India: Is your business aligned with India’s ESG wave?

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Is your business aligned with India’s ESG wave?

ESG investing, also referred to as “impact investing,” is on the rise, with global investors exerting pressure on companies not just to deliver strong financial returns, but to do so by acting responsibly and ethically. This market pressure is further compounded by increasing global and local regulatory compliance and disclosure requirements relating to Environmental, Social and Governance (ESG).

By way of response, investors are incorporating ESG elements as part of their investment decisions and due diligence processes. This is particularly evident for those considering the exciting market opportunities in India. While many are aware that the Indian government is aiming to attract at least USD 100 billion a year in gross Foreign Direct Investment (FDI) in 2024, they may be less aware that the government has also recently set out a progressive ESG regulatory framework. Investors will therefore need to align with this Indian ESG wave and also ensure that their own ESG programs are robust enough to mitigate risks as well as realize opportunities.

Unpack the complexity of India’s ESG regulatory framework

In 2014, India became the first country to mandate corporate social responsibility (CSR) requirements.¹ India has also been progressively introducing ESG obligations though its ESG regulatory framework, which spans multiple laws and sector-specific regulations, with various authorities overseeing compliance. Global companies looking to do business in India will therefore need to have regard to the unique legal and regulatory requirements in relation to the Indian market.

While India has made significant progress in aligning its ESG regulations with global standards, India’s comprehensive yet fragmented ESG regulatory framework makes it a legal minefield for businesses. Companies are advised to consider sector-specific nuances to ensure compliance with each aspect of applicable legislation.
— Mini vandePol, Head of Asia Pacific Investigations, Compliance & Ethics Group

Build an effective corporate governance (“G”) framework suitable for India

Existing global corporate governance frameworks must be tailored to comply with India requirements, which vary based on industry sector, material ESG considerations and management expertise.

The specific business location within India is also a significant factor when considering the board and committee composition, due to cultural differences across states and union territories. Furthermore, to ensure alignment with India’s unique CSR regime, eligible companies are required to constitute a CSR committee at the site of the business.

Potential impact of enforcement trends

An effective ESG governance framework needs to undergo regular monitoring and enhancements. Keeping an eye on local enforcement priorities and trends is an important part of understanding how to keep the program relevant and useful. There are a number of enforcement authorities that operate in India, including the Ministry of Corporate Affairs (MCA), SEBI and RBI.

Global businesses may also face challenges when dealing with local enforcement authorities for ESG compliance. For example, while there is a Central Pollution Control Board (CPCB), enforcement of environmental laws is decentralized to State Pollution Control Boards (SPCBs) or pollution control committees in union territories. This type of decentralization can lead to inconsistent application of rules and transparency issues.
— Christine Cuthbert, Partner, Hong Kong

Explore enforcement trends and their potential impact on Indian ESG governance:

Navigating ESG in India requires tailored governance, attentive oversight, and proactive engagement with local authorities. Success hinges on understanding regional nuances and fostering transparent, ethical practices across all operations.
— Mini vandePol, Head of Asia Pacific Investigations, Compliance & Ethics Group

Key takeaways

Integrate ESG into core India strategy: Global businesses must consider ESG risks when formulating growth strategy and executing business decisions. This includes regular training and audits on the ground with local partners, facilitating alignment with the more stringent Indian ESG disclosure requirements, and building sustainable supply chains.

Climate change and environmental risks must remain top of mind: India’s increasing role in the manufacturing and supply chains of multinational companies, and the country’s vulnerability to the effects of climate change, mean that climate change and environmental risks have now become more pronounced and may increasingly affect a company’s global disclosure and compliance requirements.

Navigate increasing ESG-related reporting and climate-risk management regulatory oversight: A holistic approach on the applicable disclosure frameworks (for example, the International Sustainability Standards Board (ISSB), the US Securities and Exchange Commission and the European Corporate Sustainability Reporting Directive (CSRD) approaches to climate disclosure), as well as other ESG disclosure requirements on governance and social factors will need to be mapped out to effectively track and monitor risks.

Footnotes:

1. ICOR Report 2023

2. SEBI BRSR Core Framework

3. SEBI Mutual Fund Schemes for ESG Investing

4. 2023 Corruption Perceptions Index

5. UNDP India’s Climate Promise

This article is being provided as general information and does not constitute legal advice. Baker McKenzie does not practice Indian law and where Indian law advice is needed, we work closely with top India-qualified lawyers. We’d be happy to discuss your needs in India. For more information, please contact Ashok Lalwani and Mini vandePol.

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