The Securities and Exchange Board of India was formed after the Indian parliament passed the Securities Exchange Board of India Act, 1992 in response to the financial services assessment program, a program developed by the World Bank and International Monetary Fund that observes and reports on the global financial systems.

The Indian government wanted to establish a strong financial atmosphere and securities market with a regulator promoting the latest in corporate governance standards. SEBI sets standards by which the securities market must operate, and protect the right of issuers and investors. SEBI has the power to investigate circumstances where the market and its players have been harmed and can enforce government standards with directives.

Now coming to ESG (Environmental, Social, and Governance), it takes the holistic view that sustainability extends beyond just environmental issues. ESG can be best explained as a framework that helps the stakeholders understand how an organization is managing risks and opportunities related to environmental, social, and governance criteria.

While the term is often used in the context of investing, stakeholders include not just the investment community but also consumes customers, suppliers, and employees. ESG investing also becomes very important in a fast-growing economy like India, allowing the government, investors, and companies to build a sustainable business economy.

SEBI understood the rise and importance of ESG investing in India and thought it necessary to incorporate sustainability reporting by corporates on par with financial reporting. This would ensure the adoption of ESG as a metric to evaluate corporate performance.

SEBI role in Corporate Governance:

To make corporate governance more effective, SEBI since its setup in 1992 has taken up a number of initiatives, appointed various committees, and has brought amendments to Clause 35B and Clause 49 of the listing agreement. Here the SEBI's role in corporate governance is illustrated through norms and provisions as stated in these two clauses; Clause 35B and Clause 49 of the listing agreement. SEBI norms and guidelines under Clause 35B and 49 of the listing agreement for effective Corporate Governance. Since its establishment, SEBI has taken initiatives to align Indian corporate governance practices with the global standards adopted in advanced economies.

The recent amendments to Clause 35B and 49 of the listing agreement make Governance more effective and rigorous in protecting the interest of all stakeholders. The amended Clause 49 of the listing agreement is in alignment with the new Companies Act, of 2013. This clause is applicable to listed companies but as per SEBI clarification, in future, this clause will be applicable to non-listing companies also.

ESG regime in India:

Though ESG is gaining more and more importance in the corporate/business ecosystem, unfortunately, there is no single piece of legislation laying down ESG compliance. ESG compliance comes from various sources of laws enforced in India, some of which are as follows:

Companies Act, 2013:

Section 134(3)(m) of the Companies Act mandates the board's report to contain details on the conservation of energy including any steps taken or impact on the conservation of energy, steps taken to utilize alternative sources of energy, capital investment in energy conservation equipment, efforts towards technology absorption, etc.

Section 135 of the Companies Act read with the Companies (Corporate Social Responsibility Policy) Rules, 2014 makes it mandatory for companies with specified net worth, turnover, or net profit to constitute a Corporate Social Responsibility (CSR) committee to oversee the CSR policy and activities.

Eligible companies are required to annually spend at least 2% of their average net profits of the last three financial years on CSR. The board's report shall disclose the composition of the CSR committee, the content of the CSR policy, an explanation for any unspent amount, etc.

Section 166 of the Companies Act lays down the duty of a director of a company to act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment.

Section 149 of the Companies Act read with Rule 3 of the Companies (Appointment and Qualifications of Directors) Rules, 2014 stipulates having Women directors for certain classes of companies. Additionally, Regulation 17(1)(a) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires the top 1,000 listed entities to have an independent, Woman director on their boards.

Section 177 of the Companies Act requires the board of every listed company and certain classes of public companies to constitute an audit committee consisting of a minimum of three directors, with independent directors forming a majority.

Additionally, Regulation 18 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires that at least two-thirds of a listed entity's audit committee members are independent directors; however, in case of a listed entity having outstanding SR equity shares, all members must be independent directors. It also requires that the chairperson of the audit committee shall be an independent director.

Section 178 of the Companies Act requires the board of every listed company and certain classes of public companies to constitute a nomination and remuneration committee (NRC) consisting of three or more non-executive directors, out of which not less than one-half shall be independent directors.

The chairperson of the company (whether executive or non-executive) may be appointed as a member of the NRC but shall not chair the NRC. Additionally, Regulation 19 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires that in case of a listed entity having outstanding SR equity shares, two-thirds of the NRC shall be composed of independent directors. It also requires that the chairperson of the NRC shall be an independent director.

While the Securities and Exchange Board of India (SEBI), i.e., the capital markets regulator, made it mandatory for the top 100 listed companies by market capitalization to file a business responsibility report (BRR) capturing their non-financial performance across ESG factors back in 2012, SEBI has recently, in May 2021, expanded the BRR and replaced it with a new business responsibility and sustainability report (BRSR).

SEBI vide Regulation 34(2) (f) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and its circular dated 10 May 2021 on 'Business responsibility and sustainability reporting by listed entities' (BRSR Circular) made it mandatory for the top 1,000 listed entities by market capitalization to include, in their annual report, a BRR describing the initiatives taken by the listed entity from an ESG perspective.

The requirement of submitting a BRR shall be discontinued after FY 2021–22 and be replaced thereafter by BRSR with effect from FY 2022–23. While the existing BRR filing is mandatory for FY 2021–22, listed entities have been given the option to voluntarily file the new BRSR for the present financial year in lieu of the BRR. The remaining listed entities may voluntarily submit such reports.

