Answer ... The regulatory framework in India governing ESG issues is not codified under consolidated legislation. Instead, a plethora of laws address ESG-related matters that apply to the operations of corporate entities in India (collectively, ‘the ESG framework’), covering issues such as:

• environmental protection (eg, the Environment Protection Act, 1986; the Water (Prevention and Control of Pollution) Act, 1974);
• employee benefits (eg, the Factories Act, 1948; shops and establishment laws; bonus and gratuity laws); and
• corporate governance (eg, the Prevention of Money Laundering Act, 2002; the Prevention of Corruption Act, 1988; the Companies Act, 2013; the Securities and Exchange Board of India (SEBI) Act, 1992).

The Indian government has recently formulated four consolidated labour codes – governing wages, social security and working conditions – in a bid to address contemporaneous concerns in the workforce. It is proposed that these labour codes will be adopted as part of state laws, with a phase-wise implementation beginning on 1 July 2022. While the codes mandate routine reporting to the regulators, only a small portion of this information is accessible to shareholders or the public in general.

Notably, certain parts of the ESG framework – specifically, the laws relating to the environment – have not been periodically updated to reflect contemporary sustainability standards. The Indian environmental laws may thus require a considerable overhaul, given India’s emission reduction targets under various international agreements.

Answer ... The ESG framework is a mix of hard law and codes of governance, which in some cases remain voluntary. Compliance with the ESG framework is mandatory for some entities, with the extent of the obligations under the framework depending on the size of the relevant entity.

For example, the Companies Act, 2013 mandates stricter governance control measures for larger companies, determined on the basis of paid-up share capital, net worth turnover or profit thresholds. Further, companies that meet certain turnover, net worth or profit thresholds must spend at least 2% of their average net profits from the previous three financial years on corporate social responsibility initiatives. Under the Environment Protection Act, 1986, industries are categorised according to their pollution load (ie, the extent of pollution that results from their operations) as Red, Orange, Green or White, in decreasing order. Industries with high pollution loads are not permitted to operate in ecologically sensitive areas.

The only mandatory reporting obligation of Indian companies is under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which apply to the top 1,000 companies listed on Indian stock exchanges, based on market capitalisation.

In addition to regulatory prescriptions, the government has been introducing soft measures to facilitate sustainable business, incentivising a greater focus on renewable energy and more sustainable means of doing business through policies, subsidies and favourable tax treatment in furtherance of the goal of becoming carbon neutral by 2070.

Answer ... Under most laws that govern ESG-related matters, adjudicative bodies with investigative powers are responsible for implementing and enforcing the obligations of Indian companies thereunder. Examples include:

• the central/state pollution control boards under the Environment Protection Act, 1986;
• regional provident fund commissioners under the Employment Provident Funds and Miscellaneous Provisions Act, 1952; and
• the regional registrars of companies under the Companies Act, 2013.

These enforcement bodies have the authority to:

• request information;
• undertake investigations; and
• adjudicate any resulting non-compliance.

Companies must also make routine filings, which assist in gathering data and information on the impact of their operations in areas where the laws constituting the ESG framework may apply.

The registrars of companies in particular have extensive powers to investigate the affairs of all Indian companies, with the authority to take cognisance of most offences under the Companies Act, 2013. The National Green Tribunal – a quasi-judicial body – was established in 2010 and adjudicates matters relating to environmental protection and conservation, including the enforcement of legal rights and the provision of relief to victims of polluting activities.

Answer ... The enforcement bodies that take cognisance of offences under the applicable laws that constitute the ESG framework are as follows:

• Registrars of companies and relevant authorities under the Income Tax Act, 1961 are proactive in taking cognisance of corporate and financial offences, based on information obtained through company filings, with routine enquiries often revealing significant irregularities.
• The Directorate of Enforcement, a financial investigation agency under the Department of Revenue, routinely investigates potential offences under the foreign exchange and anti-money laundering laws.
• The pollution control boards are active in protecting the environment, penalising offenders through fines and restricting industrial activities through closure and seizure actions. One example of this is the recent closure of the Sterlite Industries Limited plant in Tamil Nadu by the Tamil Nadu government and pollution control board.

However, the approach towards enforcement largely remains fractured and a more consistent approach aligned with contemporaneous standards may be required across the board in ESG-related matters.

