape a world where ethical, environmentally and socially responsible practices are at the heart of every enterprise. Further, by acknowledging these issues and taking proactive measures, India can enhance its ESG framework to ensure a future in which Indian companies thrive while contributing meaningfully to sustainable practices.