ESG in India: Collaboration is Key to Sustainable Growth in 2024

Organisations that embrace ESG (Environmental, Social, and Governance) standards, a framework that evaluates sustainability and ethical practices, often outperform their peers. This was revealed by Kroll's recent ESG and Global Investor Returns study, which analyzed data from over 13,000 companies worldwide. As India strives to become a $7 trillion economy by 2030 and a global superpower, adopting ESG will not only be instrumental in achieving this growth but also in sustaining it.

The Evolving ESG Landscape in India

As India's corporate landscape increasingly embraces sustainability, ESG regulations are gaining rapid importance. These regulations encompass various aspects of sustainable and ethical business practices, with a primary focus on environmental, community operations, and climate risks.

India's ESG framework is governed by multiple statutes, underscoring its significance and the need for businesses to align with it.

• Companies Act 2013: mandates certain companies to form CSR committees and addresses board diversity.

• Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015: Introduced the Business Responsibility Report (BRR), later replaced by the Business Responsibility and Sustainability Reporting (BRSR) framework in 2021. BRSR aligns with the National Guidelines for Responsible Business Conduct and the UN Sustainable Development Goals (UNSDGs). The Securities and Exchange Board of India (SEBI) in 2023 amended Regulation 34 (2) of the LODR regulations, introduced a framework commonly referred to as 'BRSR Core' for the company's value chain, and mandated the top 1,000 listed entities by market capitalization to disclose their ESG policies and practices.

ESG Adoption in India: Progress and Commitments

India's journey towards ESG began with the 2014 mandate for companies to allocate 2 percent of their average net profit over the past three years to corporate social responsibility (CSR) activities. This was just the beginning. More recently, India has reaffirmed its commitment to climate action with a target of achieving net-zero greenhouse gas emissions by 2070 and through its leadership in the G20 summit. Possibly as a result of these efforts and a testament to the progress and commitments of Indian businesses in this area, Care Edge Research reports a 160 percent surge in ESG reporting among India's top 1000 companies from 2020 to 2022.

Why ESG Matters for India

ESG has rapidly gained global prominence due to the urgency of climate change, geopolitical tensions, and growing awareness of socioeconomic disparities. As India looks to become a global supply chain hub amid changing geopolitical dynamics, the challenge of adopting ESG-compliant supply chain practices in line with the UN Sustainable Development Goals (SDGs) and investor expectations becomes increasingly important.

Overcoming Barriers to ESG Adoption

Any company starting out on its journey to effective ESG reporting will surely tell you that the path is not always smooth. Whereas Indian businesses are well practiced in Corporate Social Responsibility and, in particular, philanthropy and volunteer efforts that benefit Indian society, adoption of a more extensive set of ESG principles and the associated reporting of ESG related actions requires a more systematic approach.

• Ensuring Quality Reporting: Effective ESG practices hinge on transparent data collection, analysis, and reporting to avoid false statements that may lead to accusations of greenwashing. Companies must engage with industry associations, collaborate with regulators to push for standardised reporting formats, and partner with supply chain sustainability solution providers to gain actionable insights for ethical and sustainable procurement practices.

·        Undertaking effective and credible due diligence: The OECD Due Diligence Guidance for Responsible Business Conduct Practices provides a blueprint for companies that want to achieve effective ESG adoption. The OECD guidance talks about the importance of Identifying and Assessing Adverse Impactsin Operations, Supply Chains, and Business Relationships,but it isoften not feasible for companies to carry out extensive due diligence on all their suppliers across complex and geographically dispersed supply chains. Adopting a risk-based approach is key to ensuring that time, effort, and money are focused in the right areas, and starting with a robust risk assessment process helps to target ESG related efforts from the outset.

• Keeping track of relevant regulations: As ESG regulations in India are currently scattered across various legislations, companies need to also invest in staying updated on evolving regulations to mitigate compliance risks. Where Indian businesses have an export component to their businesses, this also requires horizon scanning at a global level to pick up on the fast-moving ESG related regulatory developments in key exports markets such as the EU, USA and Canada.
• Addressing Talent Shortage:  As regulation increases, ESG analyst roles are becoming highly sought-after. Companies must invest in developing or sourcing relevant talent to meet the rising demand for specialised ESG skill sets or look at outsourcing opportunities to help them meet increasingly challenging ESG demands.
• Tackling High Costs: Indian businesses, especially MSMEs, may face resource constraints despite recognising the importance of ESG. Leveraging technology and giving consideration to third party services that offer economies of scale, as well as being open to industry collaboration, can help mitigate costs and drive up standards.

·        Building Stakeholder Engagement and Awareness: In the journey towards ESG adoption, senior leadership plays an important role. However, it's not a journey that can be undertaken alone. It requires the collective effort and commitment of all stakeholders. Allocating resources to ESG data tools, training sessions, and communication channels can enhance awareness and commitment towards ESG initiatives throughout the organisation, fostering a sense of collective responsibility and an understanding of the value of collaboration among Indian businesses.

2024: A Year of Transformation

2024 is a pivotal year for Indian businesses as they focus on building sustainable value chains. This emphasis on value chain transparency reflects a broader social responsibility that goes beyond just the company's operations. While leading global companies have already made big strides in this area, the approach is developing in India. With SEBI's BRSR requirements being a key driver, there is an increased emphasis on value chain assessment by businesses. Indian businesses will now increasingly need to collaborate with stakeholders to address fair wages, community development, ethical procurement practices, and human rights, positively impacting brand image and attracting conscious consumers.

In 2023, we saw the groundwork laid for technological advancements in ESG practices. Now, in 2024, India enters the "Year of Compliance" for ESG reporting. Businesses must leverage a mix of risk assessment, due diligence activities, and technology to manage and report on ESG metrics effectively, including potential forecasting and decision support capabilities for climate-related analyses.

With the phased rollout of the Carbon Border Adjustment Mechanism (CBAM) and the pending implementation of the Corporate Sustainability Due Diligence Directive (CSDDD) later in 2024 in Europe, Indian organisations should expect to see increased reporting and disclosure obligations being placed on them as a result of the key roles they occupy within the upstream and downstream value chains in many industry sectors and a pressing need to stay well-prepared to navigate this dynamic global legislative landscape.

India's decarbonisation journey is set to accelerate in 2024, propelled by regulatory mandates, market forces, and technological advancements. We'll see the maturation of the voluntary carbon market, enabling wider participation and access to carbon credits. Strengthened regulations will provide clear decarbonisation targets, enabling Indian businesses to prepare better and demonstrate compliance with and mitigate carbon taxes from the EU CBAM rollout.

This new era of ESG consumer, investor, and legislative focus presents challenges and opportunities, requiring investments in due diligence processes and systems, but it also promotes responsible business practices, enhances brand reputation, and reduces potential legal and reputational risks.  Standardised ESG reporting, coupled with regular monitoring, is the way forward for Indian companies to ensure transparency and accountability.

In conclusion, 2024 will be a watershed moment for ESG in India. It's a year for businesses to move beyond compliance and view ESG as a catalyst for growth, innovation, and building a more equitable and sustainable future. By collaborating with industry partners, supply chain sustainability platforms, and the government, Indian businesses can create a ripple effect that benefits the nation and secures its position as a global leader.

(Smitha Shetty is Regional Director, APAC – Achilles Information Ltd)