Answer ... Over a dozen companies – including Reliance Industries Ltd, Vedanta Ltd, ITC Limited, JSW Energy and HDFC Bank – have signed up to go carbon neutral in the coming decades. Some of these companies are also recalibrating their businesses to hit net-zero emissions deadlines.

There is also marked interest among privately held companies to comply with international ESG standards in order to attract the attentions of foreign investors, which place significant emphasis on the sustainability of their investments. For example:

• ITC Limited, a leading tobacco and consumer goods manufacturer and hotel operator, has committed to certify all of its factories and hotels operating in areas of high-water stress to the International Water Stewardship Standard, a global benchmark for water stewardship;
• Indian companies such as Tech Mahindra, Infosys and Wipro are a part of the Dow Jones Sustainability Index, which assesses the ESG performance of companies globally; and
• fast-moving consumer goods giants such as Nestlé India and Procter & Gamble India have committed to sustainability goals to reduce energy and resource consumption in their manufacturing facilities, including attempts to recycle or reuse their entire packaging within the decade.

Interestingly, ESG data from Acuite Ratings, a SEBI-approved rating agency, showed that of the Nifty 50 companies, 40% of private sector companies are rated ESG Risk A. In contrast, only 14% of public sector units are rated Risk A. Risk A indicates an ESG leader with a largely positive track record of managing material risks. Even in the absence of rigorous regulatory oversight, increased compliance is expected as India Inc aligns itself with international sustainability standards.

Answer ... Generally, ESG laws apply to entities that conduct business operations and engage a labour force in respect of such operations in India. The ESG framework imposes additional compliance obligations on entities based on the nature of their operations. Industries with heavy pollution loads are subject to more stringent obligations in respect of community reparations and reporting of the impact of their operations on the environment. Some of the stricter governance norms – such as the inclusion of independent directors on the board and the constitution of dedicated committees (eg, a stakeholder relationship committee and a nomination and remuneration committee) – apply to larger companies that meet certain paid-up share capital, net worth and turnover thresholds.

Answer ... Few entities in India are exempt from compliance with the ESG framework as a whole. However, due to the nature and size of their operations, some entities may be exempt from compliance with certain laws or regulations that constitute the ESG framework. However, typically, any entity that engages 10 to 20 employees as part of its operations in India is required to comply with basic labour laws and corporate governance laws. However, certain corporate entities – such as one-person companies and small companies (as incorporated under the Companies Act) – are exempt from a host of compliance obligations that apply to other entities under various laws that form part of the ESG framework.

Answer ... Some of the challenges to the effective implementation of the ESG framework in India include the following:

• The shift to renewable energy: India continues rely on fossil fuels and the renewable energy industry is struggling to stay afloat due to financial distress and distribution troubles. Renewable energy capacity, which is currently at 152 gigawatts (GW), is short of the capacity goal of 175 GW for 2022 that India set for itself in the 2015 Paris Climate Accords. In the absence of alternative sources of energy, Indian companies will find it difficult to reduce their reliance on fossil fuels.
• Lack of standardised green finance taxonomy: India needs to develop a classification system that establishes a list of ‘green economic activities’, which is not restricted to environment/climate change-related activities and which addresses issues such as:
• • corporate governance;
  • protection of communities/stakeholders; and
  • diversity and inclusion within the organisational structure of companies.
• A comprehensive green finance taxonomy is the first step in providing companies, investors and policymakers with an appropriate definition of what ‘green’ means, akin to the Taxonomy Regulation being implemented by EU member states.
• Delays in litigation: Effective enforcement of laws covering ESG issues is being impeded by delays in the adjudication process. With adjudication proceedings dragging on at different levels of the judiciary and before quasi-judicial bodies, the impact of the offences in question is not being mitigated in a timely manner. Further, in some cases, the erroneous adjudication of offences (typically seen in inquiries relating to potential financial irregularities) results in companies being embroiled in enforcement proceedings, which take considerable time to conclude.

Answer ... The ESG reporting regime in India is still in its infancy. The Companies Act, 2013 mandates that the directors’ report which is circulated to company shareholders should include information relating to efforts on the conservation of energy. India Inc is also in the final stages of adopting Indian Accounting Standards, which are modelled on International Financial Reporting Standards.

