ANALYSING ESG METRICS AND ESG SUSTAINABLE FUNDS: NEED FOR STANDARDISED ESG INDICATORS

Abstract

E, S and G are just three jumbled random words in the English alphabet but when placed and combined together, compelled the world to think over about their activities while doing or planning anything. Nowadays, Businesses across the globe are making their investments by keeping the feasibility and sustainability in their decision making. Universal sustainability and responsible investment have been the focus of several UN initiatives, such as the UN Principles of Responsible Investment. These initiatives align with the policies adopted by both national and international regulators, which mandate market players to adopt sustainable ways of doing business. One such indicator is the introduction of Environment, Social, and Governance (“ESG”) related disclosure, which encourages companies to think beyond the traditional finance-centric model. However, considering the vast nature of the parameters, it has become very cumbersome to standardize ESG ratings.  The efforts have been made in line with sustainable developments by the MCA and SEBI by setting up guidelines and reporting mechanisms.  Notably, SEBI has taken a very futuristic approach by putting in place BRSR Core, which aspires to simplify the tracking of disclosures. Furthermore, there are many private and public-private bodies that have been working on building ESG metrics. Nonetheless, instances of noncompliance with sustainable requirements are increasing due to a lack of consistency across all indexes. This article aims to cover the rating mechanisms of ESG regulatory bodies, thereby stating the imperativeness of a uniform rating system.

 

Key Words:

Sustainability, ESG, Rating system, Investment and Uniformity, Consultation paper on ESG.

 

 

I. Introduction

With the advent of changes happening around the world, there is a greater requirement for risk assessment on parameters other than financial indicators for long term returns. Environment, Social and Governance, (hereinafter ‘ESG’) is a framework in corporate governance, that not only strategizes towards the attainment of sustainability, but also focuses on equitable evaluation of the value generated for all stakeholders, including investors, consumers, employees and suppliers. Since businesses have greatly profited from economic growth, globalization, increased fossil fuel consumption, it is important to weigh them on the scale of sustainability as they have greatly changed the lifestyle of the masses and have strengthened the supply chain, manufacturing and infrastructure. Therefore, there is an important role played by corporates in promoting sustainable development. Their actions form the basis of their ESG rating. However, the ratings tend to be discrete due to difficulty in compilation, valuation of disclosures and interpretation of disclosed data, therefore uniformity is strenuous to achieve.

Corporate India has been cautious of the requirements which are ESG centric, and consequently has taken several initiatives for ESG rating either through government bodies or through company policies. Within this backdrop, part II of the article, deals with the inception of the concept of ESG and areas it aims to cover. Part III of the article would explore the steps taken by Indian Government bodies, the Ministry of Corporate Affairs (hereinafter ‘MCA’) and the Securities and Exchange Board of India (hereinafter ‘SEBI’). The recent approach for setting the metrics for ESG and its requirements are discussed in Part IV. Part V of this article, would cover the performance of Indian Companies on ESG Indexes and would also emphasize the need for having uniformity in rating ESG parameters. Part VI of this article, would focus on bolstering sustainability through Investments in different forms of ESG funds. On the basis of the exhaustive analysis conducted in part VI, part VII would present the international scenario of the implementation of ESG policies. Part VIII would conclude this article with the gist of observations made.

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II. Origin of the idea of the Sustainable Investing

The United Nations Global Compact which was established in 2000, has its origin from the voluntary efforts taken based on the commitments of CEOs of global companies, to support the objectives of the UN aimed to achieve universal sustainability. It was the event where the term ‘ESG’ was coined for aspects dealing with sustainable inventing.[1] The companies have to report and abide by the ten principles, which were derived from many international documents such as International Labour Organization Declaration on Fundamental Principles and Right to work (Labour related issues),[2] Rio Declaration on Environment and Development (Environment Protection issues),[3] the Universal Declaration of Human Rights (Human Rights)[4] and United Nations Convention Against Corruption (Corruption)[5].[6]

In early 2005, the then UN Secretary-General, Mr. Kofi Annan launched the United Nations Principles of Responsible Investment (hereinafter ‘UN PRI’).[7] UN PRI was developed by the group of one of the world’s largest institutional investors, and accordingly the principles were propounded and came into existence in April, 2006 at the New York Stock Exchange.[8] These principles laid the foundation of ESG objectives, which might have an impact on the investment portfolios, these factors were to be treated alongside the investment financial indicators.

