ESG Compliance In India: A Legal Analysis With Special Reference To Corporate Laws, Authored By : Ms. Chinmay Talwar| Volume VI Issue II(March-April,2026)

ABSTRACT

ESG compliance is the latest trend in corporate regulation. This view is being increasingly held by global stakeholders. They are of the opinion that corporates now have a responsibility. That new responsibility is beyond profit maximisation for shareholders. This paper critically examines the legal framework governing ESG compliance in India with special reference to corporate laws. It additionally seeks to ascertain whether the existing statutory architecture namely the Companies Act, 2013, the Securities and Exchange Board of India (SEBI) regulations, and various other environmental and labour legislations   provide a coherent and effective architecture for ESG Compliance by India Inc.

The methodology used in the paper is doctrinal and comparative legal. For this purpose, the paper examines the primary sources which include the statute, regulation, and judicial decisions. Along with it the secondary material, academic literature is also examined. Apart from India, comparative part from the European Union, United Kingdom and United States is taken for the purpose.

The core proposition put forth is that India has a pioneering ESG framework which made major strides through the mandatory Corporate Social Responsibility (CSR) provisions under Section 135 of the Companies Act, 2013 and SEBI’s Business Responsibility and Sustainability Reporting (BRSR) framework but nevertheless suffers from three basic deficiencies   first, the fragmentation of the regulatory framework across multiple regulators and statutes without adequate coordination; second, the overemphasis on disclosure and reporting without adequate substantive compliance obligations and enforceability; and third, the failure to have a single unified ESG law with environmental, social and governance standards knitted into a single regulatory framework.

Keywords: ESG, CSR, SEBI, BRSR, Compliance Mechanism, Indian Corporate Law

 I: Introduction

A. History and Importance.

The idea behind Environmental, Social, and Governance (ESG), which refers to a corporate adherence to regulations and principles, is possibly one of the biggest developments in corporate law and regulation in the 21st century. The ESG, which evaluates the non-financial performance and impact of businesses, has become a mainstream regulatory framework that influences the legislative frameworks, investor expectations and corporate strategies of nations, having evolved from being a niche concern of socially responsible investors. The three pillars of ESG   environmental accountability which includes climate change mitigation, resource efficiency and pollution control social accountability which includes labour rights, community involvement, diversity and human rights; and governance accountability which includes board composition, executive pay, transparency, and anti-corruption  define a standard of behaviour for corporates that surpasses the traditional shareholder primacy model and embraces a stakeholder-oriented conception of corporate purpose.^[1]

India’s engagement with the principles of ESG has a historical trajectory that is quite unique due to the nation’s particular circumstances of representative democracy, fast-growing economy, large and diverse population, enduring developmental challenges and increasingly assertive regulatory state. Through Section 135 of the Companies Act, 2013, India became the first country in the world to mandate corporate social responsibility (CSR) expenditure; a legislative innovation that attracted worldwide attention. It was an audacious assertion of the power of the state to direct corporate resources for social purposes. This initiative was later complemented by the introduction of the Business Responsibility Reporting (BRR) framework of SEBI in 2012, the introduction of the Business Responsibility and Sustainability Reporting (BRSR) framework in 2021, and the gradual development of environmental as well as labour legislation tackling particular facets of the ESG agenda. ^[2]

However, scholars, practitioners, investors, and regulators have increasingly started to question the adequacy of India’s legal framework for esg compliance. As it stands, the framework is fragmented across a clutch of statutory instruments and regulatory bodies, including the Ministry of Corporate Affairs (MCA), SEBI, the Ministry of Environment, Forest and Climate Change (MoEFCC), the Ministry of Labour and Employment, and a slew of state-level agencies, and lacks legislative architecture or a coordinating mechanism. While disclosure and reporting are important for transparency, this does not mean there are substantively enforceable compliance obligations requiring corporations to achieve defined ESG outcomes. The mechanisms to enforce the obligation of ESG are underdeveloped at the moment. After all, the consequences of not complying with these obligations are limited to market-based or reputational effects. Further, it is submitted that these coordinated responses might be insufficient to lead to real behavioural change.^[3]

The worldwide regulatory framework for ESG cellular adjusting quickly. The Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) provides for new comprehensive mandatory ESG reporting and ESG due diligence obligations by the EU. The Securities and Exchange Commission (SEC) of the United States put forward rules on climate-related disclosure. The International Sustainability Standards Board has issued global baseline sustainability disclosure standards. India’s national mechanism needs to be examined against international alterations. It is because Indian companies are continuously integrating into global capital markets and supply chains. Besides that, new opportunities and pressures for conformance with international ESG standards are also being created. ^[4]

B.  Issues, Queries, and the Thesis.

Research on ESG (environmental, social, governance) compliance in India so far has focussed on the individual elements of the framework   CSR under the Companies Act, reporting requirements of SEBI, environmental regulation, etc.   without looking at their interaction as elements of an integrated ESG system. The fast evolution of regulatory landscape especially BRSR framework in 2021 and ongoing development of SEBI’s ESG regulatory agenda are raising new legal questions that existing literature doesn’t exhaustively address.

This paper seeks to address the central research question: Is the existing legal regime in India coherent, comprehensive, and effective to facilitate ESG compliance by Indian corporate India? If not, what reforms are required?

