March 01, 2021
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Note To Companies: Get Eco-Friendly, Or Prepare To Fold

Environmental, social and governance credentials of a company are key factors determining its success and growth.

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Note To Companies: Get Eco-Friendly, Or Prepare To Fold
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Note To Companies: Get Eco-Friendly, Or Prepare To Fold

The National Green Tribunal (NGT) in its order dated 10 September, 2020 while hearing a matter pertaining to use of ‘excessive plastic’ by e-commerce companies in packaging directed the Central Pollution Control Board (CPCB) to undertake an environmental audit of the respondent companies to assess and recover compensation for violation of environmental norms by such companies.

While the NGT in the past has also called for the implementation of the Extended Producer Responsibility (EPR) this is probably one of the very few occasions where the NGT has asked for an environmental audit of the companies. Environmental, social and governance (ESG) credentials of a company are increasingly determining its success and growth. Across the world ESG disclosures including those relating to climate change are becoming crucial. ESG credentials are not just an ethical consideration but they are crucial to determine the revenue and potential funding of companies. For institutional investors ESG management is a key concern to help them generate higher values for their portfolio companies.

In 2011 the Ministry of Corporate Affairs, Government of India had released the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs). Again in 2019, to align these guidelines to the global sustainability standards, the Sustainable Development Goals (SDGs), and the United Nations Guiding Principles on Business & Human Rights (UNGPs) the NVGs were revised and released as the National Guidelines on Responsible Business Conduct (NGRBC). The NGBRC was developed with the primary intent of guiding businesses to adopt the principles of responsible conduct in their day to day operations and not treat them as mere regulatory compliance requirements. The NVGs had provided for a disclosure mechanism in the form of Business Responsibility Report (BRR). The BRR has also been amended to reflect the principles of NGRBC and provide encouragement to the corporations in India to take a leadership role in making these disclosures.

The Task-force on Climate-related Financial Disclosures (TCFD) was set-up to help develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders. New Zealand has made it mandatory for all banks, asset managers and insurance companies with more than NZ$1 billion in assets to disclose their climate risks, in line with the emerging global standard from the Task Force on Climate-related Financial Disclosures (TCFD). Mandatory TCFD disclosure by New Zealand is a perfect example of a progressive approach taken by a country to ensure its disclosure standards are aligned with international best practices. When India established the NGT, it probably became only the third country in the world after New Zealand and Australia to have specialised environmental court/tribunal. It would be a good idea to follow New Zealand’s example again and adopt a progressive approach where companies are required to make disclosures of environment and climate change risks.

With ESG credentials greatly determining the investments from both individual and institutional investors, companies which are ethical and thus proactive in addressing ESG risks that might affect their business operations are able to attract higher amount of capital. The US SIF Foundation's Report on US Sustainable, Responsible and Impact Investing Trends identified $12.0 trillion in total assets under management at the end of 2017 using one or more sustainable investing strategies. In Europe, as per some estimates, the inflow of capital in sustainable funds reached €120 billion in 2019, nearly triple the previous year’s amount which stood at €44.8 billion.

The changing environmental and socio-economic conditions cannot be ignored by corporations anymore. Only such adaptive corporations that are well-equipped to handle the changing circumstances will be able to survive in an increasingly competitive and sustainability-conscious market. The brand of the company is strengthened by the steps they take for improving the conditions of the labourers working for them, promoting a diverse and inclusive workforce and ensuring that they follow the environmental norms and devise a robust ESG framework internally. The millennial population is extremely conscious about ESG issues, and now that they are becoming important stakeholders like employees, consumers and investors, they recognize and reward corporations with sustainable practices and policies.

Companies with weak governance structures have increasingly come under scrutiny from activists for failing to take a position on important environmental and social issues affected by their operations. Customers, vendors, shareholders and investors have all become vocal in their ESG demands. Only companies with a forward-thinking approach that have well-developed mechanisms to identify and mitigate ESG risks will be able to shield themselves from the intervention of activists and get the social license to operate. Any company, irrespective of where it is located, if not equipped to respond to the changing regulations and societal requirements, will find it increasingly difficult to sustain in the long run unless they do the right things.

(The author is a Partner in the Environmental Law practice at Shardul Amarchand Mangaldas & Co. The views in this article are the personal views of the author)

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