The policies aiming to achieve the goals pertaining to sustainability have to abide by the three pillars of ESG. Firstly, ‘E’ which stands for the environment, covers aspects related to ecology, preservation of natural resources, pollution and climate change. Secondly, the ‘S’ stands for Social, which covers the aspects of labor practices, human rights, consumer interaction and cooperation between manufacturers and suppliers. And lastly, ‘G’ stands for Governance or more specifically Corporate Governance, which shows management of the company in general, keeping the expectations and rights of stakeholders in tandem, along with promotion of accountability and transparency.[9]

 

 

III. India and ESG: Efforts made by the Government Regulations

The work of MCA and SEBI can be seen as steps toward the ESG model of investing.[10] In 2009, MCA issued Corporate Social Responsibility Voluntary Guidelines, which stated that all business entities should formulate a CSR policy, to devise a model for strategic planning of CSR initiatives, in synchronization with the goals of the company.[11] The policy should contain elements such as, ethical functioning, respect for workers’ rights and welfare, care for all stakeholders, respect for human rights, respect for the environment, and other activities for social and inclusive development.[12] Subsequently, these guidelines were revised as the National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business, 2011 (hereinafter ‘NVGs’),[13] on the recommendations committee appointed by the Indian Institute of Corporate Affairs (hereinafter ‘IICA’). The key fundamentals that were incorporate involve sustainable supply chain management, respecting the interest of stakeholders, transparency, and environmental protection.

The Securities and Exchange Board of India (SEBI) is the regulator for the Indian securities market. It has been at the forefront of the ESG movement in India, and has been actively promoting ESG practices in the Indian market and has introduced regulations that require companies to disclose their ESG performance and adhere to certain ESG practices. These regulations are known as the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.[14] The Business Responsibility and Sustainability Reporting (BRSR) regulations, which were also put in place by the SEBI, require companies to report on their ESG performance.[15] These regulations require the top 1000 listed companies, by market valuation, to disclose their ESG performance in their annual reports, and to provide information on their ESG performance in their shareholder communications.[16] BRSR came into being, when MCA revised NVGs and updated it to form National Guidelines on Responsible Business Conduct, 2018 (hereinafter ‘NGRBC’).[17] These aimed to promote the all- round development in line of Sustainable Development Goals (hereinafter ‘SDGs’), along with the core principles enshrined in NVGs.

The BRSR is made up of three sections that are based on the three pillars of ESG.  Section A deals with the general disclosures of the company, i.e., its location, products and services, number of employees, and CSR initiatives.[18] Section B aims to check whether BRSR norms align themselves to present an outlook on the management process of a company, pertaining to governance, leadership, and stakeholder management.[19] Section C covers every aspect of sustainability in detail via a questionnaire.[20] The questionnaire has two categories, essential indicators and leadership indicators underneath the key principles of BRSR. The essential indicators contain questions which are mandatory for a company to answer, they cover information relating to investment towards research and development of sustainable technologies, identification of key stakeholders and efficient labour management measures. The leadership indicators contain questions which are voluntary for a company to answer, they generally cover information relating to investment towards research and development of sustainable technologies, identification of key stakeholders and efficient labour management measures.[21]

In FY 2022, more than 175 companies have abided by the norms set forth by BRSR on a voluntary basis. For FY 2023, this framework will be mandatory for the top 1000 listed companies (as per market valuation). [22] These requirements may be extended to unlisted companies as well, provided they exceed certain turnover or paid-up capital thresholds. Furthermore, unlisted companies which have turnover below the threshold may adopt the lite version of the format, on a voluntary basis.

 

IV. Overview of recent developments in ESG Disclosures, Rating Methodologies and Investments

The Securities and Exchange Board of India (“SEBI”) established an ESG advisory committee (“EAC”) on May 6, 2022, to provide advice on a variety of ESG-related issues. Based on the EAC's recommendations, the SEBI released a consultation paper on ‘ESG Disclosures, Ratings, and Investing' on February 20, 2023 (“Consultation Paper”),[23] and has requested public views on the regulatory framework for ESG disclosures, ESG ratings, and ESG investing by March 6, 2023.

While BRSR norms are becoming mandatory, the assurance for the sustainability and transparency required in disclosures, becomes a key factor  for the investors and ESG Rating Providers (hereinafter ‘ERPs’). Although the reporting in BRSR is going through a nascent stage, the aforementioned Consultation Paper takes a step ahead to ponder upon the implications of the Current Reporting Mechanism.  According to the paper, it was deliberated by EAC, to enhance the scope of BRSR, by placing few leadership indicators into essential indicators. It also opined for the sector specific disclosures to bring greater standardisation in reporting. This will also help to rate and regulate segment wise disclosures in a conglomerate along the lines of BRSR.[24]

The issues pertaining to assurance of any disclosures of the company, and its credibility for the purpose of reporting, have been greatly discussed. The assurance with respect to the disclosures can be either limited or reasonable. Although limited assurance may be simple to implement, reasonable assurance, despite its higher expense, has the potential to instil mutual confidence among investors. [25] Further, the implementation of reasonable assurance, can be seen with the introduction of ‘BRSR Core’ with select key performance indicators (hereinafter ‘KPI’). KPI covers each attribute of environment, social and governance, which can be reasonably assured. The framework under BRSR Core facilitates the reporting by companies as well as the verification of disclosures by the assurance providers. [26] This will not only make the data more authentic but also create trust among investors.