Environmental Laws:

Environment (Protection) Act, 1986 entails rules in relation to e-waste management, bio-medical waste, solid waste, ozone-depleting substances, construction and demolition waste, hazardous waste, hazardous chemicals, plastic waste, batteries, and rules to assess the environmental impact of the establishment of any industry.
Water (Prevention and Control of Pollution) Act, 1974, and Air (Prevention and Control of Pollution) Act, 1981, impose obligations on companies for prevention, control, and abatement of water and air pollution.

Wildlife (Protection) Act, 1972, the Forest (Conservation) Act, 1980, and the Biological Diversity Act, 2002 ensure that companies do not interfere with the natural ecosystems of their area of operations.

SEBI's role in mandating ESG Disclosure:

There may not yet be any single, comprehensive, and stringent enactment governing the entire subject with all checks and balances, but SEBI (Securities and Exchange Board of India) has taken on the role of implementing an efficient ESG policy. As far back in November 2015, SEBI issued a circular prescribing the format for the Business Responsibility Report (BRR) with respect to reporting on ESG parameters by listed entities.

The top 500 listed companies in India were instructed by SEBI to disclose indicators of business responsibility and sustainability through Business Responsibility Reporting (BRR). Companies were mandated to include disclosures on opportunities, threats, risks, and concerns as part of their annual reports under Regulation 34(3) of the SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 (LODR Regulations).

In 2017, SEBI issued a circular on 'Disclosure Requirements for Issuance and Listing of Green Debt Securities' (also known as Green Bonds) to introduce the regulatory framework for the issuance of green debt securities in India and enhance investor confidence.

It supplements the SEBI (Issue and Listing of Debt Securities) Regulation, 2008, and envisages a list of disclosures that an issuer must make in its offer document before and after the commencement of a project financed by green debt.

These additional disclosure requirements have been prescribed to attract the finance reserved for ESG-compliant projects, such as renewable energy and sustainable energy, clean transportation, sustainable water management, climate change adaptation, energy efficiency, sustainable water management, sustainable land use, and biodiversity conversion.

To further strengthen the ESG disclosure regime in India, SEBI amended Regulation 34(2)(f) of the LODR Regulations and on May 10, 2021, SEBI issued another circular detailing new sustainability-related reporting requirements on ESG parameters called the Business Responsibility and Sustainability Report (BRSR) to replace the existing BRR and place India's sustainability reporting on par with the global reporting standards.

The BRSR is intended to have quantitative and standardized disclosures on ESG parameters. Such disclosures will be helpful for investors to make better investment decisions and also enable companies to engage more meaningfully with their stakeholders by encouraging them to look beyond financials and toward social and environmental impacts.

The filing of BRSR after the implementation of new norms has been stipulated as mandatory for the top 1000 listed companies (by market capitalization) for the financial year 2022-23 but voluntary for the financial year 2021-22, to provide the companies with sufficient time to get used to new reporting compliance/regulations.

The BRSR seeks continuous disclosures from listed entities on their performance and is aligned with the nine principles of the 'National Guidelines for Responsible Business Conduct' (NGBRCs). The adoption of BRSR is yet to pick up the pace because of the detailed nature of disclosures required in BRSR. To speed up the process, in a Press Release on May 6, 2022, SEBI constituted an advisory committee on ESG matters in the securities market to create faster momentum.

In respect of non-listed companies, however, there is currently no law that mandates that such companies be subject to mandatory ESG disclosure or reporting requirements. However, it can be expected that once the scheme is fully implemented where it is comparatively easier to regulate, it will certainly cover other companies as well as industries in unorganized sectors.

ESG disclosures are highly significant and relevant for all prospective stakeholders involved in business for reasons briefly described as follows:

• Investors:
  If a business is not conscious of sustainability, there are chances of it becoming redundant in the future due to legal and regulatory changes prohibiting certain ways of doing business or decreasing demand for business products or deteriorating services. This aspect would certainly motivate the investor's focus while investing.
   
• Businesses:
  ESG disclosures identify potential transition risks, assess future viability, and take the necessary steps to adapt to likely future changes. Companies that are not aware run the risk of losing profit-making capacity as well as market reputation.
   
• Consumers:
  ESG disclosures also help conscious consumers identify responsible businesses that not only concentrate on profit maximization but also grow in a responsible manner. Accordingly, the disclosures become part of a marketing strategy to attract more consumers.

ESG goals are a set of standards for a company's operations that force companies to follow better governance, ethical practices, environment-friendly measures, and social responsibility. They are used by socially conscious investors to screen potential investments. Environmental criteria consider, for example, how a company performs as a steward of nature and safeguards the environment, including corporate policies addressing climate change.

Companies with better ESG performance have a better track record on issues such as human rights, climate change, environmental sustainability, social responsibility, ethics, and transparency, and hence are more resilient against future risks. It has become absolutely essential for companies to have comprehensive ESG policies in place.

Conclusion:
ESG investing is very important for an emerging economy like India as it provides an opportunity for all stakeholders to build an economy that is financially inclusive and measured by parameters beyond financial metrics. SEBI is indeed a visionary to facilitate the achievement of the United Nations Sustainable Development Goals and the Paris Agreement on Climate Change by way of mandatorily requiring ESG reporting by Indian companies. One hopes that the applicability of the BRSR reporting is extended to all listed companies and large unlisted companies.