Contracting For A Greener Future Through ESG Evolution In India

In the context of India's evolving business landscape, characterised by rapid industrialisation alongside increasing sustainability requirements, the principles of Environmental, Social, and Governance (ESG) are fundamentally transforming the core nature of commercial contracts. No longer considered peripheral add-ons, ESG clauses are emerging as essential elements within agreements that encompass a spectrum from supplier contracts to venture capital endeavours, driven by SEBI's progressive Business Responsibility and Sustainability Reporting (BRSR) framework and the Companies Act, 2013. By the year 2025, the implementation of voluntary value chain disclosures for the top 250 listed corporations, as mandated by the SEBI circular dated March 28, will ensure that contractual arrangements not only yield financial returns but also align with overarching national objectives, such as achieving net-zero emissions by 2070. This strategic incorporation serves to mitigate potential risks, facilitate access to green financing, and cultivate robust partnerships, thereby positioning Indian enterprises to flourish amidst international scrutiny and domestic regulatory transformations.

Decoding ESG clauses: Tailored for Indian Landscape

ESG provisions in India facilitate the enactment of sustainability within the confines of contractual frameworks, tailored to local contexts such as diverse supply chains and labour-centric industries. In accordance with the national guidelines on responsible business conduct (NGRBC), these provisions encompass environmental stipulations, such as monitoring of scope 3 emissions in alignment with BRSR core key performance indicators, social responsibilities including compliance with fair wage mandates as outlined in the new labour codes, and governance measures that incorporate anti-corruption frameworks consistent with the Prevention of Corruption Act.

Environmental provisions frequently necessitate that suppliers implement objectives for renewable energy utilisation or strategies for waste minimisation, which can be substantiated through ISO 14001 accreditation. Social stipulations impose requirements for diversity quotas and community impact evaluations, reflecting the obligations set forth in Section 135 concerning CSR. Governance components require oversight of Environmental, Social, and Governance (ESG) matters at the board level and mandate transparent reporting mechanisms, with breaches triggering remedies under the Indian Contract Act of 1872.

These provisions appear variably: within procurement agreements that include pass-through ESG responsibilities; in mergers and acquisitions that stipulate warranties regarding compliance with BRSR; and in financing arrangements for sustainability-linked bonds according to SEBI's framework for 2024-25, wherein the proceeds are mandated to support verified environmentally sustainable projects.

Strategic Advantages: Unlocking Value in India's ESG Era

For enterprises operating in India, Environmental, Social, and Governance (ESG) provisions extend beyond mere regulatory compliance, delivering competitive advantages in a marketplace wherein sustainable investment exceeded ₹50,000 crore in 2024. These provisions reinforce supply chain integrity against potential disruptions, particularly crucial in sectors heavily reliant on agriculture by incorporating climate resilience, which has the capacity to significantly reduce Scope 3 emissions, accounting for 70-80% of total carbon footprints. From a financial perspective, they contribute to a reduction in borrowing expenses through green bonds and draw in foreign direct investment (FDI); a study conducted in 2024 established a correlation between robust ESG disclosures and valuation premiums ranging from 10-15% for firms listed on the National Stock Exchange (NSE).

In terms of reputation, these initiatives resonate with consumer inclinations and improve employee retention during periods of labour shortages. In the realm of venture capital, start-ups aligned with ESG principles, such as the environmentally-focused Skippi Ice Pops experienced expedited exits, bolstering investor confidence. On a global scale, while regulations from the U.S. Securities and Exchange Commission (SEC) highlight the significance of climate-related risks, India's BRSR distinctly incorporates value chain reporting, providing firms with a strategic advantage.