The ESG compliance framework that India has tried to establish may have incorporated several firsts but the framework in its present form would remain ineffective structurally. The reasons for this include the fragmented nature of the regulations, the stringent focus on disclosure without any real obligations, and deficiencies on the enforcement front. This essay argues for a comprehensive reform of the law that seeks to consolidate strengthen the framework while being mindful of the developmental context of India.   ^[5]

C. Roadmap.

The following outlines the paper’s content. The current paper addresses the literature reviewed under Section II. Corporate Law Framework around ESG Compliance: Companies Act, 2013, and SEBI Regulations is section iii of this chapter. The environmental and social dimensions of ESG compliance exploring under Indian law. Section V takes a critical view of enforcement mechanisms. Analysis of International Instruments  Section 6 The paper concludes with recommendations for reform.

II PREVIOUS STUDIES AND BACKGROUND.

A. Scholarship on ESG in India Existing

The academic literature surrounding ESG compliance in India is expanding gradually, but it remains weak in its analytical approach. Most of the works so far have been undertaken in isolation. Further, the literature focuses on the individual dimension of the ESG framework. However, none examine the framework as a regulatory system that is integrated. The foundational work of Varottil on Companies Act, 2013 and its corporate governance provisions provided important analytical foundations for understanding governance framework of India but did not engage with the environmental and social dimensions of the ESG paradigm extensively.5 Similarly, Afsharipour’s examination of corporate governance in India provides some valuable comparative insights into the evolution of Indian governance norms in the context of global standards but predates the significant developments related to ESG regulation post 2020.^[6]

Under Section 135 of the Companies Act, Sharma and Khanna explained the complications in the implementation of mandatory CSR spend by companies defining that CSR is becoming more of a compliance task and less of strategic commitment.^[7] Empirical analysis by Dharmapala and Khanna on spending patterns of CSR by the Indian company indicates that due to mandatory CSR, there was not much change in actual behaviour and nor was there much fuss over it as those companies concentrating their spending patterns in quite a narrow range of activities which increases visibility without hindering operation.^[8]

Mukherjee’s recent analysis of SEBI’s BRSR framework investigated the reporting requirements in the context of sustainability reporting standards globally but did not carry out a systematic comparison with the EU’s CSRD or the ISSB standards.^[9] Further, Balakrishnan and Iyer examined ESG disclosure practices among Indian listed companies and found significant variation in the quality and depth of disclosures being made. The existing framework is possibly deficient in terms of guidance and enforcement incentives to ensure meaningful discharge.^[10]

B. Gaps in Literature Identified.

The work identified important gaps in the literature that this paper seeks to fill. To begin with, there is no work that analyses the possible interaction of the provisions of Companies Act, SEBI regulations, environmental legislation, and labour law as components of an integrated ESG framework and as a coordinated system. The second-year implications of the 2021 BRSR framework, especially its phased mandatory coming into force for the top 1000 listed firms by market capitalisation, have not been systematically analysed to check their adequacy for a holistic ESG compliance. Analysis of the above three components remains limited including comparative analysis of EU’s CSRD and CSDDD as model for Indian reform. The monitoring, verification, and sanctioning mechanisms for ESG obligations, which form the enforcement dimension of ESG compliance, have not received as much analytical attention as the more substantive contents of those obligations.

C. three pillar ESG conceptual framework

The three interrelated elements of the ESG framework define the field of corporate non-financial responsibility.

The environmental pillar mandates corporations to do climate change mitigation and adaptation action and reduce greenhouse gas emissions. The areas of concern under this pillar include energy efficiency, reduced resource use, waste, pollution, and biodiversity. Further, this includes the environmentally sound management of natural resources, energy, and waste including reductions in pollution. Further, it involves substantive and procedural rights on Environmental Impact Assessment. In the Indian context, the environmental pillar engages substantial legislation such as the Environment (Protection) Act, 1986, the Air (Prevention and Control of Pollution) Act, 1981, the Water (Prevention and Control of Pollution) Act, 1974 and Environmental Impact Assessment Notification, 2006.

The environmental pillar likely engages significant legislation such as the Environment (Protection) Act, 1986; the Air (Prevention and Control of Pollution) Act, 1981; the Water (Prevention and Control of Pollution) Act, 1974; and the Environmental Impact Assessment Notification, 2006; etc.

The social pillar encompasses obligations and practices of enterprises concerning labour rights and working conditions, occupational health and safety, diversity and inclusion, community engagement, human rights due diligence, consumer protection, and data privacy; etc. A plethora of statutes provide for laws concerning the society pillar that is classified in the framework of India. There are Industrial Relations Code, 2020; Social Security Code, 2020; Occupational Safety, Health and Working Conditions Code, 2020 and various other Labour & Social Welfare legislations of India.

The Governance element includes the corporate duties and practices pertaining to the composition of the board and its independence, remuneration of executives, rights of shareholders, transparency and disclosure,  anti-corruption, whistle blowing protection and risk management. The Companies Act, 2013 and SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015 ^[11] primarily address the governance pillar.

III. THE CORPORATE LAW FRAMEWORK FOR ESG COMPLIANCE

A. The Companies Act, 2013: What’s with CSR?

The central corporate law governing businesses in India is the Companies Act, 2013. The Companies Act, 2013 contains several provisions that are directly relevant to ESG compliance. The most prominent among them is the mandatory CSR framework in Section 135. Section 135 consists of the mandatory CSR framework.^[12]

The Companies (Corporate Social Responsibility Policy) Rules, 2014 read with Schedule VII and Section 135 provides that every company having a net worth of 500 crore or more, or a turnover of 1000 crore or more, or a net profit of 5 crore or more during the immediately preceding financial year shall be required to mandatorily undertake CSR activities. Contituting a CSR Committee of the Board comprising three or more directors which includes at least one independent director.

The CSR Committee shall formulate and recommend to the Board a CSR Policy which shall indicate the activities to be undertaken by the company in pursuance of the CSR Policy and recommend the amount of expenditure to be incurred on the activities referred to in clause (b) and to monitor the CSR Policy of the company. The Board of Directors has to ensure that the Company spends, in every financial year, at least two per cent of the average net profits of the Company made during the three immediately preceding financial years, in pursuance of its CSR Policy.

