THE RISE OF THE ESG REGULATIONS

Over the last decade, regulators and corporations around the world have embraced the idea of ESG (Environmental, Social and Governance).

What is ESG (Environmental, Social, and Governance)?

  • ESG is a framework that helps stakeholders understand how an organization is managing risks and opportunities related to environmental, social, and governance criteria.
  • ESG takes the holistic view that sustainability extends beyond just environmental issues.
  • Environmental factors refer to an organization’s environmental impact(s) and risk management practices.

These include:

  • direct and indirect greenhouse gas emissions,
  • management’s stewardship over natural resources, and
  • the firm’s overall resiliency against physical climate risks (like climate change, flooding, and fires).

Social

The social pillar refers to an organization’s relationships with stakeholders.

Examples:

human capital management metrics (like fair wages and employee engagement)

an organization’s impact on the communities in which it operates.

Governance

Corporate governance refers to how an organization is led and managed.

Example:

  • How leadership’s incentives are aligned with stakeholder expectations,
  • how shareholder rights are viewed and honored, and
  • what types of internal controls exist to promote transparency and accountability on the part of leadership.

Relevance of ESG for India:

  • India has long had a number of laws and bodies regarding environmental, social and governance issues, including:
  • the Environment Protection Act of 1986,
  • quasi-judicial organisations such as the National Green Tribunal,
  • a range of labour codes andlaws governing employee engagement and corporate governance practices.
  • The Securities and Exchange Board of India (SEBI) revised the annual Business Responsibility and Sustainability Report (BRSR).
  • It was a notable departure from previous disclosure requirements.
  • New disclosures range from greenhouse gas emissions to the company’s gender and social diversity.
  • Reserve Bank of India announced recently that it would be auctioning ₹80 billion ($981 million) in green bonds.

Implications for Indian companies

Compliance:

In particular, compliance by Indian companies with the ESG regulations of the U.S., the U.K., the European Union and elsewhere will be critical if India is to take full advantage of the growing decoupling from China and play a more prominent role in global supply chains and the global marketplace overall.

Due diligence:

  • As Indian companies look to expand their ESG risk management, thorough due diligence will play a key role.
  • Due diligence that can stand up to scrutiny means going deeper.

This can include:

  • looking at company records,
  • interviewing former employees and
  • making discreet visits to observe operations to ensure that the measures to comply with international ESG standards are in effect.
  • Companies that wish to maximise their opportunities in the global economy need to embrace these new requirements and adjust their organisations accordingly.


SOURCE: THE HINDU, THE ECONOMIC TIMES, PIB

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