ESG as a yardstick for global governance: An appraisal from the Indian perspective
In contemporary days, particularly in the liberalized world, business ventures can be considered crucial components of the social system, making them liable not only in financial terms to the shareholders but also to the society, which is also a stakeholder. The incorporation of Environmental, Social, and Governance Norms (“ESG”) into Indian companies would contribute to the achievement of the golden governance standards and would be advantageous for the shareholders.
The intent of our lawmakers can be gauged from the already existing various legislations in place including inter alia the Environment Protection Act, 1986, the Workmen’s Compensation Act, 1923, the Maternity Benefit Act,1961, the Prevention of Corruption Act, 1988, the Companies Act 2013 and SEBI LODR, 2015 which were enacted generations before the advent of the ESG norms. However, the current Indian ESG norms lack in providing an effective regulatory framework and require the incorporation of more detailed and stringent norms in Indian law.
ESG norms: The need of the hour in India
In India, paying adequate attention to the “E” from the ESG is the need of the hour. Looking at the Environmental Performance Index, 2022 India has been ranked the lowest among the 180 countries in the Index. The deterioration of air quality and rising greenhouse gas emissions were deemed urgent challenges. Deforestation causes a rise in CO2 levels, and the loss of flora, fauna, and biodiversity as a whole, all of which contribute to global warming, a problem that needs to be addressed right away.
The National Green Tribunal [“NGT”] is an effective instrument in handling environmental-related cases and it has taken many precautions to safeguard the environment through suo moto cognizance. As a result, the investors are obligated to take extra precautions to comply with environmental norms. Moreover, as India is a developing country, the majority of large institutional investors’ concerns must remain focused on environmental initiatives.
In terms of social aspects, India is a nation with numerous ethnic groups and a variety of cultural traditions. Additionally, some communities are still lagging behind in socio-economic terms due to orthodox thinking that has persisted for generations. The fact that we still practice a profession like “manual scavenging” and are still governed by the varna system, which places Shudras at the bottom of the social hierarchy, reveals a great deal about the so-called equality we claim to have in accordance with our constitutional principles, particularly Articles 14 and 15.
Further India ranks 135 out of 146 countries in the Global Gender Report 2022, which reveals the existing gender disparity. Additionally, in the post-covid scenario, people are beginning to recover from shocks like the loss of family and jobs brought on by the pandemic, both of which had a negative impact on people’s mental health. Additionally, the pandemic widened the gender gap that already existed. This is evidenced by the startling suicide rate, which reveals the psychological state of the Indians.
Thereby, in order to foster a gender-inclusive, corruption-free, and workplace conscious of employees’ mental health, stricter norms have to be put in place.
Next up, “G” stands for governance, which takes into account the corporation’s internal management system, policies, and practices. It refers to how ethically the organization conducts its operations. India is ranked 85 on the Corruption Perception Index, which indicates more transparency is needed within corporations.
Further, the proper enforceability of the labor laws and Compensation Act, furthering the intention of with which our various Directive Principles of State Policies [hereinafter, “DPSP”] Articles 39(d), Article 42, etc. of the Constitution, there is a need to comply with the norms for facilitating good governance and effective management within the company.
Entailing new global governance standard: An appraisal of Indian Law
Section 166(2) of the Companies Act, 2013 lists the duty of the director of the company to advance the company’s goals in the best interests of the company, shareholders, the community, and the preservation of the environment. Further, a strict mandate is provided under Section 135 of the Companies Act, 2013 to comply with the CSR provisions. Though the existing legislations and the provisions guide the Indian corporations in complying with ESG norms, most of it is voluntary, meaning thereby, it is discretionary.
Although ESG has been regarded as a flawless idea, its implementation in India faces a multitude of obstacles. Business Responsibility and Sustainability Report [“BRSR”] disclosures have been made required for the 1000 largest listed businesses by market capitalization beginning in the fiscal year 2022-23, although there appears to be little incentive for corporations to aim for high performance in the BRSR Report. At least for the time being, the goal behind the adoption of BRSR is straightforward yet naive and unsuitable for India.
Although it has been claimed internationally that higher performance in BRSR reports equals more investment for the firm and, thus, an incentive to work towards excellent ratings, this is manifestly not the case in India. Here, all investments are motivated only by profit. Investors will not care if a firm is not doing enough for the environment or society as long as it is generating a healthy profit. Therefore, the BRSR alone would neither suffice nor motivate Indian businesses to alter their operations.
Therefore, a need to publish a comprehensive BRSR Report is insufficient to motivate businesses to pursue high ratings. Even if it results in a higher profit, it must be linked with an incentive to perform and a deterrent to doing poorly in the report. As ESG is a relatively new concept in India, the government has an uphill battle to incentivize successful performance on the ESG frontier, something it does not appear to have accomplished yet.
Corporate Social Responsibility [“CSR”] also contributes to the difficulty of implementing ESG rules correctly. While the purpose of enacting CSR regulations was to ensure that more and more organizations contributed to the growth and development of society, the number of businesses really adhering to their spirit is rapidly falling. Due to inadequate execution, various entities have devised many strategies to circumvent their CSR. The current CSR system is plagued with various problems.
There has been an increase in instances of abusing the system in which corporations send gifts to charitable foundations from corporate books and these institutions refund the funds after deducting a fee. Numerous entities have been discovered to have founded their own NGOs and siphoned off corporation funding for their own benefit. Even if companies donate their due portion of CSR funds, this is not the end of the matter. The abuse of CSR funding is on the rise, as are corrupt activities in non-governmental organizations.
All of these operations result in enormous losses for public investment while providing little social benefit. Despite being implemented for the development of society and the fulfillment of ESG duties, the CSR project appears to be failing to owe to a multitude of execution challenges. These flaws completely undermine the incorporation and mandate of the CSR clause.
Although ESG appears promising on a basic level, the manner in which it is being applied in India is plagued by a number of problems. Current rules are insufficient to dissuade businesses from pursuing short-term profits to achieve long-term advantages. While the original formulation and inclusion of ESG rules into the Indian policy framework may have been commendable, the government must now address the policy problems surrounding ESG regulations if they are to fulfill their intended purpose.
ESG Norms are or should become in the near future, a key and inalienable component of modern business practices in India and internationally. Even though these rules may initially appear difficult and pointless, their presence keeps corporate imperialist impulses in check and satisfies company moral and social standards. ESG standards should not be viewed as a burden on public shareholders but as a benefit for the company’s stakeholders.
Therefore, it can be argued that Indian corporations are complying with ESG standards, but they still have a long way to go. ESG is an EU idea, and the success of ESG in the EU is attributable to its implementation within their framework, including EU taxonomy, EU green bonds, ECO designations, etc. These methods are innovative and effective, but they cannot be implemented arbitrarily into the compliance framework of Indian firms.
In India, a solid legislative framework is required for the legal recognition of ESG on a financial basis and an entity-based approach. This might be accomplished by concentrating on directors’ roles and incorporating ESG problems into shareholder stewardship initiatives. Indian society, marred by extreme poverty, class discrimination, and extreme environmental pollution would definitely need the perfect implementation of ESG norms.
Therefore, incorporating ESG norms into the Indian corporate structure would definitely make India achieve new global governance standards if implemented properly. This will become an additional benefit for the public shareholders rather than proving to be a financial burden on them.
This article is written by Ms. Anshula Sinha and Mr. Aashish Gupta, 4th-year B.A. LL. B (Hons.) students at National Law University, Jodhpur.
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