The Companies Act contains a Schedule VII list of activities that qualify as CSR activities. These are: (i) Eradicating hunger, poverty and malnutrition; (ii) Promotion of education; (iii) Promotion of gender equality and empowering women; (iv) Ensuring environmental sustainability, ecological balance and conservation; (v) Protection and enhancement of the national heritage, art and culture; (vi) Measures for benefit of armed forces veterans, and their families; (vii) Rural development projects; (viii) Slum area development; (ix) Disaster management; (x) Contribution to the Prime Minister’s National Relief Fund.^[13]

The amendment made to CSR Rules in 2021 was aimed at strengthening the CSR force in the country. Regulations requiring an impact assessment for companies spending 10 crore or more on CSR activities were introduced. The companies can set off any excess CSR spending against the requirement for the succeeding financial year. Any unspent CSR amount would be transferred to a specified fund account. The character of CSR as a spending mandate rather than a substantive ESG mandate was not changed by the tightening of the compliance architecture through these amendments.

Criticism of Section 135 as an ESG Device.

Although Section 135 was a first-of-its-kind innovation making India the first country to mandate CSR spending, various structural features limit the effectiveness of Section 135 as an ESG compliance mechanism. First, the original provisions’ “comply or explain” approach, which required companies to explain the non-expenditure of the mandated sum instead of mandating actual expenditure, was replaced in 2021 by a mandatory transfer of unspent sums to specified funds. Nevertheless, the underlying philosophy of CSR as a spending obligation and not a behavioural or outcome- based obligation remains unchanged. Corporations can discharge their CSR responsibilities merely by nominating a qualifying activity and handing over a cheque without making any changes to their business, supply chain or environmental practices.

Moreover, eligibility criteria for CSR activities are extremely broad under Schedule VII. In fact, these include activities such as donation to PM National Relief Fund or something similar which has little relevance to the specific environmental or social impact of a company’s activity. Many companies facilitate CSR funding in a way that generates maximum PR benefits but don’t want to do the work that is more operationally challenging and affects their own environmental and social externalities.^[14]

Section 135 only applies to the “S” (social) part of the ESG framework and but only to a limited extent. It does not require companies to lessen their environmental impact, alter their governance structures, or to use sustainability considerations in their business strategy. In the corporate and regulatory discussions in India, CSR is frequently conflated with ESG. Despite their sometimes interchangeable use, philanthropic spend (CSR) and integrating environmental, social, and governance factors into corporate decision making (ESG) are fundamentally different things.^[15]

Guidelines for Corporate Governance

The Companies Act, 2013 contains many provisions connected with the governance pillar of ESG. In accordance to Section 149, listed companies and other classes of public companies must have independent directors on their boards. The proportion of independent directors must be one-third of the total number of directors in the case of listed companies. As per provisions of Section 177, the Audit Committee shall be required to be constituted and also a vigil mechanism (whistle blower mechanism) shall be established by the Company for directors and employees to report genuine concerns. According to Section 178, companies must establish a Nomination and Remuneration Committee and a Stakeholders Relationship Committee. Section 134(3)(p) states that the Board report must contain ‘description of the development and implementation of risk management policy of the company which may include business responsibility policy and whistle-blower policy’.^[16]

The corporate governance provisions create an institutional architecture for corporate accountability relevant to the governance pillar of ESG. However, the recommendations do not directly call for boards to consider and integrate ESG factors into decision-making, to create ESG-specific committees, or to establish ESG strategies and targets. Although the governance framework has adequate traditional corporation governance aspects, it is lacking an ESG-specific orientation which is now a hallmark of governance frameworks in other jurisdictions.

B. Framework governing environmental and social governance by SEBI

According to a report by Forensic Risk Alliance (FRA) titled “The Great Corporate Disclosure Experiment,” the Securities and Exchange Board of India (SEBI) has effectively emerged as the most active regulatory driver for ESG compliance of Indian listed companies, through its disclosure and reporting requirements.

Business Responsibility and Sustainability Reporting (BRSR)

The Business Responsibility and Sustainability Reporting (BRSR) framework introduced in May 2021 through amendments to LODR Regulations, is SEBI’s biggest ESG initiative. The earlier Business Responsibility Reporting (BRR) framework, which has been effective since 2012, has been replaced by the BRSR. This is a significantly more enriching reporting requirement, which is aligned with various internationally recognised reporting frameworks including the UN Guiding Principles on Business and Human Rights and the UN Sustainable Development Goals. ^[17]

The top 1000 listed companies based on market capitalisation would necessarily include a BRSR report in their annual report as per the BRSR framework. The BRSR report consists of three major components namely General Disclosures (relating to the products, operations, employees and stakeholder engagement), Management and Process Disclosures (relating to policies, governance structures and management processes of the company with respect to ESG issues), and Principle-wise Performance Disclosures (performance of the company against the nine principles).

According to the 9 principles of BRSR framework, Businesses must conduct and govern themselves with integrity and in a manner that is ethical, transparent and accountable; Businesses must provide goods and services in a manner that is sustainable and safe; Businesses must respect and promote the well-being of all employees (direct and indirect) including those in their value chains; Businesses must respect the interests of and be responsive to all their stakeholders; Businesses must respect and promote human rights; Businesses must respect and make efforts to protect and restore the environment; Businesses must, when engaging in influencing public and regulatory policy, do so in a manner that is responsible and transparent; Businesses must promote inclusive growth and equitable development; Businesses must engage with and provide value to their consumers in a responsible manner.^[18]

Reporting for BRSR Core and Value Chain.

