LEGAL HOUSE LAW JOURNAL - ISSN NO. - 3048-779X
ISSUE - I Volume - II
ARTICLE
Abstract
The rise of ESG practices, coupled with Corporate Social Responsibility (CSR) regulations, has transformed the global business landscape, emphasizing sustainability, accountability, and transparency. ESG reporting serves as a critical tool for evaluating non-financial performance, addressing environmental and social risks, and enhancing governance standards. This paper examines the evolution of ESG compliance frameworks, particularly in India, highlighting the significance of mandatory disclosures like the Business Responsibility and Sustainability Reporting (BRSR) framework under SEBI. It explores the interplay between CSR and ESG, underscoring how these principles collectively foster economic growth while addressing societal challenges. Key challenges, such as data inconsistencies, greenwashing, and lack of standardized reporting, are also discussed, along with recommendations for robust enforcement and stakeholder engagement. The findings emphasize that integrating ESG principles into corporate strategies is no longer optional but a critical pathway to sustainable development and long-term resilience. Indian corporations are positioned to emerge as global leaders in sustainability by adopting innovative practices and aligning with international frameworks. The paper concludes by advocating for a harmonious balance between profit-making and value creation, ensuring a sustainable and equitable future for businesses and stakeholders alike.
Keywords
ESG, Corporate Social Responsibility (CSR), Business Responsibility and Sustainability Reporting (BRSR), Stakeholder Engagement
Introduction
ESG reporting pertains to the disclosure of a company's performance and practices in these three critical domains. It includes a wide array of non-financial indicators that assist stakeholders in evaluating a company's ethical influence, sustainability efforts, and governance frameworks. ESG reporting is gaining prominence as investors, customers, and regulatory entities want more transparency and accountability in corporate social responsibility. The increasing significance of ESG reporting may be ascribed to many causes. Stakeholders are increasingly acknowledging that organisations with robust ESG processes often exhibit enhanced financial performance and reduced risk profiles. Research conducted by the Morgan Stanley Institute for Sustainable Investing shown that sustainable equity funds surpassed regular funds in performance amid market declines, underscoring the economic benefits of responsible company operations. Moreover, legal constraints and international accords, such the Paris Agreement, are compelling organisations to implement more sustainable practices and report their ESG-related actions.[1]
In recent years, the concept of “Environmental, Social, and Governance” (ESG) investing has gained significant traction and become a mainstream approach for ethical and sustainable investments. This strategy focuses on directing funds towards companies that demonstrate a strong commitment to environmental stewardship, social responsibility, and sound governance practices. Under the environmental aspect, businesses are evaluated on efforts to reduce carbon footprints, enhance resource utilization, minimize waste generation, and comply with environmental laws. Social criteria emphasize the maintenance of safe and healthy workplaces, equitable employment opportunities, fostering diversity and inclusion, and ensuring robust data security and employee welfare measures. Governance factors, on the other hand, examine aspects such as executive pay policies, the composition and independence of Boards, and overall corporate accountability. The global discourse on environmental issues began to take shape with the Rio Earth Summit of 1992, a landmark event addressing sustainable development. Subsequently, the Kyoto Protocol, adopted in 1997, set binding targets for reducing greenhouse gas emissions. Furthering this momentum, the “United Nations Global Compact” (UNGC) was introduced in 2000, urging businesses worldwide to align their strategies and operations with universal principles concerning labor standards, human rights, anti-corruption efforts, and environmental sustainability.[2]“ESG” was first used in 2006 by the “United Nations Principles for Responsible Investment.”[3]The UNHRC convened an open-ended working group in 2014 to create a legally enforceable instrument to govern the conduct of multinational companies and other private entities under international human rights law. The United Nations' 17 SDGs are presently being adopted by a growing number of MNCs as a framework for their ESG reports.[4]There was a proliferation of corporate activity measurement projects as a result of all of these frameworks.