Notably, the following are the key principles for BRSR Core framework,

1. ‘Quantifiable and Outcome Oriented Metrics’

The incorporation of KPIs with BRSR Core, aims to make it as quantifiable as possible, in order to facilitate the comparability of sustainable outcomes in the companies. For instance, disclosures pertaining to ‘gross wages/ income by gender’, portrays the equality with respect to payment of equal work done, and the gender diversity practices adopted by the companies.[27]

2. ‘Relevance of attributes/ areas in BRSR Core’

The BRSR Core addresses all the areas of ESG in an equitable and unified manner, which are cardinal to both manufacturing and service based sectors in India. Therefore, a company in addition to looking after its GHG emissions has to make policies for job creation, social inclusivity and openness in transactions. [28]

3. ‘Comparability across jurisdictions’

The KPIs within the BRSR Core, includes number of intensity ratios for example the intensity of waste generation, GHG emissions, water/ fuel consumption etc. These intensity ratios are based on both revenue and volume and these ratios do not carry a unit, this ensures uniform comparability, irrespective of the size of the company. In addition to this, for global investors and international ERPs, these intensity ratios, can be adjusted to compute against the Purchasing Power Parity (PPP), for low cost/ developing countries.[29]

In light of the fact that the BRSR framework is still in its infancy, it has been suggested to revise the existing BRSR framework, in order to incorporate the KPIs that are described in the BRSR Core. Beginning with the FY 2023–2024, it is planned that the top 250 corporations will be required to provide reasonable assurance on the BRSR Core. After that, these prerequisites will be increased to apply to the top 500 enterprises beginning with the FY 2024-25, thereafter it will be extended to the top 1000 companies beginning with the FY 2025-26. [30]

 

V. The Current State of ESG Indicators in India: Sustainability lies in the eyes of stakeholder

ESG ratings provide analysis and assessments of a company’s environmental, social, and governance practices. The rating agencies use various data sources, including company disclosures, third-party assessments, and news reports, to evaluate a company’s performance on various ESG factors, such as carbon emissions, labour practices, gender diversity, executive compensation, and board diversity.[31]

Over the course of time, the rating on the basis of ESG practices has become an important phenomenon in the investor community and has become a crucial aspect to run a business. These ratings are also used by companies to benchmark their ESG performance against their peers and to identify areas for improvement. The role of ESG Rating Providers (ERPs), specifically, has become important in investment decisions. Some of the commonly used ESG rating agencies include MSCI, Sustainalytics, and Moody’s. Since there is lack of regulations and supervision for the activities of ERPs, this creates potential concerns to the efficiency of market, risk management, protection of investors, green washing and so on.[32]

Futuristic Approach  by SEBI via its consultation papers.

In a consultation paper on ‘Regulatory Framework for ESG Rating Providers (ERPs) in Securities Market’, ERPs may be allowed to register with SEBI under the SEBI (Credit Rating Agencies) Regulations, 1999, and the same shall be amended to include a chapter for ERPs. The aforementioned consultation paper, also lays out certain criteria for the eligibility for ERPs, and thereby divided it into 2 categories based on their net worth and manpower requirements.[33]  In addition to this, in order to determine whether the applicant ERP is a fit and proper person, and has to comply with criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008. [34]It is only after satisfying all the above mentioned requirements and payment of registration fees specified under Part A of Fifth Schedule, the SEBI will issue a certificate of registration and will also send an intimation to the applicant. After registration, ERPs have to abide by the Regulation 28D (3) within specified time limits.

The SEBI, in Regulation 28P of CRA Regulations, 1999,[35] expects the ERPs to frame appropriate internal procedures. These procedures will aim to monitor the fraudulent trading practices by employees of ERPs,  under the SEBI (Prohibition of Insider Trading) Regulations, 2015; SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 and other laws relevant to trading of securities. [36]

Efforts made by private or public-private entities.

Currently, there are many private and public-private entities, offering rating and rankings based on the performance on ESG indicators. Although there is not a standard mechanism for ESG rating, there are many data sources and analytical approaches, which weigh the sustainability parameters based on potential value, client interest, etc. The Dow Jones Sustainability Index (hereinafter ‘DJSI’) was the first global sustainability benchmark launched in 1999.[37] In 2019, twelve Indian companies, including Godrej Consumer Products and Havells India, were included in the DJSI. The reason for the inclusion of these companies was the non-presence of any radioactive components (for Havells) and a significant increase in the renewable energy portfolio, as well as reduced greenhouse emissions and water consumption (for Godrej). UltraTech has been ranked amongst the top 10 companies internationally, in the “Construction Material” category of DJSI, for integrating a low carbon strategy into its business roadmap, so as to fulfil the climate change goal (SDG 13).[38]

 

There are many other indicators of Environmental, Social, and Governance (ESG) performance beyond the Dow Jones Sustainability Index (DJSI). Here are some examples:

1. MSCI ESG Ratings: MSCI is a leading provider of ESG ratings, research, and data. MSCI ESG Ratings evaluate companies' ESG performance on a scale of AAA to CCC, based on more than 1,000 data points across 37 ESG issues.