In July 2023, SEBI released the BRSR Core, a BRSR framework for enabling reporting of ESG by value chain partners of listed companies. The BRSR Core mandates the top 150 listed firms by market capitalisation to obtain reasonable assurance on the BRSR Core disclosures from FY 2023-24, progressively extending to top 1000 listed firms by 2026-27. Mandatory assurance is a definitive step to ensure the credibility of ESG disclosures which is an area that has always had concern because there are no standards for self-reporting.^[19]

The regulator of the securities market, Securities and Exchange Board of India (SEBI), has mooted a proposal in which Business Responsibility and Sustainability Reporting (BRSR) can cover material Environmental, Social, and Governance (ESG)-related risks and opportunities in the value chain. The company’s ESG impact transcends its direct operations as it influences the suppliers, distributors, and other business partners. In the event that this proposal is enacted, it would greatly expand the parameters of ESG reporting requirements and would pose compliance challenges for companies with complex global supply chains.

Analysis of SEBI’s ESG Framework.

The BRSR framework, SEBI’s initiative for ESG disclosures of Indian listed entities, represents a significant enhancement in the ESG disclosure requirements and is broadly aligned with international reporting standards. Nonetheless, it has a serious limitation.

To begin with, the framework is essentially disclosure-focused   it requires firms to declare their ESG performance without imposing substantive obligations on companies to attain specific ESG outcomes like emissions reductions, diversity benchmarks or governance reform. The BRSR framework may require fully compliant firms to reveal to the world that they are engaged in environmentally destructive practices and/or that they provide poor labour conditions and/or that their governance structures are inadequate. The disclosure-centred approach assumes that the pressure generated by market forces will induce behavioural change. However, evidence for this assumption is so far limited in India.^[20]

The second drawback is that the framework is limited to ‘listed’ companies, i.e., the top 1000 listed companies by market capitalisation.  Consequently, the overwhelming majority of companies in India, including large unlisted companies and private companies which have significant environmental and social footprints, escape the requirement of ESG reporting. The CSR provisions of the Companies Act have a broader applicability but, discussed above, they only address the spending dimension.

Another major concern is the quality and consistency in BRSR disclosures. Even though SEBI has laid down the reporting format in detail, companies still retain considerable amount of discretion in the selection of data as well as the manner of presentation of the data which makes it difficult to compare companies. The incremental introduction of mandatory assurance through the BRSR Core framework gives partial relief over it, but the underlying issue of standardisation remains unresolved.

Four. Ecological and societal parameters of ESG within Indian statute.

A. Environmental Legislation and The E of ESG

Environmental compliance under the ESG criteria in India is determined by a voluminous body of legislation that has evolved through the years in response to the country’s unique environmental concerns. The key legislation is the Environment ( Protection) Act, 1986 (the EPA). Legislative enactment of this Act occurs after the Bhopal gas tragedy. It provides a framework under which a Central Government can take measures for the protection and improvement of the environment. It also establishes standards of environment quality controls and the regulating of industrial activities.

According to the Air (Prevention and Control of Pollution) Act of 1981 the Central Water Pollution Control Board (CPCB) and State Water Pollution Control Board (SPCBs) are the main regulatory bodies which monitor the air and water pollution in the country.  As per the relevant SPCB, these stipulations mandate industrial players to obtain consent to set up and operate in compliance with the specified emission and effluent standards. As per the EIA Notification, 2006 issued under the EPA, the specified categories of development projects require Environmental Clearance. This clearance is administered through the process of Environmental Impact Assessment (EIA), Public Consultations, and Expert Appraisal.^[21]

The National Green Tribunal Act, 2010 provides for the establishment of a National Green Tribunal (NGT), which is a specialised judicial body set up to ensure the effective and expeditious disposal of cases relating to environmental protection and the conservation of forests and other natural resources. As a potent forum for taking action against issues concerning the environment, the NGT has passed landmark judgments on the issue of corporate environmental response. For instance, orders for cleaning up and compensating damage and complying with conditions of the environmental clearance.^[22]

The Regulatory Dimension On Climate Change Missing.

India’s legislative framework is afflicted with absence of a specific law on climate change, the most critical environmental challenge of the 21st century and the core focus of the environmental pillar of modern day ESGs. Despite Vast Environmental Legislation.avatar India has not yet passed a comprehensive domestic climate change law that would build accountability into its Paris climate commitments, including its Nationally Determined Contribution (NDC) to bring its net-zero emissions target date to 2070, and obligations on corporations to measure, disclose, and reduce their greenhouse gas emissions.

Another key gap relates to lack of mandatory climate-related financial disclosures. This has particular significance in the context of ESG. The TCFD framework has been endorsed or adopted by regulators in the EU, UK, Japan and many other jurisdictions. It provides a structured way of disclosing climate-related risks and opportunities which are financially-material to the corporate bottom line and the long-term sustainability of enterprises. SEBI’s Corporate Governance framework BRSR includes elements regarding climate disclosure but does not incorporate the full TCFD framework and therefore does not require companies to disclose their Scope 3 emissions (indirect emissions from the value chain) which are the largest component of most companies’ carbon footprints.^[23]

B. The S of ESG and Social Legislations

The social pillar of ESG compliance in India relates to a complicated body of labour and social welfare legislation, which has seen significant reforms in recent years. These reformations have taken place through the consolidation of 29 labour statutes into four Labour Codes, which are: the Code on Wages, 2019; the Industrial Relations Code, 2020; the Social Security Code, 2020; and the Occupational Safety, Health and Working Conditions Code, 2020. When fully operational, these Codes will seek to establish a consolidated framework in relation to wages, industrial relations, social security and occupational safety.^[24]

The Labour Codes includes many provisions relating to the social pillar of ESG. These include minimum wage and the right to form trade unions and engage in collective bargaining. One further benefit is social security benefits such as provident fund, employees’ state insurance, maternity benefits, gratuity, occupational safety and health, and regulation of employment of women and young persons. Nevertheless, the Codes faced criticism for weakening certain worker protections. For instance, the threshold for prior government permission for retrenchment and closure was raised from 100 to 300 workers in the Industrial Relations Code. By doing this, the Codes failed to adequately address the informal sector workers who are the majority in the workforce of India.

