Investment opportunities and challenges vis-a-vis ESG regulation- Tracing India in the global canvas

Investment opportunities and challenges vis-a-vis ESG regulation: Tracing India in the global canvas

– By Gaurav G Arora and Aditi Richa

Environmental, Social and Governance (ESG) norms can be observed to find increasing acceptance across jurisdictions as corporations around the globe progress in their quest for investment. Given the rising concern for sustainable development coupled with investment trends pushing for stakeholder-friendly corporate governance strategies, ESG norms have built concrete inroads to the global corporate-legal regime. To facilitate investment, Indian corporations, being no exception to the global ESG surge, are increasingly adapting themselves to accommodate the contemporary ESG practices, while reclaiming the ones deep-rooted in the origin of Indian corporate law. Recent reports reflect a rise in ESG investments in India from 330 million US Dollars in 2019 to 1.3 billion US Dollars in 2023, evidencing the significance of ESG. The soaring interest of investors in companies with ESG focussed practices has led to regulatory intervention aimed at ensuring investor protection across jurisdictions.

While the corporate governance component of ESG regulation can be identified in the corporate legal systems of most jurisdictions, environmental and social elements remain less regulated. Further, the overall intangibility around ESG makes it challenging to have a regulatory grip.

The European Union has, within the past five years developed a firm ESG regulatory framework through multiple regulations including Taxonomy Regulation to assess environment objectives for investment purposes, Non-Financial Reporting Directive and Corporate Sustainability Reporting Directive requiring disclosure of information inter alia concerning environmental protection, social responsibility activities, board diversity and anti-corruption practices.

Similarly, in the United Kingdom, the regulatory grip on ESG is scattered across a multitude of legislations including its Corporate Governance Code by the Financial Reporting Council aiming at guiding on practices concerning board leadership, division of responsibilities, risk and internal control, Companies (Strategic Report) Climate-related Financial Disclosure Regulations, and Companies, Partnerships and Groups (Accounts and Reports) Regulations etc., aiming to bring about transparency in disclosures and to prevent detriment to the environment.

The United States is in the process of transitioning from a voluntary to a mandatory ESG regulatory regime, apparently with efforts to align its ESG regulations to the European Union, including the Securities and Exchange Commission’s proposal titled Enhancement and Standardization of Climate-Related Disclosures for Investors requiring public companies to provide climate-related statistics as a part of public disclosures.

Where does India stand?

The conventional corporate-legal regime in India mandates sufficient shareholders’ participation in matters of significance inter-alia including related party transactions beyond specified thresholds, amendment in charter documents, appointment, and removal of directors from the board etc., and stakeholder-inclined practices including mandatory corporate social responsibility for specified companies. However, much like other jurisdictions of significance, such practices have not been traditionally acknowledged as ESG-centric practices.

The Securities and Exchange Board of India (“SEBI”) has recently mandated top 1000 listed entities to make ESG disclosures in accordance with Business Responsibility and Sustainability Reporting from financial year 2022-23 onwards. Consequently, the SEBI has introduced the Securities and Exchange Board of India (Credit Rating Agencies) Amendment Regulations, 2023 (“SEBI Regulations”) to ensure reliable ESG ratings and enhance investor protection. To align itself with the global trends drifting towards ESG regulation, the Indian corporate legal regime is on its way moulding its regulatory design to accommodate measures concerning a pro ESG regulatory regime.

Challenges concerning ESG regulation globally

Globally, while the concern for ESG- centric practices is on surge, evaluation of such practices remains a major concern, largely due to informational asymmetry and lack of quantifiable data measuring ESG on objective yardsticks. Further, while geographical, geo-political, regional, legal, regulatory, and cultural variations amongst jurisdictions push for region-specific ESG parameters, practical obstructions in evaluating ESG-compliances for inter-jurisdictional mergers calls for a uniform ESG-regime.

There are numerous organisations making efforts to quantify ESG-compliance on a globally uniform level. Jurisdictions including India continue to frame their ESG-regulatory regime on regional constraints, as is reflected by the SEBI Regulations.

The way forward

While corporations have embraced ESG at multiple levels, primarily with the motive of garnering investments, the investors’ evaluation of ESG remains blurry, due to lack of concrete and objective parameters assessing the ESG compliance. Harmonisation of ESG regulation with specific exceptions concerning varied geographical, geo-political, regional, legal, regulatory, and cultural variations appears a viable solution. There is a huge inter-jurisdictional information asymmetry data void that needs to be resolved as the primary step. While supervised data algorithms can assist with data accumulation and quantification, adaptability of algorithms by corporations depends on resource and finance constraints, particularly in developing nations.

(Gaurav G Arora is a partner, and Aditi Richa is a junior associate at JSA Advocates & Solicitors.)

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