ESG Regulation Vs Sustainable Development

ESG Regulation Vs Sustainable Development

Mains Exam: General Studies Paper 3

(ESG Regulation for Environmental Protection)

August 03, 2023

In News:

  • These days ESG i.e. environmental, social and administrative regulation is in news from corporate world to G-20 events.
  • ESG rules are definitely discussed in every discussion from climate conference to zero carbon emission every year.

What is ESG Regulation:

  • ESG goals are a set of standards for a company's operations that compel companies to follow good governance, ethical practices, eco-friendly measures and social responsibility.
  • Environmental criteria consider how a company performs as a steward of nature.
  • Social benchmarks examine how it manages relationships with employees, suppliers, customers and the communities in which it operates.
  • Governance deals with company leadership, executive pay, audits, internal controls and shareholder rights.

ESG Policy Initiatives:

  • At present, governments around the world are making policies and legal framework regarding ESG.
  • ESG's policy initiative is being considered as an effective way to get rid of the climate crisis.
  • It is being implemented in the country in the form of Corporate Responsibility and Sustainability Declaration (BRSR).
  • In the last financial year, the Securities and Exchange Board of India (SEBI) has made BRSR mandatory for one thousand listed companies.

ESG policy initiatives will enable the following essential information to be obtained:

  • ESG announcements will show what the company has done on the criteria of environment, society and governance.
  • On the environment front, companies will tell how green their economic activities are.
  • What is the level of share of renewable energy in electricity consumption.
  • What measures are being taken for energy efficiency.
  • What steps have been taken by the company for circular economy including water conservation, solid and liquid waste management.
  • Whether the company promotes recycling of e-waste. The company will have to answer many such questions related to environmental protection under BRSR.

Social claims related to ESG policy initiatives:

  • The second criterion of ESG is related to social claims. In this, companies will give information about gender equality in the workforce.
  • Companies will also put the level of implementation of child labor eradication, disabled people and maternity leave in front of the people.
  • It aims to increase the participation of women and persons with disabilities in the workforce of companies. Along with this, the government also has to strengthen linguistic and geographical diversity in public and private sector.

Claims related to internal governance in ESG:

  • The final ESG standard will address the issue of internal governance by the company to prevent corruption and illegal activities.
  • What is the level of involvement of digital infrastructure in the functioning of the company, many such required information will be made available to the common man by the bodies.

Demand for ESG rating provider firm increased in India

Analysis:

  • With the advent of BRSR in India, the demand for ESG rating provider firms has increased. Recently SEBI has presented the Credit Rating Agencies (Amendment) Regulation-2023. Through this, basic infrastructure has been developed to provide ESG rating to any company. However, there is a question as to how reliable the claims made by the companies and the ratings they get on the issue of environment, society and governance will be.
  • Actually, false claims related to the environment have become a problem for governments around the world in the past few times. Planting places more emphasis on photographing than planting and taking care of them. Vegetables, lentils, rice, flour, toothpaste, everything is said to be green, be it the neighborhood grocery store or shopping mall. From personal cosmetics to aviation companies, there is a competition to describe themselves as eco-friendly. The question is, what is the reality of these eco-friendly claims being presented before us? These questions are also necessary to encourage honest efforts related to beautifying the earth.
  • 'New Climate Institute' and 'Carbon Market Watch' have presented a report on false declarations related to the environment. It examines the eco-friendly claims made by 24 of the world's top companies on their products and services. The report states that fifteen companies made false and misleading claims about their products and services. The propaganda they did to make their business activities eco-friendly was far from the truth. Twelve companies made false claims about 'decarbonization', while thirteen out of twenty-four companies do not have any concrete plans for biofuels. Only fourteen companies adopted a strategy to reduce emissions from electricity consumption. Obviously, the regulation of ESG can be made effective only by making it transparent.
  • In such a situation, the biggest challenge before the market regulator is that the companies providing ESG ratings cannot manipulate the data. The United Nations has also expressed concern over false claims related to environmental protection by companies.
  • According to the Economic Survey 2023, ESG announcements end the atmosphere of uncertainty in front of investors. However, this is possible only if ESG initiatives are not treated as formalities or rituals like CSR. The game of misappropriation of CSR funds is not new in the country. Even the concerned agencies of the central government have tried to attack this illegal nexus of NGOs and corporates in the last few years.

Significance of ESG Initiatives:

  • ESG policy initiatives will be helpful in achieving the Nationally Determined Contribution target. This will encourage environment friendly products and services.
  • Companies will be encouraged to invest in green projects only on the basis of ESG rating.
  • This will make business activities environment friendly.
  • In a country like India, it can also prove to be a good initiative from the point of view of social empowerment.
  • ESG rating will help companies to plan long term investment strategy.
  • This will bring us closer to the seventeen sustainable development goals set by the United Nations. If the risks arising in front of investment are reduced, then the entire chain of production and distribution becomes sustainable.

Way Forward:

  • ESG regulation is being treated broadly like the Social Responsibility (CSR) program already implemented. Although the form of both may be different, but they should complement each other, so that the path of ease of doing business in true sense will also be easy. Experts recommend that ESG ratings be linked to the financial performance of companies.
  • Some time ago the country's largest industrial house set a target of making its business activities zero carbon emitter by 2030. Other public and private sector companies should also set such targets.
  • A few days ago, the Ministry of Environment, Forest and Climate Change has launched the Green Credit Program. Under this, any person and institution will be able to earn green credit. Exchange of green credits will also be possible. It is to be implemented region-wise in a phased manner. It includes tree plantation, water conservation and harvesting, natural agriculture, soil conservation, waste management, air pollution, sustainable building and infrastructure and mangrove conservation. There is a need to integrate other similar initiatives with environmental, social and governance (ESG) regulation.
  • Individuals and companies should also look at this initiative related to environment and social empowerment from the perspective of long term benefits. Ultimately, this will benefit the health of the planet as well as the entire chain of production and distribution.

Conclusions:

  • ESG initiatives bring long-term benefits to companies. However, any green initiative comes with an initial cost. In such a situation, companies should be given tax exemption or green incentives on better ESG rating. The industry's concern over the ESG skills shortage is understandable. Indian Institute of Management Ahmedabad has launched a new course on ESG. There is a need to start such courses at the university level soon. Basic knowledge of ESG regulation should also be given from courses related to environment, social work and finance. This will increase both new employment opportunities and awareness.

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Mains Exam Question

What is ESG Regulation? Discuss the major claims related to ESG regulation.