The NHRC and the state human rights commissions were set up under the Protection of Human Rights Act, 1993, to inquire into human rights violation complaints. The 2013 act on prevention, prohibition and redressal against sexual harassment of women at workplace mandate constitution of internal complaints committees and other activities to prevent and redress sexual harassment by the employer. The Companies Act and SEBI regulations do not specifically include these laws in the corporate ESG compliance framework, even though they contain important social pillar elements.^[25]

IV.  India needs to manage the environment and society writing well to help in ensuring sustainability.

A. The environmental control and E of ESG.

The Indian ESG compliance pillar on the environment is under a wide-ranging piece of legislation that has been developed decades over time in response to the environmental issues unique to India. The Environment (Protection) Act (EPA) 1986 is a simple act on which the later law was based on. It was formed after the Bhopal gas tragedy. It gives a detailed outline of the protection and improvement of environment and gives the power to the Central Government related to the matters therein. To take action to save and better the environment. It also establishes environmental quality and regulates numerous industrial activities with environmental impacts.

They are the Central Pollution Control Board (CPCB) and State Pollution Control Boards (SPCBs) which have been constituted by the Air (Prevention and Control of Pollution) Act 1981 and Water (Prevention and Control of Pollution) Act 1974 respectively, which serve as the main regulatory bodies of air and water pollution in India. That is, these laws require the operators of industries to seek the approval of the concerned SPCB to set up and operate their industries and also to comply with the required standards of emissions or effluents.

The Environmental Impact Assessment (EIA) Notification, 2006, which was introduced in accordance with the stipulations of the EPA, states that certain types of developmental projects should be preceded with the prior environmental clearance (EC). The preceding process consists of  environmental impact assessment, public consultation and expert appraisal.

The National Green Tribunal or NGT has been brought about by the National Green Tribunal Act that was passed in 2010. This is a special judicial institution, which addresses the cases concerning the environmental protection. Nilanjana Bose says that The NGT has taken on a significant role in enforcement of environmental laws and has passed several landmark orders to enforce corporate environmental responsibility. These involve directives to companies to rectify the environmental harm generated by their business, and to adhere to the terms of environmental clearance.^[26]

 

Climate Change: The Regulatory Factor Lacking.

 

There is a large and extensive body of Indian environmental laws. However, it does not have a particular legislation concerning climate change. The greatest environmental threat of the twenty-first century is arguably climate change. It also lies at the heart of the environmental pillar of the majority of modern ESG models. The 2015 UN Paris agreement has involved a number of promises by India concerning climate. These are a NDC (Nationally Determined Contribution) of net-zero emissions by 2070. Nevertheless, there is no domestic climate change legislation that requires compulsory commitments to companies to evaluate, submit information on and decrease their GHG (greenhouse gas ) emissions.

Absence of mandatory climate-related financial reporting is critical and lapse in ESG compliance.  Regulators in the EU, UK and Japan and most other jurisdictions are adopting or endorsing the TCFD framework. In addition, it offers a methodical scheme to reveal climate-related risks and opportunities that are material and financially relevant to the corporate world. The BRSR framework of SEBI includes some aspects of the climate-related disclosures but does not embrace all TCFD framework and does not mandate companies to make disclosure of their Scope 3 emissions (indirect emissions in the value chain) which are the largest portion of carbon footprints of most companies.

B. ESG and S-Legislation in Society.

A multifaceted body of legislation exists in India addressing labour and social welfare that addresses problems associated with work-related human rights abuses. In the past few years, the union and states have been more active in the legislative sphere resulting in a significant reform of the system with the consolidation of 29 labour laws into four Labour Codes that are: Code on Wages, 2019; Industrial Relations Code, 2020; Social Security Code, 2020 and Occupational Safety, Health and Working Conditions Code, 2020 ^[27]

Several provisions of the social pillar of ESG, such as minimum wage, right to form trade unions and to collective bargaining, social security benefits in form of provident fund, state insurance in form of maternity benefits, gratuity and occupational safety and health standards is outlined in the Labour Codes, as well as provisions governing employment of women and young persons. However, some of the provisions of the Codes have been of concern. To illustrate, the increase in the number of employees (retrenchment and closure) required prior government permission under the Industrial Relations Code, which requires 100 employees to 300 employees, undermines some worker protection. They also do not cover the informal sector employees that are predominantly Indian workers.