The theoretical foundation of ESG (“Environmental, Social and Governance”) with the significance of CSR (“Corporate Social Responsibility”) Regulations
India is among a select few countries to have implemented a robust framework for CSR. The introduction of CSR obligations was formalized through an amendment to the Companies Act, 2013, effective from April 1, 2014. Section 35 of the Act mandates companies to allocate a portion of their profits toward CSR initiatives. These provisions have driven meaningful transformations in business practices across the nation. The rationale behind CSR lies in the principle that enterprises, which derive substantial benefits from societal resources, have a duty to contribute positively to the communities they impact. While CSR has yielded notable progress in addressing social issues, gaps in the regulatory framework for its effective allocation remain a challenge. India is home to numerous prominent businesses committed to advancing societal and economic welfare. For instance, the Tata Group has launched multiple initiatives aimed at improving the quality of life for marginalized communities. Their programs encompass financial assistance for vulnerable groups, the promotion of education, gender equality, and rural poverty alleviation. Similarly, companies such as Ultratech Cement, Mahindra & Mahindra, and the ITC Group have undertaken significant efforts to uplift the underprivileged and create sustainable social change.[5]
CSR entails a commitment by businesses to invest a portion of their resources into initiatives that have a positive impact on society and the environment. This approach is centered around the notion that businesses should operate in a manner that benefits all stakeholders, including communities, workers, and the broader ecosystem. The "triple bottom line" framework, often associated with CSR, emphasizes a balanced approach to business success, focusing not only on profit but also on the welfare of people and the planet. Organizations of all sizes are encouraged to engage in CSR efforts to the fullest extent of their capacity, contributing to social good in ways that are meaningful and sustainable. The guiding principle of CSR suggests that businesses, by virtue of their reliance on society for resources such as labor, must reciprocate through active participation in societal development. In essence, CSR reflects the ethical responsibility of businesses to give back to the communities that support them, fostering mutual growth and prosperity.[6]
ESG REPORTING AND ITS COMPONENTS
Environmental reportingis a critical component of ESG disclosures, focusing on how companies manage their impact on the environment. Environmental reporting mandates cover key areas such as greenhouse gas emissions, resource usage, waste handling, and climate-related threats. Carbon emissions are crucial as they drive climate change. Businesses are increasingly focused on tracking and reducing their emissions, which not only contributes to mitigating climate change but also enhances their corporate image and operational efficiency. Resource efficiency involves the optimal use of natural resources, such as energy and water, and companies that closely monitor their consumption are better positioned to enhance efficiency, reduce waste, and cut costs. Waste management is another crucial aspect of environmental sustainability, with companies required to disclose details about waste types, disposal methods, and waste reduction efforts. Assessing and reporting on climate risks, including physical and transitional risks, is essential for informed strategic planning and resilience to climate-related changes. Therefore, organizations must provide detailed reports on their carbon emissions, resource use, waste management practices, and potential climate risks to craft robust sustainability strategies and foster transparent communication with stakeholders.[7]
Social reporting is an essential aspect of ESG disclosures, focusing on a company’s performance regarding social issues such as diversity, labour practices, community impact, and CSR. Companies must report on their commitment to social justice, employee well-being, and community participation. Diversity in the workforce is crucial for creativity and innovation, and companies are now required to disclose diversity data. Labour practices, including working conditions, employee rights, and fair pay, are essential for equity-focused workplaces. Community impact, including charitable work and socioeconomic impact, boosts brand and stakeholder connections. Corporate Social Responsibility (CSR) reporting covers sustainability, ethical sourcing, and business impact on society. Effective communication of CSR activities can boost brand loyalty and customer trust, promoting long-term success. Companies must also focus on diversity, employment policies, community impact, and corporate social responsibility.[8]
Governance reporting is a crucial element of ESG disclosures, focusing on how a company is directed and controlled. Corporate ethics and accountability are crucial, requiring effective governance and transparency in board composition, CEO pay, shareholder rights, and openness. A diverse board is essential for effective management and serving shareholders. Disclosure of board diversity, independence, and committees like audit, risk, and remuneration can boost decision-making and organizational effectiveness. Clear compensation systems, including salary, bonuses, stock options, and long-term incentives, are necessary for sustainable growth. Shareholders can vote on mergers and acquisitions, CEO pay, and board elections. Transparent governance reporting builds stakeholder trust and promotes ethics in organizations.
CSR Regulations in India
The Companies Act, 2013, imposes obligations regarding Corporate Social Responsibility (CSR) on both public and private companies in India. Under Section 135, compliance with CSR requirements becomes mandatory for entities meeting any of the following financial thresholds:[9]
A net worth of ₹500 crore or more.
An annual turnover of ₹1,000 crore or more.
Net annual profits of at least ₹5 crore.
If a company satisfies any one of these criteria, it must formulate and implement a CSR strategy. Additionally, multinational corporations operating in India, including their branches and project offices, are also bound by these CSR obligations.
The minimum CSR spending required is 2% of the company’s average net profits from the past three financial years. Furthermore, a dedicated committee comprising at least three members is required to oversee CSR-related decisions and activities.
As per the 2016 amendment, corporations are encouraged to contribute to national development along with addressing local issues. Companies must engage in initiatives that tackle challenges such as hunger, poverty, and environmental degradation while promoting efforts in areas such as slum rehabilitation, rural development, gender equality, women’s empowerment, education, healthcare, environmental sustainability, and the advancement of sports at the national level. These CSR commitments emphasize the role of businesses in fostering inclusive growth and addressing societal challenges within India.
