Environmental, Social, and Governance (“ESG”) is a set of factors that measures the environmental and social impact of an organization. It covers a variety of methods and measurements which assess an organization in terms of its societal and environmental footprint. ESG issues are rapidly transforming from “good-to-have” initiatives into essential business requirements and investors across the globe keeps demanding responsible and sustainable business practices as part of key ESG considerations while making investment decisions. To align with the evolving trend of implementing ESG factors into the business decisions, India has already begun embedding ESG principles into its regulatory framework. However, the existing regulatory framework predominantly applies to listed and public companies. Private companies, though increasingly impacted by market and supply chain pressures, are not subject to the mandatory comprehensive ESG framework, and thus leaving them to adopt it on voluntary basis.

In this article, we have discussed the current Indian regulatory framework on ESG, global ESG regulations which may indirectly impact the private companies based out of India, commercial risks of neglecting ESG, and key ESG measures which may be adopted by private Indian companies for market competitiveness and as a strategic imperative.

India’s ESG Regulatory Framework

The ESG framework in India is currently fragmented, with relevant provisions dispersed across multiple legislations and lacking a single and consolidated set of unified norms. It emanates from the Companies Act, 2013, which requires certain set of companies[1], amongst other things, to spend at least 2% of their average net profits made during 3 immediately preceding financial years in pursuance to their Corporate Social Responsibility policy. In 2019, the Ministry of Corporate Affairs released the National Guidelines on Responsible Business Conduct which lists out a set of best and responsible business practices which companies should adopt in letter and spirit. These guidelines are voluntary in nature and aim to assist the companies to conduct their business while keeping the ethical, social, economic, and sustainable factors in mind.

Furthermore, in June 2023, the Securities and Exchange Board of India introduced Business Responsibility and Sustainability Report framework wherein the top 1000 listed companies (by market cap) are required to submit annual report which covers a wide variety of metrics such as number of differentially abled employees and workers hired by such companies, representation of women at board and key managerial level, training programs conducted for employees, sustainable sourcing of raw materials, employee well-being, human rights training conducted for employees, etc.

Recently, the Central Consumer Protection Authority issued the Guidelines for Prevention and Regulation of Greenwashing or Misleading Environmental Claims, 2024, wherein the manufacturer, service provider, and trader are prohibited from making any greenwashing and misleading environmental claims in relation to their products and services.

In addition to the above, India’s ESG landscape is also shaped by a broader body of statutory legislation that private companies must be mindful of. On the environmental front, the Environment (Protection) Act, 1986, the Air (Prevention and Control of Pollution) Act, 1981, and the Water (Prevention and Control of Pollution) Act, 1974 constitute the foundational regulatory framework for pollution control and environmental compliance. On the sector-specific fronts, the management of different kinds of wastes is regulated under specific laws such as the Bio-Medical Waste Rules, 2016, Plastic Waste Management Rules, 2016, E-Waste Management Rules, 2022, and Battery Waste Management Rules, 2022. Lastly, on the social and labour front, the new Labour Codes, i.e., the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020, consolidate and update obligations relating to fair wages, worker welfare, social security, and occupational health and safety. Compliance with this broader statutory framework forms the baseline of any credible ESG program for Indian companies.

Global ESG Regulations and their Indirect Application on Indian Companies

  • European Union (EU): EU’s Corporate Sustainability Due Diligence Directive (“EU Directives”) introduced the obligation on the companies based out of EU to conduct human rights and environmental due diligence on their business operations, business operations of their subsidiaries, and business partners in their ‘chain of activities’. The ‘chain of activities’ covers activities of company’s upstream business partners related to production of goods or provision of services and activities of company’s downstream business partners related to the distribution, transport, and storage of a product of the company. The EU Directives further require the companies to ensure that their business partners also adopt ESG compliant practices and seek contractual assurance that they will comply with such company’s code of conduct which should be in consonance with EU Directives. To this effect, if any Indian company is covered in ‘chain of activities’ of EU’s based companies, they will need to indirectly comply with the EU Directives. In addition to the EU Directives, EU’s Carbon Border Adjustment Mechanism (“CBAM”) levies a carbon tax on imported goods (iron & steel, aluminum, cement, fertilizers, electricity, and hydrogen) based on emissions generated during their manufacturing. Designed with the intent to level the playing field between foreign and EU producers, CBAM poses a tangible commercial risk for Indian exporters because even though the carbon tax falls on EU importers, the added cost burden is likely to be negotiated back into purchase prices, pressuring the Indian suppliers to either lower their prices or lose their customers to cleaner competitors. Indian companies exportin in CBAM-covered sectors must therefore assess their carbon footprint and invest in greener production to protect their EU market access while maintaining profitability.

