What is ESG?

ESG or Environmental, Social and Governance criteria are the new parameters that the corporate world is struggling to meet. These are basically a set of standards that tell about the social consciousness of a company rather than discussing its balance sheet. ESG is prevalent in these times due to the rising problem of climate change, environmental hazards, and other eco-system problems that are creating a negative impact on society.¹ Corporates and businesses are the important key players when it comes to understanding the cause behind the rising environmental problems. So, in order to analyze and measure the effect of a company on the environment, the ESG norms and regulations are being seen as criteria to judge how a company safeguards the environment, including corporate policies addressing climate change, energy resources, etc. It also provides information on how each company is contributing to a certain level of hazards to the environment. Nonetheless, the companies try to escape these ESG declarations as they fear a negative impact on their business. However, some countries have now brought laws that have made ESG disclosures mandatory practices. A few laws of different jurisdictions are discussed in this article that have been brought into action recently.

UK

In the month of January, 2022, the UK has come up with two new regulations that promote ESG concerns within the companies via amending the Companies Act, 2006. The regulations are the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022² and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022³ These regulations obligate a category of companies, LLP, etc to provide climate-related financial disclosures in their strategic report. Under these laws, all those companies will be under its ambit which are having high turnover i.e. company having an aggregate turnover of more than  £500 million net and they may have more than 500 employees working under them. 

Under these laws, climate-related financial disclosures are provided in Section 414CB of the Companies Act which majorly means a description of the company’s governance arrangements and description of how the company identifies, assesses, and manages climate-related risks and opportunities. Further, it also includes a description of how processes for identifying, assessing, and managing climate-related risks are integrated into the company’s overall risk management process. Other than that, it focusses on describing the actual and potential impacts of climate-related risks and a description of the targets used by the company to manage climate-related risks. Other ancillary things are also provided in the definition. So, basically, the effect of this law is to understand the companies’ plan for identifying, controlling, and measuring climate-related issues.  As this compliance is mandatory, it is definitely a move towards creating alertness within the environment of corporates that the task of profit-making should not come at a cost of creating a problem for the world to solve.  Thus, UK has now set a precedent for other countries to follow in regard to integrating ESG within the companies. 

Germany
In a similar move, Germany has also joined the list of countries that are bringing new laws to tackle the problem of climate change by reforming business practices. Germany’s new Supply Chain Act named “Lieferkettengesetz” necessitates companies to fulfill their due diligence compliance by watching their supply chains for human rights violations and further ensuring compliance with certain environmental standards.⁴ The law would take effect from the 1st of January, 2023, and it will be applicable to any company in Germany that is either seated there or has a branch with more than 3,000 employees in Germany. The Act would be extended to companies with even 1,000 employees by the year 2024.⁵ 

The Act’s focus is on Supply Chain that shall include all steps starting from extracting raw materials to manufacturing products and providing services, and even delivery to the end customer. Companies have to ensure due diligence in taking appropriate steps to monitor, aggregate and report the relevant documentation to verify human rights and environmental compliance while their business functioning. Environmental compliance includes the prohibition of causing harmful soil contamination, water, and air pollution, harmful noise emissions or excessive water consumption, etc. This is done to identify, prevent, and minimize the risk of environmental damage as well as a human rights violation.⁶

The Act provides for the necessary preventive and remedial measures for the company to follow. In case, the company violates its due-diligence compliance, it would have to face a fine upto EUR 8 million depending on the nature and gravity of the violation. Moreover, those companies having more than €400 million in turnover would be fined up to 2% of their turnover. 

Europe
In 2019, EU Parliament has adopted the sustainability‐related disclosures in the financial services sector regulation (the SFDR)⁷ which was made applicable to certain financial services sectors from the year 2021. SFDR is seen as a keystone in the European goal of sustainable finance agenda. Under SDFR, transparency is brought to understand companies’ participation in fighting greenwashing. The aim of SDFR is to provide sustainability disclosure obligations on the environmental and social impact of a business, and requirements on how to present the characteristics of green investment products. The objective is to take into account the company’s role in undertaking ESG factors in their decision-making around investments. At the foundation level, the SDFR obligates market participants to identify and publish information about how they account for “sustainability risks” in their investment advice or decision-making. The sustainability risk means an ESG event or condition which can negatively impact the value of the investment.⁸ Hence, the companies are under the ESG disclosure obligation to be more cautious about the ways they deal in marketing the investment and to be more transparent with the ESG events creating awareness and producing more sustainable investment products. 

India

In India, there is no single legislation that deals with the concept of ESG thoroughly. However to locate, principles to protect the environment and sustainability can be found in different legislations and regulations. Firstly, section 166(2) of the Companies Act, 2013 which deals with the duties of directors has provided that the director of a company shall act in good faith in order to protect the environment. Further, while interpreting this section, the Supreme Court of India in the case of M.K Ranjitsinh vs Union of India⁹ has held that it is the responsibility of the Director to not only take action in the best interest of the company but has to also protect the environment. The court held that the word environment though not defined in the Companies Act has to be given the meaning assigned to it under the Environment (Protection) Act, 1986 under Section 2(a).

Secondly, under Rule 8 of the Company’s Account Rules, 2014¹⁰ which deals with the matters to be included in Board’s report has mandatorily provided information related to steps taken or impact caused on the conservation of energy, steps taken by the company for utilizing alternate sources of energy, and the capital investment on energy conservation equipment has to be included in the report. 

Other than that, the Business Responsibility and Sustainability Report (BRSR) has been introduced which is a comprehensive reporting framework and focuses on measurable key performance indicators across principles of the National Guidelines on Responsible Business Conduct (NGRBC).  NGRBC, 2018 is an improved version of the National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business, 2011.¹¹ NGRBC aims to protect, respect, and remedy the ecosystem in tune with UN Guiding Principles on Business and Human Rights. Through, BRSR, the top 1000 listed companies are mandated to report on such ESG parameters. So via this BRSR, it is intended towards having quantitative and standardized disclosures of ESG parameters to enable comparability across companies. Another objective of BRSR is to encourage stakeholders to look beyond the financial capabilities of the company and focus on social and environmental impacts. Similarly, other rules and regulations have been framed in this regard however no comprehensive regulation is available. 

ESG as a Responsibility
One cannot deny that giving adequate focus on ESG is now the need of the hour. For holistic and sustainable development, only the government cannot be an active participant. The companies also have to play a crucial role in achieving sustainable goals. It is now required that the concept of ESG must be brought into action and enough reliance is placed on judging the companies by looking to their ESG mandates. The stakeholders and the consumers also have to play a responsible role in having an opinion on a company. The profit and loss account and the financial capacity can be important factors but should not be the sole factor to rate a company. ESG compliances, norms, and future aspects of a company to fulfill the same have to be also taken into consideration to make any opinion for trusting a company and seeing its longevity in the corporate world.

 Although, ESG compliances would raise critical challenges for the company to adopt its technicalities and trivialities in its functioning as it drives the company away from its traditional lifestyle to a sustainable lifestyle, nonetheless, the same cannot be ignored and left for voluntary obedience. The government and the lawmakers must be progressive to bring comprehensive laws in motion for the companies to push them closer to ESG compliance, however, the same has to be done in a way that is easily adaptable by the companies and is also rewarding in nature.