The Regulatory Progression of ESG in India

The concept of corporate social responsibility (CSR) has had a pivotal status in the debates surrounding corporate law and governance at the turn of the century. Although CSR was ensconced in the idea of voluntarism by which companies and their boards are invited to pay attention to the interests of various constituencies affected by a company’s activities, in some jurisdictions such as India it has also acquired the status of a legal obligation. However, a recent strain of literature has identified that the broader sustainability concerns surrounding corporate governance have focused more on environmental, social and governance (ESG) factors, and away from CSR as traditionally understood.

While ESG is generally considered to be market-driven, corporate and securities regulators around the world are beginning to modulate the ESG-orientation through legal or regulatory instruments, especially when it comes to ESG reporting. Such a phenomenon has also played out in India, the jurisdiction of study of my recent working paper “The Legal and Regulatory Impetus towards ESG in India: Developments and Challenges”. Other authors such as Rudresh Mandal and Ashwin Murthy too explore this trend.

The developments in India merit greater analysis for a number of reasons: at around 1.4 billion, it is one of the most populous countries in the world; it not only attracts significant foreign investment, but several Indian companies compete in the global product (and services) and capital markets; its experiments with the role of stakeholders in corporate have has garnered attention on the global stage. While both CSR and ESG continue to coexist in India, due to certain peculiar connotations of CSR in that jurisdiction, the regulatory focus has shifted more towards ESG in recent years. First, it is clear that nowhere has CSR acquired a more prescriptive status than in India where the basic corporate statute, the Companies Act 2013 is rather elaborate about the obligations of companies to act in a manner that benefits the broader society, apart from shareholders.

Second, India is one of only a handful of jurisdictions to require large companies to spend a stipulated amount—at least two per cent of average net profits made during the three immediately preceding financial years—in pursuance of their CSR policy towards specified activities. While the Companies Act 2013 initially stipulated that the obligation was to be implemented on a ‘comply-or-explain’ basis, amendments to the legislation in 2019 have altered its status into one of a legal mandate. To that extent, CSR in India is largely concerned with companies contributing a minimum amount of money towards social activities, thereby equating CSR with corporate philanthropy’.

Third, and owing to its largely philanthropic tilt, the CSR regime in India fails to focus on the negative externalities generated by the regular business operations of companies, which has conventionally been captured within the domain of CSR elsewhere. Given the conceptual dissatisfaction surrounding CSR in India (see here and here), the emerging trend of ESG takes on great importance.

Against this background, the goal of the aforementioned paper is to build upon the transition outlined in the scholarly debates from CSR to ESG. Although ESG is well-understood to be market-driven, the paper focuses instead on the legal and regulatory measures governing ESG factors in India. It, therefore, examines the developments and challenges surrounding ESG in India along three fronts. First, the paper explores the roles and responsibilities of corporate boards in accounting for ESG factors in their decision-making process. Second, and relatedly, it analyses the obligations of companies to engage in disclosure and reporting on ESG matters. Finally, viewed from the investor perspective, it examines ESG considerations that underpin the shareholder stewardship regime in India.

Directors’ Duties and ESG Considerations

Prevalent corporate governance debates shine the light on the need for greater emphasis on long-term sustainable value as opposed to the pursuit of profits solely for the benefit of shareholders. Such ESG considerations have also received extensive support from the investor community on the basis that the longer-term interests of shareholders as well as other stakeholders enjoy a great deal of alignment. Under such a dispensation, companies and their directors bear a duty to act to protect the long-term sustainable value for a broader range of constituencies beyond shareholders.

Such an approach has been deep-rooted in Indian corporate policy making for over half a century. Consistent with the socialistic policies prevalent in India in the 1960, the role of corporate law went beyond a mere consideration of shareholder interests, and recognised the need to ensure protection of other constituencies such as employees, creditors, consumers and society. One finds the best reflection of this approach in the codification of directors’ duties in section 166(2) of the Companies Act 2013, which provides that the directors of a company shall act in good faith and in the best interests of the company, its employees, the shareholders, the community and the for the protection of the environment.

Here, the paper makes two assertions: that (i) section 166(2) resonates with the financial model of shareholder-driven ESG in that it requires directors to consider the long-term interests of the company rather than the short-term interests; and (ii) the provision also requires directors to specifically account for the interests of non-shareholder constituencies, which comports with the entity model of ESG. An important duty of the directors also relates to transparency.

ESG Disclosures and Reporting

Historically, Indian law lacked a consistent framework for ESG reporting, although some companies did undertake disclosures on a voluntary basis. Over time, though, more defined requirements emanated for reporting on ESG risks. ESG reporting in India can be categorised into two parts: (i) general ‘materiality’ related disclosures; and (ii) business responsibility and sustainability reporting (‘BRSR’).

As for the first aspect, although cast in the context of primary market transactions, a broad interpretation of the concept of ‘materiality’ has the effect of expanding the disclosure obligations in the secondary markets as well. Hence, any requirement to disclose climate-related information based on the principle of materiality must be viewed in this context. Overall, such a materiality-based disclosure is premised on introducing transparency on ESG (and other) matters that affect the decision-making of the investors, thereby making it consistent with the financial model of ESG.

As for the second aspect relating to BRSR, there has been considerable regulatory development in this regard, spearheaded by both the Ministry of Corporate Affairs as well as the Securities and Exchange Board of India (SEBI). The new framework, which requires the top 1,000 listed companies to mandatorily engage in BRSR, has been found to be a step in the right direction, which encourages companies to be socially and ethically responsible. At the same time, it is clear that the BRSR framework is still work-in-progress.

Overall, the BRSR approach is less focused on risk to investors, and is aimed at generating wider disclosures that may benefit shareholders as well as other stakeholders. If the materiality-based reporting discussed earlier connects more closely with the financial model of ESG, the BRSR is more overarching to encompass the entity model of ESG as well. Not surprisingly, a number of challenges remain, as outlined in the paper.

Shareholder Stewardship and ESG

Stewardship codes have proliferated around the world over the last decade or so, and the Indian regulators have jumped on the bandwagon as well. These codes focus on the role that institutional investors play as stewards of the companies in which they invest. In some cases, the stewardship codes also expressly recognise the need for investors to go beyondmerely considering shareholder interests and take into account ESG matters. Interestingly, the concept of ESG is inherent in the stewardship codes issued by the three Indian regulatory, namely the Insurance Regulatory and Development Authority of India, the Pension Fund Regulatory and Development Authority, and SEBI.

Although several challenges remain, as outlined in the paper, there has been a significant move in recent years towards ESG investing in India. The regulators have followed suit to establish a stewardship regime, albeit a fragmented one. Although ESG is explicitly incorporated as part of the considerations for stewardship engagement by institutional investors with their investee companies, it only takes into account the financial risk-based approach towards ESG and not the more entity-oriented formulation that is more consistent with the stakeholder responsibility of corporate boards in India. This area necessitates a regulatory reevaluation.


India’s focus on directors’ duties to consider shareholders as well as other constituencies lay a strong statutory foundation for the legal recognition of ESG, both on a financial basis and an entity approach. Coupled with this are strong regulatory moves by the Indian financial regulators (including SEBI) to develop ESG reporting and to encapsulate ESG concerns as part of shareholder stewardship initiatives. Although there have been significant legislative and regulatory measures towards ESG in India, several challenges remain, and the efforts thus far can only be considered to be work-in-progress.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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