The Companies (Amendment) Act, 2019
Under the revised rules, unspent Corporate Social Responsibility (CSR) funds from a financial year may be rolled over to the subsequent year, allowing their use alongside the allocated CSR budget for that period. However, companies must transfer any unused CSR amounts before the fiscal year's conclusion to a specific fund listed under Schedule VII of the Act. If the transferred funds remain unutilized for three years, they are required to be deposited into one of the prescribed funds.
Non-compliance with these provisions may lead to penalties, including imprisonment for responsible executives for a term of up to three years, a monetary fine of up to ₹5 lakh, or both.
What are ESG (Environmental, Social and Governance) Disclosures?
ESG disclosures refer to the practice of reporting on factors that impact a company's environmental footprint, social responsibilities, and governance standards. These disclosures help organizations prepare for future challenges, assess potential risks, and take proactive measures to ensure sustainable growth. Neglecting ESG practices can harm not only a company's profitability but also its reputation in the industry. On the other hand, adopting robust ESG practices can help organizations identify opportunities for long-term innovation and assure stakeholders of their commitment to ethical and responsible management.
Importance of ESG Reporting
ESG (Environmental, Social, and Governance) reporting is becoming increasingly important for businesses, offering a framework for promoting transparency, accountability, and long-term sustainability. One of the primary benefits of ESG reporting is its ability to enhance transparency. By including ESG data in annual reports, companies allow investors to gain a deeper understanding of their strategies for addressing global environmental, social, and governance challenges. ESG reporting is a crucial tool for companies to assess their commitment to sustainable practices, ensuring long-term viability and fostering confidence in future prospects. It promotes accountability within organizations, holding executives accountable for their actions and aligning with industry best practices. Credible ESG reports build trust, reassuring investors that a company's commitment to sustainability is backed by concrete actions. Trustworthy ESG reporting also strengthens risk management by identifying emerging risks related to environmental impacts, social dynamics, or governance issues. By integrating ESG considerations into risk management strategies, organizations can identify and address potential threats and capitalize on opportunities aligned with sustainability objectives. Lastly, ESG reporting fosters stakeholder engagement. Companies are encouraged to identify and actively engage with their stakeholders, including shareholders, employees, customers, and suppliers. This engagement provides valuable insights into stakeholder expectations and information needs, helping companies improve the accuracy and relevance of their sustainability disclosures. Engaging stakeholders also helps companies build stronger relationships with those who are impacted by their operations, ensuring that their actions align with broader societal expectations. Overall, effective ESG reporting contributes to a company’s ethical standards, risk mitigation, and long-term success.[10]
BRSR (Business Responsibility and Sustainability Report) Framework: ESG Reporting and Disclosure in India
The Companies Act of 2013 formalized the shareholder model of governance, requiring businesses to consider the interests of more than just their shareholders. For instance, according to Section 166 (2) of the Companies Act, directors are required to act in a manner that is in the best interests of the company, its employees, shareholders, the community, and the environment, while also promoting the company's objectives for the benefit of its members as a whole.[11]This demonstrates that ESG reports are relevant from the standpoint of all stakeholders engaged in the business operations. As a result, it's crucial to put in extra effort to establish a set of rules and guidelines for making disclosures of this kind. In 2012, the SEBI established the need for ESG reporting by requiring the largest 100 listed firms in India by market valuation to produce a Business Responsibility Report. In 2015, this was expanded to encompass the 500 largest publicly traded listed companies based on market capitalization. On 10 May 2021, New guidelines for ESG were published by the SEBI in the form of the BRSR. To comply with BRSR, publicly listed companies must disclose their strategy for managing substantial ESG risks and opportunities, as well as the financial consequences of not doing so. By requiring the world's largest 1000 publicly listed firms to disclose their sustainability efforts annually, BRSR aims to keep information flowing freely between businesses and the people who matter to them.
Principles of BRSR
“Principle 1: The enterprises need to engage in their operations and administration with a steadfast commitment to integrity, adhering to ethical standards while maintaining transparency and accountability.
Principle 2: The enterprises need to provide products and services in a way that ensures sustainability and safety.
Principle 3: Businesses need to uphold and advance the overall welfare of all workers, including those inside their value chains.
Principle 4: The enterprises need to demonstrate reverence for the concerns and exhibit attentiveness towards the needs of all their stakeholders.
Principle 5: This principle emphasises the need for businesses to uphold and advance the protection of human rights.
Principle 6: The enterprises need to demonstrate reverence for the environment and undertake diligent endeavour to safeguard and rehabilitate it.
Principle 7: This principle emphasises the need for responsible and transparent conduct by businesses when they participate in activities aimed at influencing public and regulatory policy.
Principle 8: This principle emphasises the need for businesses to actively foster inclusive growth and fair development.