The Protection of Human Rights Act, 1993, created and gave powers to the NHRC and SHRC of India. It is a human right legislation passed by the Indian parliament. All employers must form Internal Complaints Committees according to the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013. Moreover, prevention and redressal of sexual harassment should also be undertaken by the employer. This law addresses important points of the social pillar but they are not embedded in the corporate ESG compliance that has already been determined by the Companies Act and SEBI regulation

V. Mechanisms of Enforcement and their effectiveness.

A. CSR Responsibilities.

The latest amendments, introduced in 2021, have further imposed the enforcement of CSR obligations more stringent in terms of section 135 of the Companies Act by replacing the comply or explain with consequence on non-compliance. After the amendment of Companies Act 2013, the CSR provisions have been revised and this revision is discussed in Section 135. This section now provides that the unspent  amount shall be transferred to a fund specified in Schedule VII. Section 135(7) also gives that the company in case of failure to transfer the unspent amount to fund as per subsection (5). The punishments shall be a fine of at least fifty thousand rupees to the company. Discaly up to a maximum of twenty five lakh rupees and all the officers in default shall be punable. By imprisonment during a term, not exceeding three years or by fine not less than fifty thousand rupees and. Which may reach five lakh rupees, or both.^[28]

 

The implications are a tremendous tightening of the enforcement framework on CSR compliance. However, the fines are not on the quality or the effects of CSR actions but on the failure to transfer the amounts left over. Any company that engages in CSR expenditure on any current issue regardless of the social impact that they generate; there will be no consequences of non-compliance because compliance is through spending and not results. Such an enforcement model, which is based on expense, creates a compliance attitude towards CSR and not a commitment towards social responsibility.

B. ESG Disclosure Requirements of SEBI.

Implementation of ESG disclosures mandated by BRSR is carried out by the already existing compliance enforcement machinery in respect of listed companies. Any breach of the BRSR requirement to report will constitute a contravention of the LODR Regulations and this could be met with action by SEBI whose action may be in the form of warning, monetary penalty, suspension of trading on some stock exchanges or delisting in extreme circumstances.

However, SEBI has limited ability to implement compliance due to the list of listed companies who are advised to meet BRSR requirements, and the complexity of the regulation of ESG disclosures. The verification dilemma has been given a bit of focus due to the introduction of compulsory assurance under BRSR Core structure. Key disclosures should be assured by the third-party, which should increase their credibility. Nevertheless, it remains in its infancy of implementation and has not demonstrated its worth in enhancing the quality of disclosures.^[29]

It has to comply with the non-financial reporting directive and submit the same to a competent authority.  The existing system can provide vague implications on businesses that are indulging in false or partial ESG reporting – the so-called greenwashing. Absence of anti-greenwashing in the Indian corporate legislation is distinctly unlike the EU scenario whereby the CSRD and the new Green Claims Directive are concerned with misleading sustainability claims.

C. Implementation of the Environmental and Social Laws.

The difference between legal standards and real conformity to standards in the context of the implementation of environmental laws in India is widely incorporated in the application of the Indian environmental laws. The CPCB and SPCBs lack the resources, technical capability and institutional autonomy to monitor and enforce adherence to environmental standards. Research has revealed that a large number of industrial units in India fail to meet the environmental standards. Actually, a large proportion of industrial units are in operation in India without the necessary environmental approvals according to the CPCB itself.^[30]

National Green Tribunal that has evolved to be a more efficient tool in enforcing environmental compliance than the specialised jurisdiction that allow the Tribunal to prosecute companies that indulge in pollution and regulatory bodies who have acted carelessly. The jurisdiction of the NGT is restricted to issues of substantial question of environment and would not be able to check and implement systematically, in the industrial sector.

Application of social laws has the same problems. Labour Inspection System is the main mechanism to track compliance of the labour law in India which is not only not well covered, but also corrupt and ineffective. The introduction of the Labour Codes was replaced by the redesign of the inspection system by the risk-based inspection system which will definitely be an improvement but the implementation is still awaiting.

 

VI Comparative study: International frameworks lessons learnt

A. The European Union: The most comprehensive Framework.

The European Union has the most comprehensive and detailed guidelines on ESG compliance. The combination of mandatory reporting, due diligence and taxonomies of the EU forms a powerful regulatory framework of corporates.

Due to the new Corporate Sustainability Reporting Directive (referred to as CSRD) that will be put in place in November 2022 but will be enforced on financial years starting on 2024, voluntary sustainability reporting by EU companies will be extended and significantly more comprehensive. All large EU companies, and since 2024, all EU-listed companies (except listed micro-enterprises) fall within the scope of the CSRD. This will cover 50,000 companies, as opposed to 11,700 under the non-financial reporting directive in the past. The CSRD introduces the principle of a double materiality.  It makes companies not only report on the manner in which sustainability concerns affect the company financially, but also the way in which the operations of the company affect people and the environment.

CSDDD of 2024, which has become a reality, is the most extensive ESG law globally, with a price of large companies obliging them to carry out human rights and environmental due diligence. The CSDDD requires businesses to identify, prevent, minimize, and disclose negative impacts that their operations, those of their subsidiaries and those of their value chains are inflicting on human rights and the environment. Businesses should adopt transition plans in line with 1.5 degree Celsius of the Paris Agreement. Non-compliance of the companies with the respective due diligence duties will result in the imposition of civil liability under the directive that also establishes direct liability against the victims.

There are some important lessons that the EU can impart on India. India needs to consider implementing the concepts of a double materiality, the existence of a due diligence requirement that goes to value chains, the idea of climate transition planning as a subset of corporate law and civil liability in the case of non-adherence to ESG. Naturally, these will have to be modified to the Indian developmental context.

B. UK Governance-led approach.

The framework of governance-led approach as launched by the United Kingdom to adhere to the ESG regulations is founded on the United Kingdom Corporate Governance Code. It also includes compulsory climate-related financial disclosures, as well. The UK was the  one of the first jurisdictions to mandate TCFD consistent climate disclosure by listed companies large private companies  and financial institutions. The disclosures include governance, strategy, risk management and metrics and targets of climate-related risks and opportunities.