The top 1,000 companies, based on market capitalisation, listed on India’s stock exchanges (‘reporting companies’) must file a ‘business responsibility and sustainability report’ containing ESG-related disclosures, modelled on the principles prescribed by the National Guidelines on Responsible Business Conduct promulgated by the Ministry of Corporate Affairs (MCA) in 2019. This is one of the annual reports that must be circulated to shareholders and is also made publicly available pursuant to stock exchange filings as well as on official company websites.

The MCA is considering introducing similar reporting obligations for unlisted companies and is constituting a committee to develop the reporting formats. The reporting obligations are expected to be designed to avoid a duplicate reporting burden and linked to international non-financial reporting standards and the MCA guidelines.

The Securities and Exchange Board of India is also contemplating:

• imposing obligations (eg, additional reporting, minimum holding of ESG investments) on mutual funds launching ESG schemes; and
• introducing a regulatory framework that governs ESG rating providers, which hitherto have not been subject to formal regulation in respect of the provision of ESG-focused ratings.

Answer ... The business responsibility and sustainability reporting regime does not apply to smaller listed companies, or to unlisted public or private companies. While these companies may voluntarily include a business responsibility and sustainability report as part of their exchange filings, they are disincentivised from doing so by the typically high implementation costs, which may outweigh any potential investment or other benefits.

In the absence of regulatory prescriptions, certain companies must provide information relating to ESG concerns pertaining to their operations to shareholders and investors pursuant to agreements with such shareholders and investors. Such initiatives have considerably increased the focus on sustainable models of business and the provision of evidence of such models to relevant stakeholders, even where such reporting obligations are not mandated by regulation.

Answer ... Under the Companies Act, 2013, the board of directors of a company must act in good faith in order to promote the objects of the company for the benefit of its shareholders, employees, the community and the environment. Directors also have a certain degree of responsibility for the operations of the company. Regulatory filings of Indian companies are typically prepared and made under the authority of the key managerial personnel; and a degree of liability is ascribed to the officers of the company in the event of inaccurate reporting. Further, liability resulting from non-compliance with obligations under the ESG framework is also attributable to officers of the company.

In addition to internal controls, the Companies Act, 2013 mandates an annual audit of companies by a qualified practising chartered accountant. The audit reports – which provide an overview of operational, financial and governance matters – must be filed with the registrar of companies as part of companies’ routine filings. Certain companies that exceed certain turnover, paid-up share capital or indebtedness thresholds must also undertake an internal audit and/or a secretarial audit. Further, companies engaged in production or manufacturing may be required to undertake a cost audit. All audits are typically conducted by suitably qualified external consultants.

Answer ... The National Guidelines on Responsible Business Conduct issued by the MCA in 2019 provide a basic framework for any Indian company seeking to undertake ESG reporting for the benefit of its shareholders where this is not otherwise mandated by the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. However, as most Indian companies are not subject to mandatary reporting requirements under Indian law, Indian companies increasingly rely on internationally accepted ESG standards – such as the Global Reporting Initiative and the Sustainability Account Standards Board – when adopting an ESG reporting framework, most often pursuant to shareholder or investor requirements.

Answer ... The National Guidelines on Responsible Business Conduct issued by the Ministry of Corporate Affairs (MCA) have shaped the legislative framework governing ESG matters in India. As outlined in question 1.1, there is no consolidated legislation on ESG compliance in India; instead, ESG-related matters are governed by a plethora of laws that constitute the ESG framework.

Indian companies are adopting various ESG policies and strategies, such as:

• reducing their carbon footprints;
• increasing reliance on renewable energy;
• spending more on corporate social responsibility;
• setting up medical and educational institutions; and
• including ESG as a key factor in determining top management pay.

The format of reporting and compliance under the business responsibility and sustainability report (see question 3.1) provides a basic framework for any company that is seeking to voluntarily incorporate ESG reporting into its corporate reporting. The MCA is also contemplating making such reporting mandatory for all companies, whether listed or unlisted. It may also consider formulating standardised ESG ratings for the securities of all Indian companies, which will assist investors in identifying sustainable investments.

Answer ... The executive directors of a company are generally responsible for ensuring that the operation and management of a company are in compliance with the applicable law. The board of directors may also specifically designate individual directors to be in charge of specific aspects of the company. Accordingly, companies required to comply with reporting obligations mandated by the Securities and Exchange Board of India (SEBI) may designate any number of directors (or any subcommittee of the board of directors) to implement a suitable ESG strategy in line with the ethos of the company and ensure the company’s continued adherence to that strategy. Such directors and/or board committees may be in charge of implementing ESG initiatives to be undertaken by the company. Under the SEBI (Listing and Disclosure Requirements) Regulations, 2015, the company must designate a compliance officer (usually the company secretary) to be responsible for reporting obligations under the SEBI (Listing and Disclosure Requirements) Regulations, 2015, among other things. The compliance officer will be statutorily liable for ensuring accurate reporting in the business responsibility and sustainability report.