Principle 9: This principle emphasises the need for businesses to responsibly interact with their customers and provide value to them.” [12]
According to Annexure - I of the SEBI Circular, the BRSR should be broken down into three parts: Section A, Section B, and Section C
“Section A: Information about the company's General Disclosures, including its Listed Entity Information, CSR, Subsidiary, and Associate Companies, Products and Services, List of Operations, Markets served, Employee Information, Holding, and Transparency and Disclosure Compliances, are provided under separate headings.
Section B: It provides questions about the company's management and operations that try to show how they've adopted the NGRBC Principles and Core Elements. The questions are structured in a way that allows organisations to elaborate on their policies, management procedures, governance, leadership, and oversight.
Section C: Business performance on each of the nine NGRBC criteria is disclosed. Following these guidelines will help firms provide evidence of their positive impact on the environment and society. Different types of indicators are considered "Essential" and "Leadership" depending on their significance. Every company that has embraced NGRBC must provide information for the essential indicators, while those who want to go further in their pursuit of social, environmental, and ethical responsibility must disclose information for the leading indicators.”[13]
The SEBI's new BRSR mandate is a turning point in India's sustainability reporting environment, helping companies and other organisations incorporate sustainability. This openness will let firms engage with stakeholders beyond the financial to examine their activities' social and environmental impacts. Businesses will have better proof of their sustainability initiatives, position, and performance, creating long-term value. Instead of the BRR, the BRSR has several advantages. The BRSR now includes quantitative, in-depth enquiries and granular KPIs in addition to Essential and Leadership measurements. The BRSR covers more of the three ESG pillars, including environmental KPIs like energy, emissions, water, and waste and health & safety metrics. The BRSR disclosure form asks value chain partners on training programs, health and safety and working condition assessments, corrective measures, etc.[14]
Foundations of BRSR and What It Deems Material
The BRSR is derived from the NGBRC, which is built upon the SDGs. The SDGs include human rights and sustainability issues into 17 Goals, including economic, social, and governance aspects.[15]
The BRSR incorporates human rights and sustainability by aligning with the SDGs, although this assessment overlooks the flaws within the SDGs. Some opponents contend that the SDGs were created without enough involvement and contribution from civil society, especially from marginalised and disadvantaged areas. There are worries that the aims may not sufficiently meet the needs of these communities.
The SDGs were created by influential, developed Western nations and may not adequately address the specific local challenges and circumstances in India that contribute to human rights and sustainability problems, as well as the required solutions to address them. The BRSR is commended for comparing its performance to global ESG standards as the “Global Reporting Initiative” and the “Sustainability Accounting Standards Board.” The criticism of the SDGs might also apply to the dependence on other international reporting standards in developing the BRSR. Using foreign frameworks as the foundation of the BRSR may not be the most suitable approach for integrating business practices with human rights and sustainability in India. The BRSR aims to address the shortcomings in its essential principles by using the proprietary ESG model created by “Stakeholder Empowerment Services” (SES), in India, whether intentionally or unintentionally. It is a locally tailored model that considers relevant aspects of the reporting criteria. The requirements of the SES ESG model are optional and may not be effective until followed.[16]
The BRSR framework is a consultative approach that combines business, human rights, and sustainability. It involves interacting with external stakeholders to identify and address human rights and environmental issues related to a company's activities. This allows companies to implement targeted, proactive actions to reduce risks and function more sustainably. Collaboration between corporations, civil society, human rights, and environmental organizations helps pinpoint localized concerns and address them directly. The framework's 'object' clause emphasizes the inclusion of human rights and environmental aims. Companies must report on their strategies, allowing external stakeholders to assess their impact. While firms may initially face financial challenges, research shows that organizations with high ESG ratings are more likely to achieve financial success due to changing consumer awareness of ecological and human rights issues. By incorporating these issues into operations and decision-making processes, companies gain goodwill and recognition from customers. Reporting frameworks like BRSR can achieve human rights and environmental objectives while fulfilling a business's core purpose of generating profit.
Enforcement, Implementation and Transparency
The intersection of human rights, sustainability, and business is a key focus in the Business Risk Reduction Strategy (BRSR). However, companies' adherence to disclosure laws and data sharing methods can impact the realization of this intersection. The main issue is distinguishing between mandatory and optional disclosure, as most criteria are voluntary. This can lead to inaccurate and inconsistent statistics on operations, such as how a company incorporates human rights risks into contracts.[17]
Companies are exempt from providing detailed information about their policies, which makes it impossible for stakeholders to compare policies or determine whether a particular policy is suitable, effective, and inclusive. Worse still, even if some factors like greenhouse gas emissions need to be evaluated and reported using certain measures, they are also not always accurate. The absence of verification by any independent statutory body is the reason for the lack of dependability in this data. A third party can verify a company's data, but even that isn't guaranteed. Thus, businesses are not discouraged from releasing data that is inaccurate and/or altered.[18]
Benefits and Strategic Opportunities
Compliance with BRSR mandates offers strategic advantages for corporations, including better risk management, strengthened corporate governance, and enhanced corporate resilience. Companies can leverage compliance as a tool for long-term sustainability, aligning with international standards, building trust with stakeholders, and enhancing resilience. The increasing global focus on sustainability has led to the establishment of specialized roles like 'Chief Sustainability Officer' or committees managing ESG concerns. Progressive companies are adapting their governance structures to include these roles, anticipating future regulations and aligning with global best practices.
