RELEVANCE OF ESG REGULATIONS IN INDIA

RELEVANCE OF ESG REGULATIONS IN INDIA   I RACE IAS : BEST PCS Coaching in Lucknow  I  Current Affairs

 

Main Exam: General Studies-2

(Indian Governance)

Context:

  • In recent years, investors have become more aware of the importance of ESG criteria in their investment decisions. As a result, many businesses have begun to integrate ESG into their operations and business strategies.
  • Regulators and corporations have adopted environmental impact, commitment to social issues, strengthening of corporate governance and protection of shareholders' rights as core components in their business models.

Key points:

  • Companies realize that investors need to incorporate environmental, social and governance (ESG) considerations into a company's risk profile to properly evaluate the enterprise.
  • However, the development of ESG laws and regulations is still at a nascent stage in India, with the focus often being on providing protections in relation to the environment or workplace conditions.
  • In this regard, the Securities and Exchange Board of India (SEBI) has substantially revised the Annual Business Responsibility and Sustainability Report (BRSR) required of the 1,000 largest listed companies in India.

About ESG:

  • ESG stands for: "Environmental, Social and Governance".
  • The term ESG was coined by the Global Compactin the year 2004.
  • ESG is described as a set of principles (policies, processes, metrics, etc.) that organizations apply to limit negative impact or enhance positive impact on the environment, society and governance bodies.
  • It refers to a set of non-financial measures that reflect a corporation's impact on the environment and society.
  • ESG can be considered a subset of sustainability, which is defined by the United Nations World Commission on Environment and Development as 'meeting the needs of present generations without compromising the ability of future generations to meet their own needs'.
  • Investors and stakeholders look at three key factors when evaluating a company's sustainability and social impact under ESG.
  • Environmental Factors: This relates to the company's impact on the natural environment, including energy use, greenhouse gas emissions, waste management and resource consumption.
  • Social factors: This refers to the company's impact on society, including relationships with employees, customers, suppliers and communities.
  • Governance Factors: This focuses on the company's management and decision-making structures, including board composition, executive rules and transparency.

 

Functioning of ESG:

  • ESG serves as an evaluation technique that takes into account environmental, social and governance issues. In the private sector there is a set of ESG criteria that are used to evaluate company risks and practices.
  • ESG frameworks are important for sustainable investing because they can help individuals or other corporations determine whether a company is aligned with their values, as well as analyze the ultimate value of a company for their purposes.

Significance of ESG:

  • ESG covers issues that are, for the most part, long-term considerations.
  • ESG risks are similar to other business risks in that they are important to understand, identify, quantify and manage, but some ESG risks have the added complexity of being unpredictable.
  • Another characteristic of ESG risks is that they can be very costly.
  • Some examples of ESG risk management include assessing climate change risks to regular operations, assessing workplace culture, company diversity, etc.
  • ESG risk management supports sustainable, long-term growth by actively evaluating potential issues.
  • Early knowledge of ESG potential risk provides more time to adapt and develop cost reduction strategies.
  • The quality of a company's ESG-related risk management is critical for investors to evaluate its overall risk and return.
  • ESG integration deals with identifying ESG risks and implementing policies that will help in setting and achieving ESG goals.
  • For investors, ESG integration often means defining ESG criteria that will help assess and evaluate companies and their risk profiles.
  • Some of the most commonly used ESG frameworks and standards include the following:
  • Global Reporting Initiative (GRI)
  • Carbon Disclosure Project (CDP)
  • Climate Disclosure Standards Board (CDSB)
  • Sustainability Accounting Standards Board (SASB)
  • Task Force on Climate Related Financial Disclosure (TCFD)
  • United Nations Principles for Responsible Investment (PRI)
  • World Economic Forum (WEF) Stakeholder Capitalism Metrics

Difference between ESG and CSR:

  • India has a strong Corporate Social Responsibility (CSR) policy which obliges corporations to engage in initiatives that contribute to the welfare of society.
  • This mandate was codified into law with the passage of the 2014 and 2021 amendments to the Companies Act of 2013 which required:
  • Companies with a net worth of ₹500 crore (approximately $60 million) or a minimum turnover of ₹1,000 crore (approximately $120 million) or a net profit of ₹5 crore (approximately $6,05,800) in any financial year.
  • Companies spend at least 2% of their net profit in the last three years on CSR activities.

Relevance of ESG in India:

  • There are many laws and bodies in India with respect to environmental, social and governance related issues
  • New initiatives in India establish guidelines that emphasize monitoring, quantification and disclosure similar to ESG requirements found in other parts of the world.
  • Compliance with ESG regulations from other parts of the world will be crucial if India is to take full advantage of its growing isolation from China.
  • ESG compliance can play a more prominent role in global supply chains and the global marketplace as a whole.

Implications for Indian companies:

  • Compliance with ESG regulations presents a positive change as compared to CSR regulations in India.
  • ESG will play an important role in expanding risk management with thorough due diligence.
  • Companies wishing to maximize their opportunities in the global economy need to adapt to these new requirements and adjust their organizations accordingly.
  • Indian companies looking to expand their ESG risk management need to conduct thorough due diligence that can stand up to scrutiny.
  • It is the practice of making investments that not only generate financial returns, but also create positive social and environmental impacts.

Way Forward:

  • Environmental, social and governance (ESG) factors are a very important consideration for investors and stakeholders when evaluating a company's sustainability and social impact.
  • The evolution of ESG laws and regulations requires controls and disclosures that are hallmarks of contemporary ESG regulation.
  • There is also a need for legislation by the Government of India on ESG issues, which can be seen in India's more active role in global climate fora and in securing sustainable growth in today's business landscape.

Conclusion:

  • In short, no company can prosper unless it involves the community and the people around it. So companies need to play an active role in the community apart from making profit.

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Source: The Hindu

Main. Exam Question:

What is ESG? Write the importance of ESG in the context of India