Environmental, Social and Governance (ESG) Regulations, How they are Different from CSR?

ESG Regulations: Environmental, Social and Governance (ESG) Regulations include the various social and environment costs of the business while dealing with various economic aspects of the business. Environmental, Social and Governance (ESG) Regulations is important for UPSC Mains Exam (GS Paper 2- Governance policies and programs for regulation and development of various sectors; GS Paper 3- Environment protection and conservation measures by the government).

ESG Regulations Evolution

Over the last decade, the idea of measuring businesses have evolved from measuring only traditional economic outputs to measuring their environmental impact, commitment to social issues, etc.

• Regulators and corporations around the world have embraced the idea of ESG regulations which measures businesses-
  • Environmental impact,
  • Commitment to social issues and
  • Soundness of their corporate governance and protection of shareholder rights.
• The development of ESG framework for measuring business have been-
  • Partially due to the belief that companies have a distinct responsibility as corporate citizens,
  • But Mainly due to the realisation that environmental, social and governance (“ESG”) considerations need to be included by investors in a company’s risk profile. This is to be done in order to accurately assess the enterprise.

Status of ESG Regulations in India

• Having said so, the reality is that the evolution of ESG laws and regulations is still at a nascent stage in India.
• In India, the focus is often on providing protections regarding the environment or workplace conditions without also incorporating the controls and disclosure that are a hallmark of contemporary ESG regulation.

Difference ESG and Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR)

India has a robust corporate social responsibility (CSR) policy. India’s CSR Policy mandates that corporations engage in initiatives that contribute to the welfare of society. The Companies Act of 2013 (amended in 2014 and 2021) codified the CSR mandate of various companies in India.

• Eligibility Criteria under CSR Mandate: The Companies Act requires companies with a net worth of ₹500 crore or a minimum turnover of ₹1,000 crore or a net profit of ₹5 crore in any given financial year spend at least 2% of their net profit over the preceding three years on CSR activities.
• Eligible CSR Activities: The list of qualifying CSR activities is very broad, ranging from supporting the protection of historically important sites to promoting safe drinking water.

ESG Regulations

On the other hand, ESG regulations, in comparison to CSR, differ in process and impact. The U.K. Modern Slavery Act, for example, requires companies with business in the U.K. and with annual sales of more than £36 million to-

• Publish the efforts they have taken to identify and analyse the risks of human trafficking, child labour and debt bondage in their supply chain;
• Establish internal accountability procedures;
• Evaluate supplier compliance and to train supply chain managers regarding these issues.

Importance of ESG in India

India has long had a number of laws and bodies regarding environmental, social and governance issues, including the Environment Protection Act of 1986, quasi-judicial organisations such as the National Green Tribunal, a range of labour codes and laws governing employee engagement and corporate governance practices. The penalty for violations can be substantial.

• While these laws and bodies provide important environmental and social safeguards, new initiatives in India go further, establishing guidelines that emphasise monitoring, quantification and disclosure, akin to ESG requirements found in other parts of the world.
• The Securities and Exchange Board of India (SEBI), responding to the increase in ESG investing and the demand by investors for information on ESG risks, substantially revised the annual Business Responsibility and Sustainability Report (BRSR) required by the 1,000 largest listed companies in India.
• SEBI describes the current report format as a “notable departure” from previous disclosure requirements, which are aligned with evolving global standards and place “considerable emphasis on quantifiable metrics” to allow companies to engage meaningfully with stakeholders and to enhance investor decision making.
  • Disclosures range from greenhouse gas emissions to the company’s gender and social diversity.

Implications for Indian companies

Compliance with ESG regulations, both originating in India and elsewhere around the world, pose a significantly different challenge than India’s CSR regulations.

• The compliance by Indian companies with the ESG regulations of the U.S., the U.K., the European Union and elsewhere will be critical.
  • This is so because India is aspiring to take full advantage of the growing decoupling from China and play a more prominent role in global supply chains and the global marketplace overall.
• As Indian companies look to expand their ESG risk management, thorough due diligence will play a key role. However, this requires more than having sub-suppliers fill out a questionnaire.
  • Due diligence that can stand up to scrutiny means going deeper.
• Depending on the situation, this can include looking at company records, interviewing former employees and making discreet visits to observe operations to ensure that the measures to comply with international ESG standards are in effect.

Conclusion

Companies that wish to maximise their opportunities in the global economy need to embrace these new ESG requirements and adjust their organisations accordingly.

ESG Regulations FAQs

1. What is the Mandatory CSR criteria for Companies in India?

Ans. The Companies Act requires companies with a net worth of ₹500 crore or a minimum turnover of ₹1,000 crore or a net profit of ₹5 crore in any given financial year spend at least 2% of their net profit over the preceding three years on CSR activities.

2. What are the ESG Regulations?

Ans. Regulators and corporations around the world have embraced the idea of ESG regulations which measures businesses- Environmental impact, Commitment to social issues and Soundness of their corporate governance and protection of shareholder rights.

Corporate Social Responsibility: New CSR Mandate for Corporate India

Corporate Social Responsibility: New CSR Mandate for Corporate India

Sharing is caring!