Though unlisted public companies, private companies and listed companies that do not qualify under the applicable threshold are not required to file a business responsibility and sustainability report. If they do choose to voluntarily undertake any ESG initiatives, such initiatives may be driven by the directors of the company.

Answer ... The implementation of ESG strategy by reporting companies is primarily regulated and monitored by the Securities and Exchange Board of India (SEBI).

In addition, SEBI-accredited rating agencies provide ESG ratings based on international ESG standards (eg, the Global Reporting Initiative and the Sustainability Account Standards Board) and the National Guidelines on Responsible Business Conduct promulgated by the MCA. As the rating providers that issue ESG ratings are not formally regulated, SEBI is in the process of introducing a regulatory framework in this regard, which will be a step towards cementing the credibility of these rating agencies in the ESG sphere.

SEBI has also issued a consultation paper on proposed changes to the regulatory framework applicable to mutual funds, which would impose more obligations (eg, additional reporting, minimum holding of ESG investments) on mutual funds that launch ESG schemes for investors. These measures aim to help SEBI ensure that such schemes remain committed to their ESG objectives.

Various institutional and foreign investors, which are subject to stricter ESG norms in other jurisdictions in respect of their overseas investments, require Indian companies to structure their operations to be more compliant with international ESG norms and more detailed reporting on matters in this respect, in line with globally applicable standards.

Answer ... The board of directors of a company has certain fiduciary duties towards the company under the Companies Act, 2013. The directors must act in good faith to promote the objectives of the company for the benefit of its members, employees, the community and the environment. Further, Schedule IV of the Companies Act, 2013, which sets out the code for independent directors, emphasises that the interests of all stakeholders of the company must be balanced.

The board has an overall supervisory role over the company and its operations and policies. The Companies Act, 2013 requires qualifying entities to establish committees to effectively administer various aspects of the company and ensure that its operations have a positive impact on ESG matters, such as:

• an audit committee;
• a nomination and remuneration committee;
• a corporate social responsibility committee; and
• a stakeholder relationship committee.

As the size of companies increases, they become subject to more stringent governance measures, including a requirement to appoint suitable key managerial personnel such as a company secretary, managing director or CEO. To ensure that the board acts impartially towards all stakeholders in this respect, larger companies must also ensure the neutrality of the board by including independent directors and women directors.

Answer ... According to a 2020 study by Refinitiv ESG, only 8% of the remuneration of CEOs in India is linked to ESG-related performance metrics. However, awareness of this issue appears to be increasing among Indian business conglomerates. Major Indian business groups such as the Tata Group, Vedanta and Marico have added ESG as a new parameter in the variable pay of their CEOs and as a key factor in assessing the performance of management. At Vedanta, safety and sustainability performance also accounts for a significant portion of the key performance indicators of senior-level employees.

Answer ... The prescribed format of the business responsibility and sustainability report aims to promote the dissemination of information on various aspects of the operations of a company which are relevant from an ESG perspective. The report seeks to procure information from companies relating to:

• environmental matters, such as details of:
• • greenhouse gas emissions;
  • consumption of non-renewable resources;
  • waste management;
  • extended producer responsibility;
  • local sourcing; and
  • engagement with local stakeholders;
• social aspects, such as initiatives being undertaken in relation to:
• • the health and safety of employees;
  • human rights;
  • diversity in the workforce; and
  • gender sensitivity; and
• governance matters, such as implementation of:
• • anti-corruption and anti-bribery policies; and
  • a robust corporate governance structure.

Making this information publicly available incentivises management to drive the operations of the company in line with the National Guidelines on Responsible Business Conduct. The business responsibility and sustainability report itself offers a benchmark against which companies can grade themselves and accordingly calibrate their operations for better compliance.