Legal Considerations and Risks
While BRSR compliance offers numerous benefits, companies must navigate associated legal risks carefully. The obligation to disclose ESG-related data is currently limited to the top 1,000 listed companies. However, any misleading or false disclosures can attract legal liabilities. Globally, the trend of stakeholders using legal means to hold companies accountable for failing to address ESG concerns is rising. For instance, in the United States, the “Securities and Exchange Commission’ (SEC) has initiated investigations into alleged greenwashing practices by financial institutions and investment funds, demonstrating a stringent regulatory approach that could inspire similar enforcement actions by SEBI.
The interplay between CSR and ESG: Its implication on the economy
The advent of modern industry has opened up many doors all across the world. However, it has also contributed to issues including a rise in average global temperatures, an increase in the frequency and severity of natural disasters, a decline in biodiversity, the proliferation of illness, and widening income and wealth disparities. Energy production is the sector most responsible for carbon dioxide emissions, followed by manufacturing and building. Fortunately, the global attention on ESG, which is synonymous with sustainability, has encouraged companies all over the globe to aim for more than just profit maximization and risk avoidance. Investors and regulators are looking carefully at how well companies meet ESG standards because of their social and environmental responsibilities.[19]
By 2050, increasing sea levels, wildfires, floods, unpredictable weather patterns, and storms might threaten 52% of India's GDP, according to research by S&P Global. Sustainable practises are not a luxury for modern organisations, but a need. Following their global competitors, Indian companies are now paying serious attention to the ESG framework.
Crisil's Sustainability Yearbook 2022 found that Indian enterprises generally have a far higher ESG score than they did a year ago. Disclosures, however, continue to be minimal. Only 198 out of 586 firms included in the study have released their sustainability report for fiscal 2021. The FMCG and hotel industries have made the most disclosures, but the auto, OEM, loan, and cement industries have all shown promise. For instance, in the textile industry, 75 per cent of firms reported using recycled and sustainable source materials.[20]
India is unusual among countries in that it requires businesses to engage in CSR. One of the two defining stages in India's progress toward environmental sustainability. Companies are required to disclose how much they spend on CSR initiatives annually under the Companies Act of 2013. INR 5 billion ($61 million) or more in net worth (or INR 10 billion in sales or INR 50 million in net profit) are required to allocate 2% of net income to CSR activities.[21]
When it comes to sustainability initiatives in India, one defining occasion was when the SEBI mandated that the 1,000 largest listed businesses by market capitalization publish BRSR. On April 1, 2022, it became mandatory to provide a sustainability report. Responsible corporations will flourish as a result. It serves as a solid foundation upon which to build the country's still-developing ESG infrastructure. Due to the combined efforts, India will become a key market for sustainability solutions and green financing, which is essential to the development of the global ESG ecosystem.[22]
More and more people all around the globe want big businesses to prioritize social responsibility and sustainable growth. Similarly, investors have begun to value and consider such elements as crucial dimensions for affecting their investment, working in tandem with government measures to introduce legislative reforms. In addition to financial returns, investors are increasingly interested in making a beneficial influence in the world. The effects of COVID-19 are already causing a shift in priorities in many areas of society.”
CSR Versus ESG
Leveraging Data for ESG Decision-Makin
ESG reporting often serves to address the concerns of investors and other prominent stakeholders, offering them insights into a company’s environmental, social, and governance efforts. On the other hand, CSR activities, along with their associated reporting, aim to inspire employees, enhance the organization's reputation, and foster goodwill among customers and the broader stakeholder community.
Regulatory Obligations in ESG Reporting
In many parts of the world, businesses of varying scales and industries are now required to disclose their ESG performance. The adoption of uniform and regulated standards for ESG reporting has escalated the need for companies to collect, evaluate, and share ESG-related data. In contrast, CSR remains a voluntary initiative, driven by a company’s commitment to social responsibility rather than legal mandates.
Focus on Relevant Risks and Opportunities
The strategic approach of ESG diverges from CSR by concentrating on identifying and mitigating risks and opportunities that have a direct financial impact on the company. ESG disclosures prioritize information that is pertinent to the firm’s business model and operations, whereas CSR initiatives are more aligned with promoting the company’s core principles and societal contributions.