2. FTSE4Good Index Series: The FTSE4Good Index Series measures the performance of companies that meet globally recognized ESG standards. The index is based on a set of ESG criteria, including environmental management, social practices, and governance issues.

3. S&P Global ESG Scores: The S&P Global ESG Scores evaluate companies’ ESG performance on a scale of 0-100, based on over 600 data points across 20 ESG issues.

4. Corporate Knights Global 100 Index: The Corporate Knights Global 100 Index is an annual ranking index of the most sustainable companies in the world. The index evaluates companies’ performance on a range of sustainability criteria, including energy and carbon productivity, water productivity, and social and governance indicators.[39]

The above indicator differs from DJSI in terms of the methodology, weightage of ESG factors, and the scope of industries covered. For instance, some indicators may focus more on social issues such as labour practices, while others may emphasize environmental issues like carbon emissions. Additionally, some ESG indicators may have a more comprehensive approach to evaluate companies’ ESG performance, using more data points and a broader set of indicators.

While DJSI is widely recognized and used by investors, academics, and practitioners, it is not necessarily ‘better’ than other ESG indicators. Different indicators may provide different perspectives and insights into a company’s ESG performance, and investors may use multiple indicators to form a holistic view of a company's sustainability practices.

Need for a uniform ESG Indicator

There is a growing need for uniform ESG indicators, as the lack of standardization in ESG reporting can make it difficult for investors and stakeholders to compare the sustainability practices of different companies. [40] Here, there are some reasons why uniform ESG indicators are needed:

 

1. Improved comparability: With standardized ESG indicators, investors can compare the ESG performance of different companies on a like-for-like basis, making it easier to make informed investment decisions.

2. Better decision-making: Standardized ESG indicators can also help companies make better decisions about their sustainability practices. By using a common set of ESG metrics, companies can benchmark their performance against industry peers and identify areas for improvement.

3. Increased transparency: Standardized ESG indicators can increase transparency in ESG reporting, making it easier for stakeholders to understand the sustainability practices of companies they invest in or do business with.

4. Reduced green washing: Green washing is a practice where companies misrepresent their sustainability practices to appear more environmentally friendly than they are. Standardized ESG indicators can help reduce green washing by providing a common framework for companies to report their sustainability practices.[41]

5. Enhanced accountability: Standardized ESG indicators can also enhance accountability by making it easier for investors and stakeholders to hold companies accountable for their sustainability practices.

 

VI. Bolstering sustainability through Investments in different forms of ESG funds

ESG funds are investment funds that focus on environmental, social and governance (ESG) criteria when selecting the companies they invest in. These funds typically seek to invest in companies that demonstrate strong ESG practices, such as reducing their carbon footprint, promoting workplace diversity and inclusion, and maintaining high ethical standards. In India, ESG funds and investments have gained popularity in recent years as investors become more aware of the impact of their investments on society and the environment. Some of the popular ESG funds in India include Axis ESG Equity Fund, ICICI Prudential ESG Fund, and SBI Magnum Equity ESG Fund.

ESG Investments as Green Bonds

Seeing the consistent efforts towards reporting of companies, based on sustainable and responsible conduct, the need of having ESG debt securities was felt by India. This was evident through the Consultation Paper released on draft International Financial Service Centres Authority (Issuance and Listing of Securities) Regulations, where emphasis was laid on ESG debt securities, and its framework.[42] The credit definitely goes to Green Bond for kick starting the process of financing towards Green Projects which targets renewables, bioenergy, low carbon transport and so on. World Bank, private companies, and national and local government institutions, generally issue these bonds. SEBI vide its circular in May 2017, has issued guidelines for the listing of Green Debt Securities in India for Green bond issuance. Since these guidelines follow international principles, SEBI has brought India closer to attain the target set in Intended Nationally Determined Contribution.[43] The first green bonds of India were issued by the Ghaziabad Municipal Corporation and listed on the Bombay Stock Exchange. These bonds raised INR 150 cores.[44] Subsequently, JSW Hydro Energy Limited has also raised USD 707 million overseas, after issuing green bonds which are currently listed in Singaporean Stock Exchange.[45]

ESG investment in Private Equity and Venture Capital funds

Recently, Avishkaar Group announced the launch of USD 250 million ESG fund with the collaboration of German investment and Development Bank, KfW.[46] This fund aimed to bolster ESG practices of mid-cap businesses in Asia and Africa, and offer them growth capital. Mostly Private Equity (PE) funds and Venture Capital (VC) funds, have witnessed the mushrooming of ESG funds in India, in the past few years. ESG funds shortlists companies that perform well on the ESG parameters. Thereafter, the financial viability of the products and the profit yield were estimated, prior to the investment. According to the report given by Bain & Co., assets under management by ESG-focussed PE funds in India more that doubled to $650 million in 2021, these PE funds are estimated to grow 90% in the next five years.[47] An analytics firm named Entrackr has reported that, in start-ups six out of top 25 early-stage deals were pertaining to the environment, in the month of January- June, 2022.[48] Although continuous investments have been made to promote effective waste management, pollution control and conservation of natural resources, the pace of investments promoting the causes of social and corporate governance factors, is sluggish.