 

The UK Stewardship Code 2020 was published by the Financial Reporting Council. This sets the expectations of the institutional investors that they will factor in the ESG in their investment decision and stewardship. This, in its turn, creates a demand-side pressure on the businesses to enhance their ESG performance. The 2015 Modern Slavery Act requires large companies to publish annual statements on what they have done to prevent modern slavery happening in their operations and supply chains.

The ESG reform model led by governance provided by the UK is quite applicable to India as both nations share the common law heritage.  Furthermore, the UK Corporate Governance Code is slightly analogous to the Indian corporate governance system of the Companies Act and LODR Regulations.^[31]

C. The United States: A battle between regulation and the market forces.

In the United States, the situation is the exact opposite since there is regulatory contention regarding ESG, and the strong political and legal resistance to the mandatory ESG disclosure and compliance provisions. The SEC proposed climate disclosure rule has created a politically disputed legal dilemma, within the context of the overall political polarisation of ESG matters in the United States. Firms would be denoted to undertake various disclosures relating to climate such as the greenhouse gas emissions.^[32]

The United States has a strong market-driven aspect of ESG. The increased appeal of ESG-oriented investment funds, shareholder activism on ESG issues and the development of voluntary ESG reporting frameworks like SASB and GRI have led to a significant market pressure on corporate ESG performance. The experience of the US demonstrates the potential of market-oriented ESG, and its boundaries. Market pressures can entice major listed companies to enhance their ESG performance. The same market forces cannot, however, cause the entire corporate sector to comply.

 VII. CONCLUSION

The paper has critically analyzed how well the current legal and regulatory framework in India is coherent, comprehensive and practically efficient in promoting Environmental, Social and Governance (ESG) goals. The discussion shows that, despite the gradual integration of ESG elements into the Indian legal framework, the existing system is still disjointed, disclosure-focused, and has a narrow scope in its ability to ensure a significant corporate change.

 Firstly, the Indian ESG environment is not coherent but pluralistic in nature. The obligations relating to ESG are spread over a variety of statutes and regulatory regimes, which work in their respective domains and logic. Corporate governance norms are governed by the Companies Act, 2013 which requires Corporate Social Responsibility (CSR) expenditure; the Business Responsibility and Sustainability Reporting (BRSR) framework of the Securities and Exchange Board of India deals with non-financial disclosures of listed companies; environmental compliance is covered by the Environment (Protection) Act, 1986; and labour laws govern Although these frameworks add to the particular pillars of ESG, the lack of a comprehensive and integrative ESG framework leads to the lack of harmonisation. Such structural fragmentation generates overlaps in regulation, interpretational inconsistencies and compliance gaps, thus affecting the effectiveness and predictability of ESG governance in India.

 Second, the Indian ESG regime is more of a disclosure-based regime and not an outcome-focused regime. BRSR framework, especially, is a compliance model that emphasises transparency more than enforceable performance standards. Although disclosure can be enhanced to make information more available, there is no guarantee that companies will change their practices that are damaging to the environment or society. Companies can attain compliance, which is formal and involves the use of elaborate reporting, but still engage in operations that are not aligned to ESG goals. Equally, the CSR framework focuses on compulsory expenditure limits as opposed to quantifiable social impact or sustainability results in the long-term. This generates a check-the-box strategy, where adherence is measured by investment, as opposed to the success or internalization of ESG principles in business strategies. The regulatory belief that market discipline will be created through transparency and will induce responsible behaviour is still doubtful in the Indian environment where the issues of information asymmetry, lack of investor sophistication in ESG analysis, and promoter-controlled corporate structure all weaken the disciplining impact of market forces.

 Third, the institutional and practical limitations to the implementation and enforcement of ESG-related obligations remain very high. Enforcement is also not consistent despite the recent changes in regulation, especially the amendments to the CSR regime of 2021 that have brought more stringent compliance and penalties. Regulatory bodies usually have capacity, technical and resource constraints, in order to effectively monitor and verify. There are also similar problems with environmental and labour law enforcement mechanisms, particularly, bureaucratic inefficiency, poor inspection regimes and lack of consistency in their application across jurisdictions. Here, the lack of strong verification mechanisms and the continued existence of regulatory uncertainty open up opportunities to token compliance and the presentation of exaggerated or deceptive ESG credentials, often called greenwashing.

 Moreover, it is not clear how effective recent ESG initiatives, especially the forced implementation of BRSR by the top listed companies, can be over the long term. Since these frameworks are quite new, there is a lack of empirical research evaluating their effectiveness in corporate behaviour, stakeholder performance or financial performance. The larger business argument of ESG in India, that is, whether or not compliance with ESG principles increase profitability, risk management, or long-term value creation, needs to be empirically investigated. In the absence of such evidence, ESG compliance may easily seem as a regulatory liability, as opposed to a strategic necessity.

 Notably, being a developing economy, India adds another layer to the design and implementation of ESG norms. The nation still struggles with critical developmental needs such as poverty reduction, creation of jobs, development of infrastructure, and industrialization. Such socio-economic factors frequently require a moderated attitude to ESG regulation, striking the balance between sustainability goals and developmental aims. As a result, the ESG structures in India cannot be imported wholesale out of the developed jurisdictions but they need to be modified to incorporate realities and limitations in India.

 Lastly, the institutional investor factor, especially public sector financial institutions play a major but unexplored aspect of ESG governance in India. Institutional investors have the potential to have a strong impact on corporate ESG behaviour through various mechanisms to include, but not limited to, stewardship, shareholder activism, and investment screening. Nevertheless, there is a limited involvement of such actors in ESG considerations in India and this would be an area of additional scholarly and policy interest.