Data-Driven and Standardized Approach
While both ESG and CSR can involve measurable outcomes, ESG reporting is distinguished by its reliance on extensive quantitative analysis. Companies engaged in ESG initiatives must collect and disseminate significant amounts of numerical data, adhering to globally recognized frameworks and benchmarks. Conversely, CSR reporting is often tailored to reflect individual company efforts, frequently emphasizing qualitative achievements.
Significance of ESG Risks
The growing emphasis on sustainability, transparency, and accountability has introduced novel challenges for businesses. Stakeholders are increasingly scrutinizing a company’s environmental stewardship, ethical conduct, employee relations, and community impact. ESG risks pertain to environmental, social, and governance factors that can influence a company’s operational and financial health. Despite their diversity, these risks share a common thread: they directly affect a company's ability to remain competitive and sustainable in the long run.[23]A corporation that overlooks these dangers may lose shareholders, customers, and other stakeholders and suffer financial losses. The relevance of an ESG concern for a firm, industry, or sector depends on those elements. This indicates that every organisation must identify, manage, and reduce severe ESG risks.[24]
Types of Environmental Risks
● Impacts of climate change
● Deforestation and land degradation
● Practices in environmental management
● Greenhouse gas (GHG) emissions
● Biodiversity conservation challenges
● Pollution control and prevention
● Preserving healthy ecosystems
● Sustainable use of marine resources
● Transitioning towards a circular economy
● Ensuring water security and sustainable usage
● Waste reduction, management, and recycling
Types of Social Risks
● Engaging and collaborating with communities
● Safeguarding data privacy
● Promoting diversity, equity, and inclusion (DEI)
● Ethical labor practices in supply chains and vendors
● Upholding human rights
● Workforce training and professional development
● Ensuring wage fairness and equity
● Providing safe and healthy working conditions
Types of Governance Risks
● Preventing anti-competitive practices
● Ensuring board diversity and balanced structures
● Combating bribery and corruption
● Upholding corporate integrity and ethical standards
● Implementing measures against corruption and fraud
● Transparent ESG (Environmental, Social, and Governance) disclosures
● Compliance with existing and emerging ESG regulations
● Fair and transparent executive compensation
● Establishing grievance mechanisms and systems
● Adhering to clear policies and standards
● Ensuring tax compliance
● Communicating transparently with stakeholders
Key challenges and good practices
The next step for an investor is to choose where and how to take action once they have identified the most critical ESG issues. Integrating ESG into current processes rather than creating new, independent inspections is preferred if investors (such as banks, asset managers, or development finance institutions) want to effectively move ESG from policy to practice. The credit or investment cycle is a formal flow of decisions that is integral to asset or fund management; these processes provide the rationale for including ESG considerations. Investors should think about ESG factors at every point in the loan or investment lifecycle, from applying to repaying or renewing. When assessing creditworthiness based on ESG criteria, for example, it could be simpler to anticipate ESG difficulties if investors were aware of them in advance.[25]
Many stockholders may have first-hand dealings with the companies in which they have invested. During the due diligence process, the post-investment period, and the reporting check-ins, investors have the opportunity to gather and evaluate ESG data on a firm. Maximising the use of these methods and technologies is essential for effective ESG risk management. Given that the key to success is in the competences of individuals engaged, investors should ensure that their investment managers and teams possess the necessary knowledge and expertise to engage in productive dialogues with firms about ESG matters.
Investors need to gather the required data in order to identify and assess ESG risks or incorporate ESG into risk models. To determine how susceptible their clients are to physical and transition risks, investors may look at data such as the locations of their production plants and the amount of greenhouse gases they release. By examining the client's supplier chain data, investors may get insight into the firm's potential social and governance risks. This data might show that the company conducts business in countries with higher human rights risks or poor governance.
However, investors may find it laborious and time-consuming to call individual customers in order to collect this information. There may be challenges with data collecting, access, and analysis when managing large investment portfolios. Investors should proceed with care when relying on other parties, such as ESG data providers, since the data they supply could not be directly comparable and might display varied degrees of complexity depending on the asset class in question. In order to gather and assess the necessary data, investors might make use of their current Client Due Diligence/ KYC processes. Customers would have less "reporting fatigue" and there would be less need to create and execute new client communication strategies if ESG criteria were included into KYC processes.[26]
Each organisation has to show how it has reduced ESG risks and taken advantage of ESG opportunities. Companies that have shown a dedication to ESG best practices may be given preference for exit by private equity firms. These credentials (and the efforts put in by the fund to get them) have to be widely visible, quantifiable, and communicated. Giving potential buyers a clear picture of the company's ESG state before the acquisition, what steps will be done to improve it throughout the holding term, and what the results will be will help them understand the importance of ESG.