ESG Investments in Mutual Funds

The bulletin report[49] released by SEBI in March, 2021, shows the increment of around INR 2100 crore in investment in mutual funds in FY 2019-20 and further INR 3800 crore in FY 2020-21.  Mutual Funds Industry of India, have been rapidly growing with a sustainable mind-set, as almost 25% of institutional investors are following ESG policies. As per a prominent ESG rating agency named Morning Star, Mutual Funds fare well on risk management and returns. Though, India in comparison to the global economy, has less ESG based funds, it is expected that with recent disclosure requirements by SEBI, progress will surely happen.[50] Additionally, Mutual funds companies are required by SEBI to cast votes on resolutions proposed by corporations where they have investments.[51] Moreover, on 31 August, 2021 all Mutual Funds and Asset Management Companies were required by SEBI to disclose the information pertaining risk and performance of mutual fund schemes.[52] This indeed paves a way for sustainable investing. On January, 2023 SEBI released a circular[53]  to establish a framework for disclosures by the Fund Management Entities for ESG Schemes.

The consultation paper on, ‘ESG Disclosures, Rating and Investing’, throws light upon the investments by Mutual Funds and their role in ease of doing business and transparency in governance, thereby addressing all the consequences of greenwashing and mis-selling. Under the existing legal framework, mutual funds are required to adhere to a Stewardship Code regarding their investments in publicly listed companies, which includes maintaining a defined voting policy, compulsory voting with respect to Social and Corporate Responsibility matters and many more aspects that involve public disclosure on voting decisions.[54] This is reinforced by placing additional responsibilities on Asset Management Companies (AMCs), and Mutual Funds, in order to ensure greater transparency in casting of votes and stakeholder engagement.  Furthermore, SEBI also released a consultation paper in relation to disclosure requirements in ESG mutual fund schemes,[55] which has mentioned certain ‘core responsibilities’, involving independent evaluation and  due diligence by Trustees. The ‘core responsibilities’ offers checks and balances to the powers of Trustees and also addresses the conflicts of interest between the interest of AMCs’ stakeholders and that of unit holders.

Varied efforts for inclusion of ESG

Apart from mutual funds, investors can also consider investing in individual companies that have strong ESG practices. Some of the Indian companies that score well on ESG metrics include Tata Consultancy Services, HDFC Bank, Infosys, and Wipro.

Large companies are also coming forward to adopt ESG practices. For instance, recently JSW Cement signed a sustainability linked loan of INR 400 crores, with MUFG Bank India. The said funding (being first of its kind) will help the company to achieve its goal of 25 MTPA with increased focus on sustainability.[56] Tata Sons, a group which was known for the utilization of traditionally used conventional energy have set up the Tata sustainability group in 2014. Furthermore, Tata Sons has lived up to the ideals of sustainability, this was observed in the recent vision of the chairman, Mr. N. Chandrasekaran to push -this platform for better ESG ratings.[57]

Present Scenario

The recent findings of Hindenburg Research Report[58] criticizes the Adani Group for ignoring the concerns of local communities and violating environmental regulations. The report has caused a decrement to the stock price of Adani Group, and also sparked a discussion for increased transparency and accountability. As a consequence, Adani Enterprises (a flagship company of Adani Group) has been removed from DJSI, thereby making the shares less appealing to ESG conscious investors.[59] 

 

Therefore, it is important to note that while ESG funds and investments provide an avenue for investors to align their investments with their values, they may not always perform better than traditional funds. It's essential to research and understand the underlying holdings of these funds before investing in them.

 

VII. The Impact of ESG in Investment decisions and policies: International scenario

For global trade and business, adopting the ESG mechanisms is a path for the attainment of SDGs. As per the data provided by the World Business Council for Sustainable Development (hereinafter ‘WBCSD’), it is very important for the companies to adhere to SDGs as experts have estimated that it could generate $12 trillion a year,  increase opportunities and create 380 million jobs.[60] According to Mr. Sambitosh Mohapatra, ESG Platform Leader (PwC India) the phenomenon of ESG in India, is at a nascent stage. In India the share of ESG linked bonds is 0.5 percent while in China the share is 25 percent.[61]

Compliance to ESG policies, amongst small scale enterprises.

