Evolving regulatory contours of ESG: An inescapable engine to inclusive growth

The concept of Environmental, Social, and Governance (ESG) principles is transforming corporate governance in India, shifting focus from financial profitability to a more holistic approach that considers sustainability concerns. ESG-screened portfolios have been shown to outperform conventional benchmarks, while companies with strong ESG credentials command a premium in mergers and acquisitions transactions. As regulatory attention on sustainability grows, the landscape has pivoted toward mandatory ESG reporting.

The Securities and Exchange Board of India (SEBI) has not yet issued any regulations mandating ESG reporting, but the trend is clear: companies that prioritize ESG considerations are reaping benefits in terms of cost savings and market valuation. The question remains whether this shift will lead to a more sustainable and inclusive growth model.

India's regulatory approach to ESG has been incremental, starting with pollution control measures under the Environment Protection Act, 1986. Over time, focus shifted toward corporate responsibility post-liberalisation, with the introduction of Corporate Social Responsibility (CSR) in the Companies Act, 2013. The Supreme Court has linked CSR to corporate evolution, emphasizing the need for social accountability and responsibility.

The rise of green finance has directly linked valuation to ESG considerations, creating a market-driven incentive for companies to adopt sustainable practices. However, the lack of clear regulatory guidance on mandatory ESG reporting remains a challenge. The ongoing regulatory approach relies on market forces to reward ESG-integrated companies, but this may not be enough to drive meaningful change.

As India continues down the path toward mandatory ESG reporting, companies must adapt and prioritize sustainability considerations to remain competitive. Practitioners should closely monitor regulatory developments and advise clients on the implications of emerging trends in ESG disclosure.