For future financial institutions to be more robust, ESG risks must be included into the framework at every level. This ensures that traditional risk management approaches fully include ESG risks. For example, as part of their risk management, financial institutions should regularly engage sustainability experts to stay abreast of (regulatory) developments. An investor's potential exposure to ESG risks might be shown by the concentration of their portfolio in a particular industry or geographical location. ESG risk assessments may benefit from climatic stress testing. Finally, ESG risk may be mitigated via the employment of exclusion policies or modified risk premiums.
Conclusion
The growing emphasis on ESG practices and Corporate Social Responsibility (CSR) marks a pivotal shift in global business and regulatory paradigms. ESG reporting, driven by an amalgamation of legal mandates, market forces, and societal expectations, underscores the critical need for transparency and accountability in corporate operations. With frameworks such as the BRSR in India, businesses are increasingly recognizing that sustainable practices are not merely an ethical obligation but a strategic necessity for long-term success. This evolution in corporate conduct aligns with global trends, reinforcing the importance of integrating environmental stewardship, social equity, and robust governance structures into business models.
The regulatory environment has played a vital role in institutionalizing these practices. For example, India’s Companies Act, 2013, and the SEBI's introduction of the BRSR framework represent critical steps toward embedding sustainability into corporate DNA. These initiatives ensure that organizations contribute meaningfully to societal and environmental well-being while fostering economic growth. The BRSR, in particular, highlights the shift from voluntary sustainability reporting to more structured and mandatory disclosures, thereby creating a uniform platform for evaluating ESG performance across industries.
While ESG and CSR share common objectives, they differ fundamentally in their scope and execution. ESG focuses on identifying and mitigating risks and opportunities directly tied to a company’s financial performance, relying heavily on quantitative analysis. In contrast, CSR initiatives, though impactful, often prioritize qualitative outcomes and remain largely voluntary. This distinction highlights the necessity for businesses to adopt ESG practices as a strategic imperative rather than merely a compliance measure.
Despite significant advancements, challenges persist in ESG adoption and reporting. The lack of standardization, verification mechanisms, and mandatory disclosure requirements often results in inconsistencies and potential misrepresentation, such as greenwashing. Addressing these gaps requires robust regulatory oversight, independent verification, and enhanced stakeholder engagement. Furthermore, fostering a culture of sustainability within organizations through capacity-building initiatives, such as appointing Chief Sustainability Officers or establishing dedicated ESG committees, can bridge the gap between intent and implementation.
The interplay between ESG and CSR is also critical to understanding their collective impact on the economy. Sustainable practices not only mitigate risks associated with climate change and social inequities but also unlock opportunities for innovation, resource efficiency, and stakeholder trust. For example, industries like FMCG and textiles have demonstrated the potential of incorporating sustainability into core operations, achieving both ecological balance and economic gain.
As businesses navigate this transformative era, the integration of ESG principles must be complemented by a robust enforcement framework, proactive policy-making, and a shift in stakeholder mindsets. With increasing global attention on sustainability, Indian corporations stand at the cusp of becoming global leaders in ESG compliance and innovation. The alignment of business objectives with environmental and societal goals is no longer optional but imperative for building resilient economies and inclusive communities.
Ultimately, the success of ESG and CSR initiatives lies in their ability to foster a harmonious balance between profit-making and value creation, ensuring a sustainable and equitable future for all stakeholders. By embracing these principles, businesses can redefine their role in society, not just as profit-generating entities but as catalysts for positive change.
[1] Pollman, Elizabeth. "Corporate social responsibility, ESG, and compliance." Forthcoming, Cambridge Handbook of Compliance (D. Daniel Sokol & Benjamin van Rooij eds.), Loyola Law School, Los Angeles Legal Studies Research Paper 2019-35 (2019).
[2] Avinash Das, Anmol Jain, Arjun Goswami. “An Introduction of ESG Disclosures in Indian Regulatory Space - Part 1.” December 2, 2021. https://corporate.cyrilamarchandblogs.com/2021/12/an-introduction-of-esg-disclosures-in-indian-regulatory-space-part-1/. Accessed December 26, 2024
[3] “SEBI | Consultation Paper on ESG Rating Providers for Securities Markets.” https://www.sebi.gov.in/reports-and-statistics/reports/jan-2022/ Accessed December 26, 2024
[4] Consultivo. “BRSR | Business Responsibility and Sustainability Reporting,” December 17, 2021. https://consultivo.in/brsr-business-responsibility-sustainability-reporting-faqs/. Accessed December 26, 2024
[5] “BRSR - The New Age Sustainability Reporting for India.” https://orennow.com/blog-details?id=102. Accessed December 26, 2024
[6] Karwowski, Mariusz, and Monika Raulinajtys‐Grzybek. "The application of corporate social responsibility (CSR) actions for mitigation of environmental, social, corporate governance (ESG) and reputational risk in integrated reports." Corporate Social Responsibility and Environmental Management 28, no. 4 (2021): 1270-1284.