Globally, ESG principles are becoming in vogue for the investors irrespective of its applications in the form of sovereign wealth funds, private equity funds, pension funds etc. For instance, Kohlberg Kravis Roberts (hereinafter ‘KKR’) became a signatory to the UN PRI in 2009. KKR since then has contributed in formulating the guidelines for sustainable and responsible investing, being a member of the American Investment Council.[62] In the year 2013, KKR began communicating to its employees via its own Private Equity ESG Policy, it aimed to amalgamate the idea of ‘smart businesses’[63] and thoughtful management of ESG requirements.

Some investors consider abiding ESG principles as their responsibility and have thereby integrated the principles with their Board’s fiduciary duties.[64] This provides a method of risk assessment by keeping sustainable development into consideration. The afore-mentioned instances show that firstly, the investors will not be too passive to consider investing beyond the financial indicators and secondly, investors have taken a step further by integrating the ESG factors in their investment decisions and risk analysis and also making it a part of their fiduciary duties. In a simpler way, if a company does not comply with the ESG issues, then for the investors it will become less desirable, as it will cast a doubt on the system and transparency of the company.[65]

Compliance to ESG policies, amongst large enterprises.

Amongst the big Tech companies, sustainability is considered synonymous to climate change. Google aims to achieve net zero carbon emissions, across all domains till 2030.[66] Moreover, Alphabet has also invested USD 5.75 billion in sustainability bonds, which gives an impetus to this goal.[67] Apple is also striving hard to become carbon -neutral in the supply chain and production by 2030.[68] Although, emphasising on climate change is a crucial aspect on ESG policies, this issue has its place, as a colour in a pallet of ESG parameters. ESG is a broad phenomenon where policies should contain social measures and accountability in corporate governance.

Notably, Tesla was removed from the S & P 500 ESG Index due to the company's governance and social performance falling short of the standards required for inclusion in the index. While it has made significant progress in advancing the adoption of electric vehicles and promoting sustainable energy. However, it was found to have underperformed in the below mentioned ESG criteria. For example, Tesla was criticized for its lack of transparency in disclosing environmental impact data and for its poor labour practices in some of its factories. These factors contributed to the company's removal from the DJSI in May, 2022.[69]

Unfortunately, there are many examples of prominent companies that have faced criticism for not complying with ESG regulations or failing to meet ESG ideals. Volkswagen faced a scandal in 2015 when it was discovered that the company had installed software in its diesel cars that allowed them to cheat emissions tests.[70] The scandal led to fines and lawsuits, as well as damage to the company's reputation. ExxonMobil has also faced criticism for its lack of action on climate change, racial discrimination and its history of funding climate denial organizations.[71] However, the company has made certain key changes in its strategy and is now focusing on ESG compliance in its oil and natural gas businesses.[72] The company has also been accused of human rights violations in countries where it operates, including Indonesia and Papua New Guinea. Although Xerox has displayed its performance on virus indices on their website,[73] the leading tech company has been facing many lawsuits pertaining to the violations of labour laws.[74]

The aforementioned instances call for stricter analysis for ESG requirements, along with certain penal measures for the companies, in order to safeguard the stakeholders. Most importantly, a uniform set of ESG parameters is required for investors and consumers to do their own research and consider a company's ESG performance when making decisions.

 

VIII. Conclusion

There are various forms of ESG indexes prevalent in the domain of rating and they provide ratings to different sorts of companies on different parameters. However, due to lack of standardized mechanism for ESG data collection and disclosures, firstly the companies are disclosing the data to ERPs which do not show negative about them or the different rating agencies are rating companies on different metrics. This whole process is creating a system where the one ERP is saying something about a particular company, however, the other ERP is saying something contrary to what has been said by the other ERP.  Interestingly, all the companies are in a fierce competition to lure the investors by only focusing on the positive aspects of ESG. For instance some are focusing on E and the others are focusing on S and G, so as to attract the investors and consumers for their products.  Although ESG rating in India is at a very nascent stage but financial watchdog, SEBI has to keep a check on these activities so as to protect the interest of investors and further, to set certain key indicators which would be mandatory in nature, this will  not only make ESG rating effective but also protect the interests of stakeholders. In the absence of any standardized or uniform reporting and lack of regulatory guidelines, investors would continue to face deceitful practices. In order to safeguard investor’s interest and stop ESG malpractice, therefore, it is crucial that the regulators should establish adequate benchmarks. The securities market regulator SEBI has power to prescribe key indicators. There needs to be punishment in the form of monetary and penal nature, like the BNY Mellon Case of USA,[75] where the company deceitfully cheated the investors. Recently, the US SEC has also imposed a penalty on Goldman Sachs Asset Management for failing to follow its policies and procedures involving ESG investments.[76]  Therefore, the corporates would also have to come forward to disclose the risk assessment to investors before they could take investment decisions, hence sustainability must prevail over profit earning. Adopting ESG compliance can make business more reliable, sustainable and profitable and in turn would make the economy more resilient in the long run.

