Of late, there has been a concerted global move amongst corporates to veer towards strengthening their social responsibility and promoting sustainable development. While governments around the globe (in particular, the Indian Government) have taken some initiatives, a fair number of funds (not just impact investment funds) are also beginning to expect their investee companies to follow ESG (or environment, social and governance) principles and norms and take CSR (corporate social responsibility) initiatives. Their Limited Partners or LPs are desirous of an increased focus on not just monetary returns, but also farreaching social impact created on account of their investment. Further, corporates are independently being nudged towards following ESG norms by their shareholders and other stakeholders. This attention towards ESG goals has heightened in the wake of the pandemic considering the havoc unleashed by COVID-19 on societies across the globe.
In India, social impact principles are being enforced in some way or the other by the Indian Government through the Companies Act, 2013 (“CA”) and the requirements issued by the Securities and Exchange Board of India (“SEBI”). We aim to analyse the same in this article and also throw light on the extant requirements in certain other jurisdictions.
On April 1st 2014, India became the first country in the world to legally mandate corporate social responsibility through the CA and the rules framed thereunder.
Section 135 of the CA mandates that every company in India with a net worth of INR 5,00,00,00,000 (Indian Rupees Five Billion) or more, or with a turnover of INR 10,00,00,00,000 (Indian Rupees Ten Billion) or more or with a net profit of INR 5,00,00,000 (Indian Rupees Fifty Million) or more as shown on the balance sheet in a preceding financial year must be involved in CSR activities by setting up a Corporate Social Responsibility Committee within its Board of Directors. The Board of Directors is, in turn, empowered to plan, approve, execute, and monitor the CSR activities of the company, the tasks undertaken by the CSR committee and are also vested with the responsibility to ensure that a minimum of 2% of the net profits made during the 3 (immediately) preceding financial years are spent towards CSR activities. Additionally, companies are also required to make disclosures in their financial statements to the Ministry of Corporate Affairs (“MCA”) regarding the expenditures undertaken for CSR activities.
If one were to ponder over what activities are recognised as CSR activities, one needs to look no further than Schedule VII of the CA. Schedule VII provides for a comprehensive list of activities for which CSR expenditure can be incurred (eradication of hunger, poverty, malnutrition, the promotion of education, gender equality, women empowerment, rural sports, ensuring environmental sustainability, ecological balance, protection of national heritage, art and culture, promoting incubators or research and development projects in the field of science, technology, engineering and medicine, etc). It becomes germane to note here that no expenditure can be made beyond the scope of Schedule VII. However, since these activities are for welfare programmes, the items listed under Schedule VII are meant to be liberally interpreted to permit a wide range of activities that can be covered as CSR expenditure1 .
While discussing the requirements of companies, it is also important to touch upon the penalties in case of non-compliance. The penalties levied on a company for non-compliance of its respective duties as per Section 135 of CA is enumerated under Section 134(8) of the CA wherein the company shall be punishable with a minimum fine of INR 50,000 (Indian Rupees Fifty Thousand) which may increase to INR 2,500,000 (Indian Rupees Two Million Five Hundred Thousand), or a punishment which is imprisonment for a term which may extend to three years or both.
Moreover, since the applicability of mandatory CSR provision in 2014, CSR spending by corporate India has increased significantly. In 2018, eligible companies spent 47% more compared to the amount spent by them in 2014-15, contributing close to USD 1 billion to CSR initiatives.
Also, it is pertinent to note that with the onset of the coronavirus pandemic, the MCA, through its notifications dated March 23rd 20202 and April 22nd 20213 , clarified that a company’s expenditure towards the promotion of healthcare, sanitation, disaster management and ‘the setting up of makeshift hospitals and COVID-care facilities’ to fight the pandemic will also be considered valid under CSR activities under schedule VII of the CA.
On May 10th 2021, the SEBI issued a circular (“Circular”) introducing the Business Responsibility and Sustainability Report (‘BRSR’) requirement, which will replace the Business Responsibility Reporting (‘BRR’) requirement by the top 1,000 listed companies by market capitalization.4 The new disclosure requirement (BRSR) format is based on the nine principles stipulated in the National Guidelines on Responsible Business Conduct (“NGRBC”) and listed below:
Principle 1: Businesses should conduct and govern themselves with integrity, and in a manner that is ethical, transparent, and accountable.
Principle 2: Businesses should provide goods and services in a manner that is sustainable and safe.
Principle 3: Businesses should respect and promote the well-being of all employees, including those in their value chains.
