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ESG, short for Environmental, Social, and Governance, has become a hot topic in global capital market investments over the past decade. Many people find it mysterious, despite its widespread attention and debate. It plays a pivotal role in shaping investment decisions worldwide.
Beyond corporate governance, which represents the “G” in ESG, it includes responses to climate change, internal policies, labor treatment, and staff support. Crucially, it also involves shaping corporate culture and work environments. Implementing ESG in India faced a key hurdle: the absence of a unified law. Instead, different legislations like the Environment Protection Act (1986), Factories Act (1948), and Prevention of Money Laundering Act (2002) have overseen the Environmental, Social, and Governance aspects of corporations.
India’s main ESG reporting, via listed entities, reveals alignment with nine principles from the National Guidance on Responsible Business Conduct (NGRBC). These principles mirror global concerns, SDGs, and UN guidelines on business and human rights. They emphasize ethics, sustainability, employee welfare, and stakeholder interests, among other factors.
The Business Responsibility and Sustainability Report (BRSR) divide reporting into three sections: general, management, and principle-based specifics. It includes both essential and voluntary indicators for each principle. It covers ESG risks and addresses environmental, social, and governance aspects. The aim is to aid investor choices and encourage firms to adopt sustainability and ethical practices. Successful adherence fosters trust and attracts conscientious investors. (BRSR) steers company performance toward UN SDGs and Paris Agreement goals, with obligations set to expand to listed and impactful unlisted firms.
Challenges in Environmental Governance and ESG Data Integrity
Current environmental legislations, notably outdated, fall short of tackling contemporary challenges. For instance, the Water (Prevention and Control of Pollution) Act of 1974 imposes a three-month sentence for not providing information to Pollution Control Boards. Additionally, it includes a Rs. 10,000 fine, reflecting outdated penalties. Other laws like the Prevention of Money Laundering Act (2002) exhibit loopholes, allowing misuse for nefarious purposes, raising doubts about their effectiveness.
Globally, an obstacle persists regarding the credibility of collected ESG data. Despite being crucial in the ESG framework, several countries, including India, lack mandatory disclosures.
Within the voluntary requirements of BRSR, significant aspects include the Environmental Impact Assessment. Companies are also encouraged to disclose their corporate contributions to national commitments. Additionally, fostering employee work-life balance and rectifying anti-competitive actions are emphasized. The unreliability of disclosed corporate data amplifies this issue, lacking verification mechanisms for accuracy.
ESG’s growing prominence has led to a surge in greenwashing, involving the fabrication of sustainability claims. This deceptive practice is notably prevalent in sectors like fast fashion. In response, SEBI has taken steps to define and address this issue.
SEBI’s Governance Initiatives for Sustainable Finance
SEBI has taken a leading role in promoting transparency and fostering sustainable finance within India. Over recent years, companies have notably increased reporting on Environmental, Social, and Governance (ESG) analysis. They are also disclosing sustainability data and information on risks and opportunities. SEBI has implemented reforms addressing the necessity for a more comprehensive reporting framework. These changes aim to narrow the gap and boost efficiency in capital markets.
Through a circular on July 20, 2023, SEBI urges mutual funds to introduce new categories within ESG schemes. These categories should encompass exclusions, integration, best-in-class, positive impact investing, and sustainable objectives. This move aims to fuel green financing, bolster disclosures, and curb greenwashing. Additionally, SEBI has implemented measures for mutual funds. It mandates that ESG scheme investments constitute at least 65% of Assets Under Management (AUM). This requirement specifically applies to entities assured on BRSR Core. The regulation also necessitates third-party assurance and enhanced disclosures on voting decisions, with a focus on ESG factors. Furthermore, explicit disclosure of ESG strategy names within the fund is required.
Global Trends and India’s Sustainable Finance Governance
The call for sustainable finance grows louder each day, encompassing environmental and social concerns in fund sourcing, while sustainable investing prioritizes these principles in investment avenues. Institutional investors drive this momentum, seeking both financial returns and positive impacts.
Key international agreements in 2015, such as the UN 2030 Agenda and the Paris Climate Agreement, amplified the commitment to mitigating climate change. This commitment was reiterated in the 2021 UN Climate Change Conference (CoP 26) and CoP 27. In these conferences, nations pledged enhanced climate finance and sustainability measures.
The global issuance of green bonds is expected to reach $1 trillion this year, playing a pivotal role in sustainable finance. Green bonds differ from traditional ones as their proceeds are explicitly allocated to ‘green’ projects like renewable energy, waste management, and climate adaptation.
Institutional investors, such as mutual funds and pension funds, are showing increasing interest in sustainable investing. This interest is aided by initiatives like the Green Bond Principles set forth by the International Capital Market Association (ICMA). These principles aim for transparent criteria and controls in green bond issuances. SEBI has aligned its Green Bond Framework with the ICMA’s Green Bond Principles to further promote sustainable finance practices.
Net-Zero Emissions and Innovative Financial Tools
Transitioning to renewable energy and robust policy frameworks will propel India towards achieving net-zero emissions. To secure the necessary funding for this national objective, innovative financial tools like green bonds must expand.
The aim is to broaden the definition of green debt securities, introducing concepts like blue bonds for water management, yellow bonds for solar energy, and transition bonds for sustainable operations. ‘Green debt securities’ encompass a range of purposes, including renewable energy and clean transportation. They also support climate adaptation, sustainable waste management, biodiversity conservation, and circular economy products.