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[17] Ministry of Corporate Affairs, National Guidelines on Responsible Business Conduct, 2018 <https://www.mca.gov.in/Ministry/pdf/NationalGuildeline_15032019.pdf>(last visited on March 23, 2023).

[18] Ashima Obhan and Vrinda Patodia, India: SEBI's ESG Disclosure Requirements: Business Responsibility And Sustainability Reporting, Mondaq (May 25 2022). <https://www.mondaq.com/india/securities/1196024/sebis-esg-disclosure-requirements-business-responsibility-and-sustainability-reporting> (last visited on March 23, 2023).

[19] Abhishek Saraf, BRSR Reporting: Actions and Disclosures required for Business Sustainability, Vinod Kothari And Consultants, (June 8 2021). <https://vinodkothari.com/2021/06/brsr-reporting-actions-and-disclosures-required-for-business-sustainability/(last visited on March 23, 2023).

[20] Business Responsibility & Sustainability Reporting Format. <https://www.sebi.gov.in/sebi_data/commondocs/may-2021/Business%20responsibility%20and%20sustainability%20reporting%20by%20listed%20entitiesAnnexure1_p.PDF> (last visited on 29 May 2023).

[21] Aanchal Kabra, India’s Changing Landscape of ESG Disclosures IndiaCorpLaw (October 27, 2022) <https://indiacorplaw.in/2022/10/indias-changing-landscape-of-esg-disclosures.html>(last visited on March 23, 2023)

[22] Editorial, SEBI proposes Framework on ESG Disclosures, Ratings, Economic times (February 22, 2023).

[23] Consultation paper, ESG Disclosures, Ratings, and Investing (SEBI,  February 20 2023).

[24] Consultation paper, Regulatory Framework on ESG Rating Providers (ERPs) in Securities Market’(SEBI, February 22, 2023).

[25] Id.

[26] Anindya Ghosh and Ravin Abhyankar, Demystifying SEBI’s Consultation Paper on ESG Disclosures, Ratings, and Investing Lexology ( March 2 2023).

[27] Id.

[28] Id.

[29] Id.

[30] Supra Note, 18 at 7.

[31] Maryam Rostoum, The Environmental, Social, and Governance (ESG) Ratings Industry: How can publicly traded companies improve their overall ESG scores? (PhD dissertation., Barnard College 2018).

[32] Id.

[33] Id.

[34] Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

[35] Securities and Exchange Board of India (Credit Rating Agencies) Regulations, 1999.

[36] Id.

[37] Ajit R Singhvi, Top performing ESG companies and how their stocks are faring, Economic Times (December 24, 2020) https://m.economictimes.com/markets/stocks/news/top-performing-esg-companies-in-india-how-are-their-stocks-faring/articleshow/79935953.cma>(last visited on March 23, 2023).

[38] Id.

[39] Wendy Stubbs and Paul Rodgers, Lifting the veil on environment-social-governance rating methods, Social Responsivity Journal 622, (2013)

[40] Ryan Clements, Why Comparability Is a Greater Problem than Greenwashing in ESG ETF, William and Mary Business Law Review 441 (2022).

[41] Id.

[42] Circular, Disclosure of risk-o-meter of scheme, benchmark and portfolio detail to the investors, SEBI, SEBI/HO/IMD/ IMD-II DOF3/ P/ CIR/ 2021/ 621. (August 31, 2021).

[43] Editor, Ghaziabad Municipal Corp lists first green bonds, Economic Times (April 8, 2021) <https://economictimes.indiatimes.com/markets/stocks/news/ghaziabad-municipal-corp-lists-first-green-bonds/articleshow/81974055.cms> (last visited on March 23, 2023).

[44] Editor, JSW Hydro Energy raises Rs 5187 crore via green bonds, Financial Express (May 12, 2021) <https://www.financialexpress.com/market/jsw-hydro-energy-raises-rs-5187-crore-via-green-bonds/2250201/>(last visited on  March 23, 2023).

[45] Id.

[46] Press Trust of India, Aavishkaar Capital, KfW launch $250 million ESG First Fund, Business Standard (January 25, 2022) <https://www.business-standard.com/article/companies/aavishkaar-capital-kfw-launch-250-million-esg-first-fund-122012501574_1.html> (last visited on March 9, 2023).

[47] Editor, ESG-focused PE fund allocation more than doubled in 2021; AUM to further expand in five years: Bain & Co report, Economic Times (June 16, 2022) <https://m.economictimes.com/news/company/corporate-trends/esg-focused-pe-fund-allocation-more-than-doubled-in-2021-aum-to-further-expand-in-five-years-bain-co-report/articleshow/92245660.cms>(last visited on March 23, 2023).

[48] Id.

[49] Amarjeet Singh et.al., Vol. 19 SEBI Bulletin, Department of Economic and Policy Analysis,  SEBI (2021).