 In sum, although the changing ESG system in India is an important move toward responsible and sustainable corporate governance it is limited by its lack of cohesion, over-reliance on disclosure-based compliance, and the ineffective enforcement mechanisms. To realise the transformative effect that ESG is meant to have, a more integrated regulatory architecture, greater institutional capacity, and a shift to outcome-based standards with a more emphasis on measurable environmental and social performance are necessary. Also, the context-sensitive policy framework, backed by empirical research and active stakeholder involvement will play a crucial role in ensuring that ESG values are successfully integrated into the corporate and developmental environment of India.

^[1] P. Bansal & H. Song, An Evolving Stakeholder Framework in Business and Society, 35 Bus. & Soc’y 223, 228 234 (2017); Organisation for Economic Co-operation and Development (OECD), OECD Guidelines for Multinational Enterprises on Responsible Business Conduct 12 18 (2023).

^[2] The Companies Act, 2013, No. 18 of 2013, § 135 (India); Securities and Exchange Board of India (SEBI), Circular No. SEBI/HO/CFD/CMD-2/P/CIR/2021/562 (May 10, 2021).

^[3] S. Mukherjee, SEBI’s BRSR Framework: A Critical Analysis, 30 Indian J. Corp. Gov. 89, 94 98 (2023).

^[4] Directive (EU) 2022/2464 of the European Parliament and of the Council (Corporate Sustainability Reporting Directive), 2022 O.J. (L 322); International Sustainability Standards Board (ISSB), IFRS S1: General Requirements for Disclosure of Sustainability-related Financial Information (2023).

^[5] Umakanth Varottil, Corporate Governance in India: Change and Continuity 112 145 (Cambridge University Press 2022).

^[6] Afra Afsharipour, Corporate Governance and Corporate Social Responsibility: Emerging Markets Focus 78 95 (Emerald Publishing 2020).

^[7] A. Sharma & V. Khanna, Mandatory CSR in India: Compliance or Commitment?, 28 J. Corp. L. Stud. 145, 152 158 (2022).

^[8] D. Dharmapala & V. Khanna, The Impact of Mandated Corporate Social Responsibility: Evidence from India’s Companies Act, 56 J.L. & Econ. 451, 462 470 (2020).

^[9] Mukherjee, supra note 3, at 95 101.

^[10] R. Balakrishnan & K. Iyer, ESG Disclosure Practices Among Indian Listed Companies, 22 J. Corp. Fin. 234, 242 248 (2023).

^[11] Ministry of Corporate Affairs, National Guidelines on Responsible Business Conduct 8 22 (2019).

^[12] The Companies Act, 2013, No. 18 of 2013, § 135(1) (2) (India); The Companies (Corporate Social Responsibility Policy) Rules, 2014 (as amended 2021), rr. 2 4.

^[13] The Companies Act, 2013, No. 18 of 2013, Schedule VII (India).

^[14] Sharma & Khanna, supra note 7, at 155 160; Dharmapala & Khanna, supra note 8, at 465 472.

^[15] G. Serafeim, Public Sentiment and the Price of Corporate Sustainability, 49 Fin. Analysts J. 28, 32 38 (2020).

^[16] The Companies Act, 2013, No. 18 of 2013, §§ 149, 177, 178, 134(3)(p) (India).

^[17] SEBI, Circular No. SEBI/HO/CFD/CMD-2/P/CIR/2021/562 (May 10, 2021).

^[18] Ministry of Corporate Affairs, supra note 11, at 12 20.

^[19] SEBI, Circular No. SEBI/HO/CFD/CFD-SEC-2/P/CIR/2023/122 (July 12, 2023).

^[20] Balakrishnan & Iyer, supra note 10, at 245 250; A. Raghunandan & S. Rajgopal, Do ESG Funds Make Stakeholder-Friendly Investments?, 26 Rev. Acct. Stud. 822, 830 838 (2021).

^[21] The Environment (Protection) Act, 1986, No. 29 of 1986, §§ 3, 6, 7, 25 (India).

^[22] The National Green Tribunal Act, 2010, No. 19 of 2010, §§ 14 16 (India); Indian Council for Enviro-Legal Action v. Union of India, (1996) 3 SCC 212 (India).

^[23] Task Force on Climate-related Financial Disclosures (TCFD), Final Report: Recommendations of the TCFD 14 25 (2017); R. Nair & J. Thomas, Environmental Regulation and Corporate Compliance in India, 18 Indian J. Env’t L. 67, 75 80 (2021).

^[24] The Code on Wages, 2019, No. 29 of 2019 (India); The Industrial Relations Code, 2020, No. 35 of 2020 (India); The Social Security Code, 2020, No. 36 of 2020 (India); The Occupational Safety, Health and Working Conditions Code, 2020, No. 37 of 2020 (India).

^[25] The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013, No. 14 of 2013 (India); The Protection of Human Rights Act, 1993, No. 10 of 1994 (India).

^[26] The Companies Act, 2013, No. 18 of 2013, § 135(7) (as amended by the Companies (Amendment) Act, 2020) (India).

^[27] SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, rr. 34, 46, 98.

^[28] Directive (EU) 2022/2464, supra note 4, recitals 35 38.

^[29] Vellore Citizens Welfare Forum v. Union of India, (1996) 5 SCC 647 (India); M.C. Mehta v. Union of India, (1987) 1 SCC 395 (India).

^[30] Directive (EU) 2022/2464, supra note 4, art. 19a; Directive (EU) 2024/1760, arts. 4 11.

^[31] UK Modern Slavery Act 2015, c. 30, § 54; Financial Reporting Council, The UK Stewardship Code 5 12 (2020).

^[32] Securities and Exchange Board of India (SEBI), Consultation Paper on ESG Disclosures, Ratings and Investing 18 25 (Feb. 2023)