This expanded scope also covers blue bonds for water and maritime sustainability. It includes yellow bonds for solar energy and transition bonds aligning with India’s sustainable goals. Additionally, it encompasses any other specified categories endorsed by the regulatory board.
SEBI’s Guidelines on Green Debt Securities
SEBI updated the definition of ‘green debt security’ and its disclosure requirements on February 2 and 6, 2023, respectively. Within this revised definition, ‘transition bonds’ emerge as a subcategory aimed at funding the shift to more sustainable operations aligned with India’s Nationally Determined Contributions (NDCs).
These NDCs, formed under the Paris Agreement, reflect India’s commitment to reducing emissions, increasing non-fossil fuel-based energy, and expanding forest cover to absorb carbon dioxide. India has set ambitious goals for 2030, aiming for 500 GW of non-fossil energy capacity, meeting half of its energy needs from renewables, and slashing carbon emissions by a billion tonnes.
At CoP 26, India introduced the ‘Panchamrit’ plan, emphasizing net-zero emissions by 2070 and a 45% reduction in carbon intensity by 2030.
Combating Greenwashing and Enhancing ESG Rating Governance
“Greenwashing” involves making false, misleading, or incomplete claims about a product or business’s sustainability. To prevent this, SEBI outlines guidelines for issuers of green debt securities. They must monitor the transition’s impact, ensuring it aligns with a sustainable pathway as outlined. Funds raised through green bonds should strictly serve eco-friendly purposes. If misutilization is detected, prompt disclosure and potential early redemption to investors are required. Issuers must avoid misleading practices, maintain high standards, quantify negative impacts, and refrain from falsely claiming third-party certifications.
Investing in companies involves considering environmental, social, and corporate governance issues. SEBI initiated reforms on ESG ratings to address concerns like differing methodologies among rating providers, opacity in practices, and lack of independent assessment. SEBI’s reform in March 2023 mandated ESG Rating Providers (ERPs) to consider India’s challenges and introduced ‘Core ESG Ratings’ based on BRSR Core parameters. The reforms cover definitions, ERP activities, applicability, categories, business plans, disclosures, governance, SEBI oversight, and risk management to ensure accuracy and quality in ESG ratings. The regulations aim to prevent greenwashing and mis-selling while emphasizing robust disclosures and credibility in ESG ratings.
Regulatory Governance for ESG Rating Providers
In India’s sustainability wave and the rise of Environmental, Social, and Governance (ESG), rating providers (ERPs) hold substantial influence. These independent agencies evaluate entities, furnishing ratings that aid investors in gauging a corporation’s dedication to sustainability. Currently, unregulated ERPs have seen SEBI approve a regulatory framework through amendments to the existing CRA Regulations.
ESG is a fresh concept globally, yet India can draw valuable insights from the experiences of trailblazers like the European Union and the United States. While SEBI aims for equilibrium, expecting flawless outcomes might be overly optimistic. India, as a developing nation, will encounter distinctive hurdles, necessitating a trial-and-error approach. Nonetheless, it’s crucial to strive for global best practices in ESG adoption.
Challenges in ESG Implementation in India
In India, a scarcity of skilled ESG professionals complicates both the adoption of ESG practices by businesses and the assessment of company ESG performance by investors. Pinpointing material ESG issues relevant to specific industries or companies poses a challenge due to contextual variations in these factors. The absence of a universally accepted ESG reporting framework hampers investors’ ability to compare and evaluate companies effectively.
Reliable ESG data is lacking in India, stemming from challenges in verifying accuracy and completeness, compounded by the scarcity of independent ESG rating agencies. Implementing ESG initiatives, particularly for small and medium-sized enterprises, can be financially burdensome. The evolving regulatory landscape surrounding ESG in India adds complexity for businesses seeking to comprehend their obligations and comply with the law.
Resistance to ESG adoption among businesses may arise from concerns over change costs, unclear benefits, or the fear of losing market share. These multifaceted challenges contribute to the intricate landscape surrounding ESG implementation and evaluation in India.
Amidst various requisites, a pressing need emerges for a comprehensive ESG code, replacing fragmented legislation. Revisiting environmental laws becomes imperative, particularly in penalty imposition. The existing “polluter pays” principle requires active deterrence to prevent it from merely sanctioning pollution with delayed payments.
With ESG’s rising significance, independent directors are crucial internal monitors ensuring authentic corporate disclosures. Their removal process warrants reconsideration, currently a straightforward majority decision with minimal compensation—a challenge.
ESG funds are swiftly proliferating in the mutual fund sector, globally among the fastest-growing. India’s stance on the intricate facets of E, S, and G remains a subject of observation, navigating this multifaceted landscape. Rising ESG awareness, investor demands, and mounting pressure on businesses to embrace these practices fuel this upward trajectory.
About The Author
Simran Goyal
Intrigued by art, architecture, culture, mythology, and history, I’m a Kathak dancer connected to the world of experience, an avid reader, and a socio-political enthusiast. The dynamics of geopolitics, sanity, strategic studies, and socio-political issues captivate me in unconventional ways. I aspire to transform societal perspectives and debunk false narratives. Observing the world out and within, I cannot stay shut; my analytical mind compels me to address matters that interest me, advocating for substantive change.