  • United States of America (USA): In USA, various state-level laws require ESG disclosures in different shapes and format. For example, the Climate Corporate Data Accountability Act (“California CCDA”) of California requires companies operating in California and having revenue exceeding USD 1 Billion to report information regarding greenhouse gas emissions. Starting from 2027, it also mandates such companies to report ‘Scope 3 Emissions’ which includes all indirect emissions across a company’s suppliers, transportation, waste disposal, etc. which also extends to such Indian companies which are doing business with California based companies.

Commercial Risks Neglecting ESG

Failure in adopting an appropriate ESG governance framework by private Indian companies may carry serious commercial downsides which includes the following:

  • Access to Capital and ESG-Linked Financing: ESG performance now directly influences capital access. Financial institutions, global private equity funds, venture capitalist etc., are increasingly considering sustainability practices adopted by a company while making lending or investment decisions. Companies lacking credible ESG practices may face higher borrowing costs or exclusion from green financing, while ESG-aligned firms attract sustainability-focused capital.

  • Supply-Chain and Buyer Procurement Risks: Indian suppliers integrated into global value chains and conducting business globally especially in EU or US are expected to comply with jurisdiction specific ESG norms. Therefore, EU and California based companies demand assurances from their Indian business partners to comply with the EU Directives or California CCDA, as the case may be, and address human rights, environmental impacts, and other ESG related obligations. In absence of such compliance, the Indian companies may face significant commercial risk including exclusion from global procurement process, termination of their existing cross border contracts or non-renewal of long-term commercial arrangements.

  • Reputational Exposure: There is a growing trend among customers and business partners to prefer ethical and sustainable brands. A paradigm shift is visible from conventional products to eco-friendly and responsibly sourced alternatives. At this juncture, lack of proper ESG governance framework exposes the companies to serious reputational risk and public backlash can arise from greenwashing, labour rights violations, workplace harassment, etc. Such incidents can damage company’s brand value, loyal customer base, loss of business partnerships, etc. We have seen instances wherein the products were advertised as “100% natural” or “chemical free” wherein such claims were found misleading and causing a serious impact on brand. In today’s digital economy, reputational harm spreads rapidly and is costly to repair as well. Therefore, ESG is not merely a ‘good to have initiative’ but a critical safeguard for company’s brand value and substantiality.

  • M&A and Investor Due Diligence: Market analyses indicate that companies with robust ESG frameworks often command valuation premiums in M&A and investment transactions. Acquirers and investors increasingly scrutinize environmental, labour, and governance practices whereby poor ESG compliance may derail such transactions. Demonstrating credible ESG oversight, by contrast, enhances investor confidence and deal success.

Key ESG Measures

We have identified below certain key ESG measures which may be adopted by the private Indian companies in order to stay ahead in terms of ESG compliance:

  • Adopt an ESG Policy: First and foremost step is to prepare and implement a comprehensive ESG policy that articulates the company’s commitments across environmental, social, and governance pillars. Although Indian laws do not prescribe a statutory format, the policy may align with key domestic and international frameworks as discussed above. The policy may also cover broad ESG principles into actionable objectives including areas such as emissions and resource efficiency, labor rights and gender diversity, ethical governance, and data protection. It may also outline governance structures (for e.g., constituting an ESG committee), identify material ESG risks, and include periodic board review and disclosure mechanisms. Publishing the policy on the company’s website may further demonstrate transparency and strengthen stakeholders’ confidence.

  • Manage Supply-Chain ESG Risks: Undertake periodic structured ESG due diligence across the supply chain to identify, mitigate, and monitor sustainability and ethical risks. In this context, companies may start with a scoping and materiality assessment through a legal and operational audit to identify sector-specific risks (for instance, water usage in textile industry, or labour/ emission issues in manufacturing sector), supported by stakeholder mapping. Further, companies may also identify and mitigate ESG risks by benchmarking exercises, introduce contractual ESG clauses and indemnity protection in the commercial contracts for equitable risk allocation, and accreditation by recognized agencies.

  • Ensure Board/ Management Oversight: Assign clear responsibility for ESG compliance at the key managerial level. This may involve formulating an ESG committee at the board level or designating a senior executive as an ESG officer. Embed ESG goals into corporate governance (e.g. management incentives, or board reviews) and implement periodic reporting on ESG performance in management and board meetings.

  • Set Targets and Verify Practices: Define achievable ESG targets (e.g. emission-reduction goals, diversity objectives, etc.) and publish reports of same. Implement basic internal controls, gender diversity while hiring, adequate facilities for workers and employees (such as safe and hygienic working conditions, medical support facilities, grievance redressal mechanisms, mental health and wellness initiates, etc.) and keep assessing the same from a third-party to build an ESG credibility.

  • Engage Stakeholders: Regularly engage with employees, local communities, customers, and investors on ESG issues. Transparent communication (through annual reports, sustainability disclosures, etc.) will demonstrate accountability and reinforce trust.

[1]Companies having net worth > INR 500 Cr, or Turnover > INR 1000 Cr, or net profit INR 5 Cr or more during immediately preceding financial year.