The Rise of ESG Laws: How Companies Are Being Held Accountable

Author: Chandan Sha, Indian Institute of Legal Studies, Siliguri

Introduction

In the present time, business is not judged based on money but rather on how companies make their profits. Whether they are polluting or treating workers fairly, this demand led to the rise of ESG laws. ESG stands for Environmental, Social, and Governance. These three areas measure how the companies are responsible for their operation.

Earlier, ESG was a voluntary disclosure, but now many countries have made it a legal requirement, including India.

In this blog, we have discussed the meaning, origin, and rise of ESG Law globally, how companies are being held accountable, challenges faced by the companies and Future ESG laws in India.

Meaning of ESG

ESG focuses on the three pillars of Sustainability, i.e., Environment, Social and Governance factors. It aims to promote sustainable and responsible business practices by holding companies accountable for their impact on

Environmental (E)

It checks how a company affects nature. For example, which includes-

Greenhouse gas emissions
Water usage
Waste management
Pollution control
Protection of Biodiversity
land use and impact on forests.

Social (S)

It examines how companies manage a relationship with employees, suppliers, customers and communicate where they operate. For example, which includes-

Fair wages and labour practices
Workplace safety
Diversity and inclusive practices in employment
Community development.

Governance (G)

Criteria deal with how a company’s internal structures and decision-making processes operate. For example, which includes-

Business ethics and anti-corruption
Shareholder rights
Independent board of directors
Transparency and audit practices

Together, these three pillars make a good company towards society.

Origin of ESG

ESG was invented by John Elkington in 1998, a co-founder of the business Consultancy Sustainability. John Elkington introduced the idea that companies should not only focus on profit but also on people’s welfare and the planet. In 2004, the UN Report “Who Cares Wins” encouraged companies to add ESG factors into financial decision-making. For the first time in 2006, the United Nations Principles for Responsible Investment (UNPRI) considered that the Freshfields Report ESG criteria and investors around the world formally agreed to be incorporated in the financial evaluations of companies.

Meaning and Rise of ESG Law

ESG laws are the set of rules, regulations, and standards that every organisation must follow to disclose their impact on Environmental, Social and Governance factors of their operations.

Its main purpose is to promote corporate accountability and transparency and ensure that businesses manage risks and opportunities regarding sustainability and ethical practices in the organisation.

In recent years, ESG compliance has become a top priority for businesses across the world due to climate change, social issues and corporate fraud.

European Union (EU)

The European Union replaced the Non-Financial Reporting Directive (NFRD) with the Corporate Sustainability Reporting Directive (CSRD) in 2023. It requires-

Mandatory ESG reporting
Third-party audit
Detailed environmental and social metrics
Reporting from large companies and even non-EU companies doing business in Europe.

United States (US)

In the United States, the Securities and Exchange Commission (SEC) proposed a climate risk disclosure requirement rule in March 2022. Companies must disclose-

Emissions
Climate-related risks
Transition plans and
Governance systems

Other countries, such as Japan, Singapore, South Korea, and Australia, have introduced their own ESG reporting systems.

ESG Law in India

Securities and Exchange Board of India (SEBI)

SEBI made the ESG reporting mandatory requirements for the top 1000 listed companies through the Business Responsibility and Sustainability Report (BRSR) from FY 2022-2023.

Structure of BRSR

BRSR has the 3 sections

Section A- Business overview

Company profile

Products and services

Location

Section B- Management and Policies

Policies on environment, energy, labour, and Governance

Risk management

Internal system

Section C- Key Performance Indicators (KPIs)

Emissions

Energy Usage

Water usage

Wages and labour practices

Governance information

SEBI has introduced BRSR Core, which includes strict, measurable, and verifiable ESG indicators.

This requires;

Supply chain reporting
External assurance
Standardised metrics

It makes ESG reporting more accurate and reduces greenwashing.

Corporate Social Responsibility under Indian Company Law, 2013

The ‘social’ part of ESG already exists under the Companies Act 2013. This makes certain companies Compulsory to spend on activities such as Education, skill development, healthcare, environmental sustainability, rural development, and disaster relief, etc., under section 135 of the Companies Act. Companies must spend at least 2% of the average net profits from the last three financial years on CSR activities. If the Net worth of ₹500 crore or more, / Turnover of 1,000 Crore or more, / Net profit of ₹5 Crore or more, any of these limits exceeded in the previous financial year.

ESG Laws hold companies accountable in various ways

Companies should be required to make mandatory disclosure of reports to the public about social and environmental impact in an easy to understand.
The reports of ESG must be verified by an external auditor to prevent manipulation of reports.
Consumers, employees, and Investors must check the ESG performance and hold the companies accountable.
ESG increases the legal responsibility; now, companies may face lawsuits for greenwashing, pollution, and unsafe working conditions.
If the companies do not follow the legal compliance, they may face penalties. Some of the companies, like Philip Morris Tobacco and Coca Cola, receive good ESG scores despite a negative impact on social and environmental.

Need for ESG Law

ESG Law has become necessary because companies used to make claims about sustainability without proof. Some of the examples are-

Several companies are claiming their products are eco-friendly without evidence
Child labour, unsafe workplace conditions
Illegal dumping of waste and emissions

There are several reasons, and the government realised that voluntary reporting is not enough.

Challenges faced by the companies in ESG Compliance

Even though ESG laws are growing nowadays, several companies face many problems, such as

Many businesses are still not aware of the ESG requirement.
Several companies face a problem of a lack of systems to measure emissions.
Large companies often depend on small suppliers who do not follow ESG standards.
India needs more trained ESG compliance officers.