The concept of corporate social responsibility (CSR) has had a pivotal status in the debates surrounding corporate law and governance at the turn of the century. Although CSR was ensconced in the idea of voluntarism by which companies and their boards are invited to pay attention to the interests of various constituencies affected by a company’s activities, in some jurisdictions it has also acquired the status of a legal obligation. However, a recent strain of literature has identified that the broader sustainability concerns surrounding corporate governance have focused more on environmental, social and corporate governance (ESG), and away from CSR as traditionally understood.
For instance, Professors MacNeil and Esser point to the fact that investors have begun to incorporate ESG factors into their decision-making to mitigate environmental, social and governance risks. Termed as the ‘financial model of ESG investing’, they argue that it is the role of capital and investors that drives sustainability efforts than the intention or obligation of corporate boards to cater to broader stakeholder interests. The authors contrast the financial model of ESG with what they term the ‘entity model’ where the focus is on board decision-making and the impact of corporate activities on the real world, regardless of the financial implications on the investors. Here, the attention shifts from ESG investing to the interests of stakeholders more broadly (and directly).
While ESG is generally considered to be market-driven, corporate and securities regulators around the world are beginning to modulate the ESG-orientation through legal or regulatory instruments, especially when it comes to ESG reporting. Such a phenomenon has also played out in India. The developments in India merit greater analysis for a number of reasons: at around 1.4 billion, it is the most populous country in the world; it not only attracts significant foreign investment, but several Indian companies compete in the global product (and services) and capital markets; its experiments with the role of stakeholders in corporate law have has garnered attention on the global stage. While both CSR and ESG continue to coexist in India, due to certain peculiar connotations of CSR in that jurisdiction, the regulatory focus has shifted more towards ESG in recent years. First, it is clear that nowhere has CSR acquired a more prescriptive status than in India where the basic corporate statute, the Companies Act 2013, is rather elaborate about the obligations of companies to act in a manner that benefits the broader society, apart from shareholders.
Second, India is one of only a handful of jurisdictions to require large companies to spend a stipulated amount—at least two per cent of average net profits earned during the three immediately preceding financial years—in pursuance of their CSR policy towards specified activities. While the Companies Act 2013 initially stipulated that the obligation was to be implemented on a ‘comply-or-explain’ basis, amendments to the legislation in 2019 have altered its status into one of a legal mandate. To that extent, CSR in India is largely concerned with companies contributing a minimum amount of money towards social activities, thereby equating CSR with corporate philanthropy.
Third, and owing to its largely philanthropic tilt, the CSR regime in India fails to focus on the negative externalities generated by the regular business operations of companies, which has conventionally been captured within the domain of CSR elsewhere. Given the conceptual dissatisfaction surrounding CSR in India, the emerging trend of ESG takes on great importance.
Against this background, the goal of my book chapter ‘The Legal and Regulatory Impetus Towards ESG in India: Developments and Challenges’ published in the Research Handbook on Environmental, Social and Corporate Governance edited by Professor Thilo Kuntz has been to build upon the transition outlined in the scholarly debates from CSR to ESG. Although ESG is well-understood to be market-driven, the chapter focuses instead on the legal and regulatory measures governing ESG factors in India. It, therefore, examines the developments and challenges surrounding ESG in India along three fronts.
First, the paper explores the roles and responsibilities of corporate boards in accounting for ESG factors in their decision-making process. Here, the chapter makes two assertions: that (i) the duties of directors of Indian companies resonate with the financial model of shareholder-driven ESG in that it requires directors to consider the long-term interests of the company rather than the short-term interests; and (ii) they also require directors to specifically account for the interests of non-shareholder constituencies, which comports with the entity model of ESG.
Second, and relatedly, it analyses the obligations of companies to engage in disclosure and reporting on ESG matters. Historically, Indian law lacked a consistent framework for ESG reporting, although some companies did undertake disclosures on a voluntary basis. The chapter demonstrates that over time, though, more defined requirements emanated for reporting on ESG risks. The discussion on ESG reporting in India proceeds on the lines of a categorization involving: (i) general ‘materiality’ related disclosures; and (ii) business responsibility and sustainability reporting (‘BRSR’).
Finally, viewed from the investor perspective, the chapter examines ESG factors that underpin the shareholder stewardship regime in India. Although ESG is explicitly incorporated as part of the considerations for stewardship engagement by institutional investors with their investee companies, it only takes into account the financial risk-based approach towards ESG and not the entity-oriented formulation that is more consistent with the stakeholder responsibility of corporate boards in India. This area necessitates a regulatory reevaluation.
Overall, as the findings in the chapter demonstrate, India’s focus on directors’ duties to consider shareholders as well as other constituencies lay a strong statutory foundation for the legal recognition of ESG, both on a financial basis and an entity approach. Coupled with this are strong regulatory moves by the Indian financial regulators to develop ESG reporting and to encapsulate ESG concerns as part of shareholder stewardship initiatives. Although there have been significant legislative and regulatory measures towards ESG in India, several challenges remain, and the efforts thus far can only be considered to be work-in-progress.
Keywords: CSR, ESG, corporate governance, India
AUTHOR INFORMATION
Umakanth is the Vice-Dean of Graduate Studies and Professor at the NUS Faculty of Law.
Email: v.umakanth@nus.edu.sg
LinkedIn: https://www.linkedin.com/in/umakanthv/