[7] Halbritter, Gerhard, and Gregor Dorfleitner. "The wages of social responsibility—where are they? A critical review of ESG investing." Review of Financial Economics 26 (2015): 25-35.
[8] Chouaibi, Yamina, and Ghazi Zouari. "The effect of corporate social responsibility practices on real earnings management: evidence from a European ESG data." International Journal of Disclosure and Governance 19, no. 1 (2022): 11-30.
[9] Nial, Naresh, and Pranay Parashar. "A comparative study on sustainability standards with specific reference to GRI standards and BRSR framework." International Journal of Quality & Reliability Management (2024).
[10] International Labour Organization, “ESG and its implications for medium-sized enterprises in Africa” https://www.ilo.org/wcmsp5/groups/public/documents/publication/wcms_848406.pdf Accessed December 26, 2024
[11] ICAI. “Guidance Note For Business Responsibility & Sustainability Reporting Format.” https://wirc-icai.org/wirc-reference-manual/guidance-note-for-business-responsibility-and-sustainability-reporting-format.html.
Accessed December 26, 2024
[12] SEBI, “SEBI | BRSR by Listed Entities.” https://www.sebi.gov.in/legal/circulars/may-2021/business-responsibility-and-sustainability-reporting-by-listed-entities_50096.html. Accessed December 26, 2024
[13] Ibid
[14] Sruthi S and Dr. D. Gnana Senthil Kumar, “Research Trends in Commerce and Management”, 1st ed. (Lunawada, India, 2022), DOI: 10.25215/9395456299, https://ssrn.com/abstract=4258206
[15] Singal N, “How Sebi Stringent Sustainability Reporting Mandate Is Proving to Be a Challenge for Top Listed Companies” (Business Today, November 28, 2023) <https://www.businesstoday.in/magazine/deep-dive/story/how-sebis-stringent-sustainability-reporting-mandate-is-proving-to-be-a-challenge-for-top-listed-companies-407240-2023-11-28> accessed February 21, 2024
[16] Sadiq, Muhammad, "The role of environmental social and governance in achieving sustainable development goals: evidence from ASEAN countries." Economic research-Ekonomska istraživanja 36, no. 1 (2023): 170-190.
[17] “Business Responsibility and Sustainability Report” (Deloitte India) <https://www2.deloitte.com/in/en/pages/finance/articles/business-responsibility-and-sustainability-report.html> accessed February 21, 2024.
[18] wipro,“Business Responsibility and Sustainability Report 2022-23” <https://www.wipro.com/content/dam/nexus/staticsites/annual-report-2023/pdf/business-responsibility-report.pdf> accessed February 21, 2024.
[19] Datatracks, “Importance of ESG Reporting | DataTracks,” September 7, 2022. https://www.datatracks.com/eu/blog/importance-of-esg-reporting/. Accessed December 23, 2024
[20] Shailendra Singh Rao, “How Indian Businesses Are Growing with ESG,” December 2, 2022. https://www.pv-magazine-india.com/2022/12/02/how-indian-businesses-are-growing-with-esg/. Accessed December 23, 2024
[21] “The Interplay Between CSR and ESG Norms: What India Inc and Investors Need to Focus on,” https://elplaw.in/the-interplay-between-csr-and-esg-norms-what-india-inc-and-investors-need-to-focus-on/. Accessed December 23, 2024.
[22] Kearney. “Taking Corporate Social Responsibility to the next Level in India.” Accessed February 2, 2024. https://www.kearney.com/sustainability/article/-/insights/taking-corporate-social-responsibility-to-the-next-level-in-india. December 23, 2024
[23] Walsh, Brendan. “All About ESG Risks | ESG Risks Examples - ESG Risk Guard.” ESG Risk Guard, June 14, 2021. https://esgriskguard.com/all-about-esg-risks/. Accessed December 27, 2024
[24] PwC, “Six Key Challenges for Financial Institutions to Deal with ESG Risks.” https://www.pwc.nl/en/insights-and-publications/services-and-industries/financial-sector/six-key-challenges-for-financial-institutions-to-deal-with-ESG-risks.html. Accessed December 27, 2024
[25] Novisto. “What’s The Difference Between CSR and ESG?” October 11, 2022. https://novisto.com/whats-the-difference-between-csr-and-esg/. Accessed December 27, 2024
[26] Deloitte Ireland. “ESG Risk Management Framework,” https://www2.deloitte.com/ie/en/pages/financial-services/articles/esg-risk-management-framework.html. Accessed December 27, 2024