Companies that are not required to file a business responsibility and sustainability report may voluntarily adopt a suitable ESG compliance framework, such as the standards issued by the Global Reporting Initiative or the Sustainability Account Standards Board. Companies with good ESG track records are increasingly being considered good long-term investments by investors, which continue to deploy capital into green projects and are increasingly reliant on investment outcomes based on evidence which can be showcased by a robust ESG reporting framework adopted for the benefit of shareholders and other key stakeholders

Answer ... Indian corporates have increasingly been raising funds through sustainable financing from the global market. However, the legislative framework governing sustainable financing on the domestic market is still in its infancy.

The Indian capital markets regulator, the Securities Exchange Board of India (SEBI), has undertaken certain initiatives such as ‘green debt securities’: debt securities that are issued to raise funds that will be entirely utilised for projects and/or assets that fall under qualifying criteria as set out in the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021). However, there are no mandatory regulatory prescriptions that apply to Indian banks (and no direct and concessional lending to companies that qualify under suitable criteria for sustainable business models, as exists in several countries), which would incentivise borrowers to undertake more sustainable business models by making it easier to raise funds.

Notably, the Indian Banks’ Association has issued National Voluntary Guidelines for Responsible Financing. While the guidelines are not mandatory, they represent a positive step in encouraging banks to develop a suitable ESG policy in order to:

• screen borrowers according to identified ESG-related parameters developed on the basis of the guidelines;
• conduct focused due diligence to ascertain the extent of borrowers’ compliance with these parameters; and
• institute suitable monitoring mechanisms to ensure compliance throughout the tenure of the financing.

Answer ... Green bonds have been a key source of financing for various green initiatives in India. Several Indian financial institutions, private sector corporates and public sector entities have issued green bonds in recent years, after the first green bond issuance by Yes Bank in 2015. In addition, sustainability-linked bonds have also emerged as a new class of instrument and certain corporates have issued such instruments.

SEBI has amended its regulatory framework to accommodate the issuance of ‘green debt securities’ (GDS), which are akin to other debt instruments for raising finance, with certain added requirements (eg, that the funds be utilised for environmentally conscious business objectives). GDS may be unlisted or listed. Any GDS sought to be listed on an Indian stock exchange must comply with the applicable SEBI regulations. However, the funds raised through GDS may be used only for limited purposes, primarily centred on environment/climate change-related concerns, leaving little room for financing activities on the social and governance fronts.

The lack of overarching legislation governing the categorisation of various activities based on their sustainability is telling. India has no ‘green finance taxonomy’, similar to the EU Taxonomy Regulation (2020/852) in Europe, leaving the companies, investors and policymakers in the dark as to what exactly ‘green’ means.

Answer ... The earlier green bond issuances in India (starting with the first issuance by Yes Bank in 2015) accorded with the Green Bond Principles, 2016 – voluntary process guidelines established for the issue of green bonds. Since then, SEBI has introduced a regulatory framework (see question 5.1); however, this remains rudimentary, with a narrow focus on activities relating to climate change and other environmental aspects.

The Reserve Bank of India (RBI) has also been taking proactive policy measures to promote and support green finance initiatives. It included the small renewable energy sector under its Priority Sector Lending scheme in 2015, providing loans to firms in the renewable energy sector as well as to households for investing in renewable energy. The Indian Renewable Energy Development Agency – a government-backed agency for promoting clean energy investments – has also set up a ‘Green Window’: a dedicated facility to develop the financially under-served clean energy market. And the India Infrastructure Finance Corporation Limited has launched a dedicated scheme known as the ‘credit enhancement scheme’ to fund viable infrastructure projects with bond tenors above five years.

However, the prevailing trends suggest that green financing in India is not sufficiently incentivised for banks to prioritise such financing, with private players often being plagued by high borrowing costs. As noted by the RBI in its communication to stakeholders, while India has existing mechanisms to incentivise greenhouse gas emissions reductions (eg, perform-achieve-trade schemes and renewable purchase obligations), it still lacks a standardised national measurement, reporting and verification platform for tracking climate finance.

Answer ... The National Voluntary Guidelines for Responsible Financing promulgated by the Indian Banks’ Association present good practices which Indian financing institutions should seek to adopt in relation to ESG in the financing context. The guidelines broadly set out desirable business practices and appropriate disclosure requirements for monitoring such practices, and may be adopted by banks in whole or in part. They cover issues such as:

• environmentally friendly investment;
• inclusive human and social development; and
• stakeholder engagement.