Practical Integration: A step-by-step Roadmap

Embed ESG clauses to ensure enforceability¹. Initiate materiality mapping using BRSR's NGRBC principles, focusing on critical areas such as water stress in textiles. Conduct due diligence through vendor questionnaires aligned with SEBI thresholds disclose partners exceeding 2% of transactions. Draft definitions like "GHG emissions" per IPCC, set SMART targets (e.g., 20% renewable sourcing by 2027), and include verification by third-party audits². In supply contracts, adopt Infosys's approach i.e. pre-contract ESG evaluations for 38% of new suppliers on social parameters. For M&A, implement phased due diligence: scoping for red flags, examining environmental clearances under the Environment Protection Act, and post-deal remediation covenants. Utilise ERP software for real-time tracking and train procurement teams on negotiations, prioritising "obligations of result." In VC deals for SMEs, stagger milestones, e.g., initial ESG management systems prior to full reporting to address resource limitations. Pilot in high-risk supply chains, exemplified by Maruti Suzuki's green procurement enforcing ISO 14001 for Tier-1 vendors.

Enforcement Tools: Safeguards Under Indian Law

The enforceability of agreements is contingent upon clear mechanisms. It is imperative to mandate the submission of periodic reports, specifically quarterly key performance indicators (KPIs) pertaining to emissions and the inclusion of audit rights, with costs shared per contract terms. Breaches of contractual obligations activate graduated response: a 30-day cure period for minor lapses, as per the Specific Relief Act, 1963 while immediate termination for critical violations, such as pertaining to child labour, designating ESG compliance as a fundamental obligation.

Indemnity cover liabilities, including penalties for pollution fines under the Water Act, while arbitration under the Arbitration and Conciliation Act, 1996 resolves disputes efficiently. Emerging ESG panels under the Singapore International Arbitration Centre (SIAC) rules are becoming increasingly relevant for transactions linked to India. In financing, it is advisable to correlate bond covenants with impact assessment reports, with penalties for non-verified proceeds. Annual evaluations should be synced with updates from the SEBI, thereby ensuring a dynamic and responsive regulatory framework.

Indian Successes and Lessons

Ramkrishna Forgings Limited (RKFL) is a prime illustration of integration: In collaboration with PwC³, it set a target for achieving 100% water recycling by the year 2025 and has instituted supplier ESG audits to be completed by 2024, incorporating clauses into procurement processes for compliance training to generate operational efficiencies and facilitate SEBI-aligned reporting that aims for carbon neutrality by 2050. Hindustan Unilever's supplier climate initiative mandates the utilisation of low-carbon inputs, like collaborations in soda ash production, culminating in nearly complete reliance on renewable energy sources while pushing 273 vendors towards decarbonisation to reduce Scope 3 emissions and improve BRSR disclosures. In the context of M&As, a manufacturing transaction revealed deficiencies in labour code compliance through due diligence, resulting in the establishment of indemnities and post-closing objectives, effectively mitigating potential fines. Conversely, a 2024 arbitration conducted under the Indian Councils highlighted ambiguities in vague ESG terminology, prompting renegotiations and emphasising the necessity for precise contractual drafting.

ESG as India's Contractual Norm by 2030

By the year 2030, the mandatory implementation of disclosures aligned with RBI's TCFD, in conjunction with the IFSCA requiring ESG considerations for funds exceeding USD 3 billion, is projected to result in 85% of Indian contracts incorporating ESG components, further enhanced by AI for Scope 3 emissions tracking. The emergence of hybrid contractual elements such as biodiversity stipulations in the agricultural sector will be stimulated by the clean technology initiatives given in the 2025 Budget. For corporations operating in India, the acquisition of expertise in these domains is not merely a matter of choice, it represents a pathway for achieving resilient and value-oriented growth within a sustainable economic framework.

Footnotes

1 Niyaman, N. (2025, September 17). ESG Compliance in India 2025 | SEBI BRSR & CSR Rules. Neeti Niyaman.

2 Sarangi, K. (2025, April 24). ESG integration in Indian M&A: navigating legal frameworks, due diligence, and deal structuring.

3 PricewaterhouseCoopers. (n.d.). Fortifying company growth with ESG - PwC India. PwC.

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