India’s regulators are finally attempting to improve the country’s sustainability reporting regulations to reflect global best practice. There is palpable change in the mindset of India’s business community as well, who are keen to attract capital from foreign investors bound by stringent sustainability disclosures back home. But there is still a long way to go. This is early stage, and the lack of uniform legislation or a coherent framework means investors still need to navigate an array of compliance obligations with varying levels of sophistication, disclosure requirements and sector-specific considerations.
Winds of change
India’s financial regulatory agencies like the Securities and Exchanges Board of India (SEBI; markets regulator), and the Reserve Bank of India (central bank), have enhanced existing frameworks governing sustainability reporting, rating methodologies and green finance. While these go some way to defining the ESG regulatory landscape, promoting sustainability in operating practices and aiding reduction of emissions intensity in the economy, they lack uniformity and are not wide-ranging with regards applicability and enforcement, posing operational and integrity challenges for investors.
The Matrix
India does not have a standard framework for ESG reporting and disclosures at present, nor does it have any overarching ESG-specific legislation. Instead, multiple laws and regulations seek to address ESG-related matters, creating a kind of matrix of direct and indirect compliance requirements that are monitored across various ministries and regulatory agencies.
The National Voluntary Guidelines (NGVs) on environmental, social, and economic responsibilities, published by India’s Ministry of Corporate Affairs in 2011, marked the first ever requirement for businesses to demonstrate responsible conduct. A year later, SEBI notified India’s 100 largest publicly listed companies to publish annual reports comprising NGV-related performance. This was extended to the 500 largest publicly listed companies in April 2022, and rebranded as Business Responsibility and Sustainability Reporting (BRSR) regulation.
Starting 1 April 2023, SEBI made it mandatory for the 150 largest publicly listed entities to report on business responsibility and sustainability practices using a core framework comprising a set of 42 Key Performance Indicators (KPIs) for mandatory reporting in annual reports. It also requires prospective investors to obtain assurances on KPIs from accredited ESG ratings providers on country-specific parameters, such as emissions reductions, stakeholder interests, workforce safety, and leadership and governance. Shortly after, SEBI mandated the BRSR Core framework (as sub-set of the BRSR) for the same entities, to provide assurances for nine KPIs in their value chain, i.e., those entities that cumulatively comprise 75% of the listed entity’s purchases or sales. SEBI is likely to extend the regulation to the 1,000 largest publicly listed companies by 2027.
Separately, the federal and state governments have also recently introduced various ESG related policies that are applicable across a range of sectors but driven largely by the need to meet the country’s short and long-term emission reductions targets. These include the 2022 Energy Conservation Act, which requires power-intensive sectors like manufacturing, infrastructure, automotives and real estate to source part of their power needs from green energy sources and electric-vehicle adoption regulations. The federal government in June also approved a domestic carbon credit market, which will start mandatory trading for carbon credits in 2025 for energy intensive sectors like petrochemicals, iron, and steel.
These rest on top of existing laws that speak to the ‘E’, ‘S’ and ‘G’ factors of ESG, such as those governing environment protection, waste and pollution control, labour welfare, and anti-bribery and corruption, which sit with various ministries and state governments, and carry their own compliance requirements.
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Problem statement
The BRSR is the most advanced ESG disclosure requirement in India. It mandates reporting on business stability, growth and sustainability practices across operations. However, private companies and smaller publicly listed entities are not required to comply, but can follow the rules voluntarily, leaving room for discretionary parameters and reporting standards. Notably, there is varied reporting compliance in the existing pool too. For example, in FY2021-22, SEBI noted that 328 of 500 companies that were required to follow a structured approach to report on sustainability related activity failed to do so, presumably because of the nascency of the regulation and its enforcement, and teething issues among businesses. SEBI remains hopeful that its framework will have a trickle-down effect on entities not covered in the mandate, lend credibility to ESG rating providers and methodology, and minimise risks of greenwashing. Coupled with the BRSR’s low take up, other regulations are either archaic, lack uniform applicability, or emphasise self-disclosure without effective deterrents such as hefty penalties or prosecution.
Moreover, these requirements are entity-specific and reporting disclosures, including for investment due diligence, do not necessarily require comprehensive assessments of the broader environmental and socio-political dynamics in the jurisdictions of proposed investment and business activity. This can potentially create blind spots for investors, who may have to use additional methods to gain a deeper understanding of the environments they seek to operate in, particularly when mapping materiality issues to proposed investments, and stakeholder interests and concerns. Complex bureaucracy, varying ethical standards and a slow pace of reforms, particularly on labour, land, and environment protection, means that investors need to carefully consider and understand the operating environment of their proposed investments to minimise operational and reputational risks.
Implications
Even as progress will remain protracted and inconsistent in the next 2-3 years, the trend towards enhancing ESG purviews will continue. Notwithstanding the confusing matrix of India’s ESG regulatory matrix, and the poor enforcement of current rules, businesses – particularly those operating in energy intensive sectors like infrastructure, petrochemicals, manufacturing coal and steel – would be wrong to be complacent over the government’s commitment towards improving the ESG regulations landscape.
Foreign investors that stay ahead of the regulatory curve are likely to be better prepared to respond to changes in regulation in a timely and cost-effective manner and mitigate reputational risks. This means identifying material issues to businesses and proposed investments, monitoring local regulatory trends, and engaging with domestic players and regulators to ensure that ESG frameworks are guided by practical realities.