A dedicated ESG policy should be put in place by each financial institution, which should be followed when assessing the profiles of prospective borrowers. Borrowers may be screened according to the level of sustainability in their business model, based on identified criteria such as:

• having a detailed ESG policy that outlines long-term sustainable development goals;
• undertaking a voluntary ESG audit;
• procuring an ESG rating from an adequately qualified rating agency;
• instituting discernible measures for minority shareholder protection;
• incorporating cost reductions in business operations along with energy efficiency proposals; and
• outlining suitable policies to increase employee productivity and enhance employee welfare.

Financial institutions should also consider:

• developing sound governance systems to oversee the environmental and social performance of their business activities; and
• disclosing relevant data to their shareholders and other relevant stakeholders such as employees.

Funds may be earmarked for disbursement to borrowers that qualify under certain criteria developed under ESG-related parameters. This may help to increase access to funds for corporates with strong ESG principles and incentivise ESG compliance.

Answer ... Investors and shareholders play a key role in shaping the ESG strategies of companies, as they have the capital resources to induce positive changes at scale.

We have seen investors acting as crusaders for transparent corporate governance, social commitments and environmental justice. Around the globe, it is clear that companies which focus on ESG factors can be rewarded with meteoric growth. Many companies are developing ESG policies and making voluntary ESG disclosures at their shareholders’ meetings to win the confidence of stakeholders.

Over a dozen companies – including Reliance Industries Ltd, Vedanta Ltd, ITC Limited, JSW Energy and HDFC Bank – have committed to go carbon neutral in the coming decades. Some of them are also recalibrating their businesses to hit net-zero emissions deadlines. They are tapping into newer pools of capital and shoring up valuations to attract investors in these reorganised entities, while enhancing shareholder value.

There is also marked interest among privately held companies to comply with international ESG standards, to attract the attentions of foreign investors that place significant emphasis on the sustainability of their investments, even in the absence of a robust regulatory framework in this regard.

Answer ... Traditionally, shareholders have been a driver of better corporate governance. However, in the last couple of years we have also seem them prioritising community engagement and environmental development, as ESG is seen as a long-term value creation tool. On occasion, class actions have been brought against measures that are seen to be detrimental to the immediate environment or ecosystem within which the relevant companies operate. Whistleblowers have been vocal in calling out ineffective corporate governance frameworks and malpractices within organisations. At shareholders’ meetings, several big companies have begun to voluntarily disclose ESG action plans and long-term sustainability endeavours to avert shareholder ire.

Answer ... Currently, it may be argued that ESG as a concept in India is dominated by the ‘E’ – environmentally focused initiatives – in light of the nationally determined contributions undertaken by India pursuant to various climate conferences. Policy initiatives by the Indian government have incentivised carbon emissions reductions and a simultaneous shift towards renewable sources of energy. As India is a developing nation, the concerns of most large institutional investors continue to centre on environmental initiatives.

It may also be argued that the social and governance frameworks that apply under various Indian laws impose considerable compliance obligations to ensure that business is conducted in a manner that is not detrimental to various stakeholders, such as employees and shareholders.

Answer ... Although these have not been specifically labelled as such, there have been several instances of activism covering aspects of ESG, including:

• actions relating to the protection of the environment;
• whistleblowing against impropriety within the organisational structure of a company; and
• investor activism due to the protection of investor funds as well as stakeholder interests.

For example, in February 2021, a large pharmaceuticals company and some of its executives settled, for a total amount of INR 13 million, a complaint with the Securities and Exchange Board of India (SEBI) in relation to illegal diversion of funds through a related party. The non-compliance was identified after a series of whistleblower complaints were made to SEBI.

Notably, SEBI has strengthened the whistleblower mechanism by increasing the incentives payable to whistleblowers in respect of specific matters, including insider trading. The rewards payable to whistleblowers under the SEBI (Prohibition of Insider Trading) Regulations, 2015 have been increased to a maximum of INR 100 million pursuant to recent amendments.

Shareholder activism is on the rise in respect of governance concerns, as evidenced by the lawsuits instituted by shareholders of a prominent Indian real estate group against key managerial personnel, alleging improper management of shareholder/homebuyer funds. The claims were bolstered by a writ petition filed by a former employee with the Supreme Court regarding impropriety within the group. While the arbitration proceedings instituted by the shareholders in London and the United States were settled by the parties, the complaints from the employee and customers of the group resulted in the Enforcement Directorate taking cognisance of the matter and arresting certain key managerial personnel on charges of fraud and money laundering.