[50]  Patturaja Murugaboopathy and Gaurav Dogra, India has fewer ESG funds than other top 10 economies, (Reuters, August 27 2021) <https://www.reuters.com/business/sustainable-business/india-has-fewer-esg-funds-than-other-top-10-economies-2021-08-26/> (last visited on March 23, 2023).

[51] Supra note 33.

[52] Supra note 34.

[53] Circular, Disclosures by Fund Management Entities For Environmental, Social Or Governance (ESG) Schemes, IFSCA, 756/IFSCA/ESG SCHEMES/2022-23 (January 18, 2023).

[54] Supra note 17.

[55] Consultation paper, Introduncing disclosure norms for ESG Mutual Fund Schemes’ (SEBI, October 26 2021).

[56] Editorial, JSW Cement raises ₹400 crore sustainability-linked loan from MUFG Bank, The Hindu (3rd October 2022) <https://www.thehindu.com/business/jsw-cement-raises-400-crore-sustainability-linked-loan-from-mufg-bank/article65966803.ece> (last visited on March 23, 2023).

[57] Rajesh Kurup, Tata Sons chief N Chandrasekaran to add ‘sustainability’, ‘speed’ as themes during his second term at the conglomerate, Financial Express (May 12 2022) <https://www.financialexpress.com/industry/synergy-simplification-key-themes-tata-sons-chief-n-chandrasekaran/2521081/>(last visited on  March 23, 2023).

[58] Hindenburg Research Report, Adani Group: How the world’s 3rd Richest Man Is Pulling The Largest Con In Corporate History ( January 24 2023) <https://hindenburgresearch.com/adani/>(last visited on March 23, 2023).

[59] Index Announcement, Removal of Adani Enterprises from the Dow Jones Sustainability Indices (S&P Dow jones indices, February 2 2023) <https://www.spglobal.com/spdji/en/documents/indexnews/announcements/20230202-1461140/1461140_djsi-adani-20230202.pdf> (last visited on March 23, 2023).

[60] The Reporting Exchange, ‘Insights from the Reporting Exchange’ (ESG Reporting Trends, 2017) <https://docs.wbcsd.org/2018/02/Reporting_ Exchange_Report_ESG_reporting_trends_2017.pdf>(last visited on  March 23, 2023).

[61] Id.

[62] Ruth Jebe, ‘The convergence of financial and ESG materiality: Taking sustainability mainstream.’ American Business Law Journal 645 (2019).

[63] Id.

[64] Max M. Schanzenbach, and Robert H. Sitkoff, ESG investing: Theory, evidence, and fiduciary principles, Journal of financial planning (Oct, 2020).

[65] Gautam Gandotra, Environment, Social and Governance- An analysis (Taxmann, No. 183 2017).

[66] Ruth Porat, Alphabet issues sustainability bonds to support environmental and social initiatives, Google Blog (August 3, 2020) <https://blog.google/alphabet/alphabet-issues-sustainability-bonds-support-environmental-and-social-initiatives/>(last visited on March 23, 2023).

[67] Id.

[68] Diana Olick, Climate Change will disrupt supply chains much more than COVID – here’s how businesses can prepare, CNBC (August 9, 2021) <https://www.cnbc.com/2021/08/19/climate-change-supply-chain-disruptions-how-to-prepare.html>(last visited on March 23, 2023).

[69] Lora Kolodny, Why Tesla was kicked out of S&P 500’s ESG Index CNBC (May 18, 2022).<Why Tesla was kicked out of the S&P 500's ESG index (cnbc.com)>(last visited on March 23, 2023).

[70] Russell Hotten, Volkswagen: The scandal explained, BBC (December 10, 2015) <https://www.bbc.com/news/business-34324772> ( last visited on March 23, 2023).

[71] Emily Schmall, U.S Sues Exxon Mobil over Nooses Found at Louisiana Refinery, New York Times (March 5, 2023) <https://www.nytimes.com/2023/03/05/us/exxon-lawsuit-nooses-louisiana.html>( last visited on March 23, 2023).

[72] Id.

[73] Report, Perfect Scores Boost Xerox Sustainability, Corporate, Social and Responsibility Ranking. Xerox (September 21, 2018) < https://www.news.xerox.com/news/FTSE4Good-Index-Series-perfect-scores-boost-Xerox-sustainability-and-CSR-ranking> (last visited on March 23, 2023).

[74] Carrigan v. Xerox Corp, 3:21-CV-1085 (SVN) (D. Conn. Apr. 18, 2022).

[75] BNY Mellon Bank v First Found Bank, No. G059083 (Cal. Ct. App. Sep. 9, 2021)

[76] Press Release, SEC Charges Goldman Sachs Asset Management for Failing to Follow its Policies and Procedures Involving ESG Investments, Us Sec (Washington DC, November 22, 2022) <https://www.sec.gov/news/press-release/2022-209>(last visited on March 23, 2023)