The pollution control boards are also active in protecting the environment and penalise offenders by imposing fines or restricting industrial activities through closure and seizure actions. An example is the recent closure of the Sterlite Industries Limited plant in Tamil Nadu by the Tamil Nadu government and pollution control board, which was affirmed by the Supreme Court.

Answer ... Indian companies are increasingly adopting measures to shift to more sustainable business models, not least due to pressure from foreign institutional investors. ESG data from Acuite Ratings, a SEBI-approved rating agency, showed that of the Nifty 50 companies, 40% of private sector companies are rated ESG Risk A. In contrast, only 14% of public sector units are rated Risk A. Risk A indicates an ESG leader with a largely positive track record of managing material risks. Even in the absence of rigorous regulatory oversight, increased compliance is expected as India Inc aligns itself with international sustainability standards.

While the global appetite for ESG-compliant Indian investment targets continues to grow, the domestic markets have yet to catch up. This may be due to the nascent regulatory framework in this regard, as only the top 1,000 companies (based on market capitalisation) listed on the Indian stock exchanges are required to undertake mandatory reporting through the business responsibility and sustainability report recently introduced by SEBI.

As the regulatory supervision of ESG increases and extends to more companies, this situation may change. The Ministry of Corporate Affairs and SEBI are deliberating further regulatory oversights and the imposition of substantive obligations on Indian companies in line with international ESG standards. SEBI has published certain consultation papers in this regard, inviting comments from stakeholders before further regulations are introduced.

Answer ... Local bodies and stakeholders are very significant influences on ESG practice. There have been incidents in which companies in the mining, infrastructure and chemical industries have caused outrage due to the adoption of unfair environment practices. To do business in certain sensitive sectors, local licences and approvals are required. The commercial laws and labour laws also subject companies to duties, disclosures and responsibilities in order to undertake best corporate, governance and labour practices. Stakeholders that are overlooked or ignored may take offence at the following practices, with protracted litigation the result:

• local sourcing arrangements;
• disposal of hazardous waste;
• preservation of local ecology and biodiversity;
• social welfare;
• manpower upskilling;
• socially inclusive policies;
• rights of minority shareholders;
• long-term effects of infrastructure projects; and
• land acquisitions and afforestation.

Answer ... The legal framework governing ESG compliance in India is in its infancy, as only the top 1,000 companies (based on market capitalisation) listed on the Indian stock exchanges are required to undertake mandatory reporting through a business responsibility and sustainability report.

However, this situation may change in the not too distant future. For example, the Ministry of Corporate Affairs is considering imposing a business responsibility reporting obligation on unlisted companies and is establishing a committee to consider the reporting formats.

Further, the Securities and Exchange Board of India (SEBI) is also contemplating:

• imposing obligations (eg, additional reporting, minimum holding of ESG investments) on mutual funds that launch ESG schemes; and
• introducing a regulatory framework to govern ESG rating providers, which are not yet subject to any formal regulation in respect of the provision of ESG-focused ratings.

SEBI has published consultation papers, inviting comments from stakeholders, before introducing new regulations on these matters.

Answer ... While mandatory reporting obligations are primarily limited to public listed entities under Indian law, it is advisable for all companies to take a proactive approach towards the implementation of ESG initiatives.

Listed companies that must file a business responsibility and sustainability report may wish to appoint a qualified professional to coordinate efforts to comply with the reporting framework among the various stakeholders and functionaries within the company. The mandate of monitoring compliance should be entrusted to identified directors or key managerial personnel of the company. Companies may also consider:

• incorporating additional ESG-related responsibilities in the terms of reference of their corporate social responsibility committee; or
• establishing such a dedicated committee if none currently exists.

Companies that are not mandatorily required to comply with the reporting requirements under the Securities and Exchange Board of India (Listing and Disclosure Requirements) Regulations, 2015 may voluntarily adopt a suitable ESG compliance framework, such as the standards issued by the Global Reporting Initiative or the Sustainability Account Standards Board. Companies with good ESG track records are increasingly being considered good long-term investments by investors, which continue to deploy capital into green projects and are increasingly reliant on investment outcomes based on evidence which can be showcased by a robust ESG reporting framework adopted for the benefit of shareholders and other key stakeholders.

Co-Authored by Abin Francis | Senior Associate