Principle 4: Businesses should respect the interests of and be responsive to all their stakeholders.
Principle 5: Businesses should respect and promote human rights.
Principle 6: Businesses should respect and make efforts to protect and restore the environment.
Principle 7: Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent.
Principle 8: Businesses should promote inclusive growth and equitable development.
Principle 9: Businesses should engage with and provide value to their consumers in a responsible manner.
The BRSR aims to enforce not merely the reporting, but also the actual implementation of the NGRBC principles by eligible companies. The report requires the companies to disclose the description of the policies in place and the mechanisms implemented by them to follow these principles. This ensures that a company remains ESG compliant not just on paper but in spirit as well.
BRSR helps the stakeholders recognise a company’s commitment towards ESG parameters. ESG compliant companies gain the benefits of effectively reaching out to responsible investors, increased access to capital, loyalty from consumers and value creation to shareholders. BRSR also helps in building awareness and in bringing about change in the internal managerial functionality of a company.
The disclosures to be made under the BRSR are from an ESG perspective and are intended to enable businesses to make disclosures in a standardized format, engage more meaningfully with their stakeholders, be transparent, demonstrate their sustainability objectives, position and performance and encourage them to go beyond regulatory financial compliance and report on their environmental and social impacts.
The reporting in respect of the BRSR compliances is required to be issued under the format mentioned in Annexure I of the Circular, which is specified below:
United Kingdom: Companies are mandated to provide and publish a report on their website disclosing their annual greenhouse gas emissions, diversity, and human rights under the Companies Act 2006 (Strategic and Director’s Report) Regulations, 2013. Companies with a premium listing of equity shares in the UK are also required to report the CSR compliances undertaken by the company along with their application of the main principles of the Corporate Governance Code, 2012.
United States of America: Unlike India, there is no official law in place in the USA that mandates the corporates to spend a specific portion of their income towards Corporate Social Responsibility.6 As an obligatory practice, owing to consumer expectations and internal norms, corporates usually follow internal policies such as reducing carbon footprints to mitigate climate change, improving labour policies and embracing fair trade, engaging in charitable giving and volunteer efforts within the surrounding community, and making socially and environmentally conscious investments.7 Further, while the Securities and Exchange Commission (“SEC”) in 2010 has issued interpretative guidance regarding disclosure related to climate change, it has recently stated publicly that it will propose a rule to require climate-related disclosures in public filings and that the proposal will likely be made before the end of this year.8 This is a step forward in the SEC’s focus on sustainability and climate change matters.
Other than these, while there are no extensive laws for positive reinforcement, there are laws in place in the USA to prevent companies from causing social or environmental harm and to force them to take necessary precautions or steps to revert the damage caused by their operations. For example, the US federal legislation protects the environment from harm spawned by corporate activities through the National Environmental Protection Act, the Clean Air Act, the Clean Water Act, the Safe Drinking Water Act, the Toxic Substances Control Act, and other related environmental regulations.
Australia: The Australia Corporations Act 2001 requires Product Disclosure Statement (PDS) to set out the extent to which labour standards or environmental, social, or ethical considerations are taken into account in the selection, retention or realisation of investments. It also requires more detailed disclosure about the considerations the issuer takes into account in relation to the ESG purposes of an investment and the extent to which those considerations impact the selection, retention or realisation of that investment or investments.
Companies in India like Tata Group, Reliance Industries claim that sustainability is among the top four business objectives for the organization and have begun to include ESG targets as a part of their priority commitments.11 Further, companies like Tech Mahindra, Infosys, and Wipro are a part of the Dow Jones Sustainability Index (“DJSI”), which assesses the ESG performance of companies globally. Such practices have been a profitable commitment for the companies and resulted in value creation as it helps them to attract institutional and retail investors who wish to invest in companies that are more socially responsible.12 In fact, Indian companies which are part of the DJSI and have been following healthy ESG practices have seen positive returns and fared well on Indian stock exchanges as well.
There has been a paradigm shift in the way investors (both institutional and retail) look at companies and they increasingly believe in impact investing via sustainable growth, and not just through mindless wealth creation. A board of directors in today’s social climate would be living in a fool’s paradise if they do not imbibe strong ESG practices to mitigate risks related to climate change, human rights, labour rights and still expect to grow at a strong pace and attract capital in the long run. A clear indicator is shown by Bloomberg who has forecasted global ESG assets to hit USD 53 trillion by 2025.
India is on the right part when it comes to ESG regulations; and authorities should help Indian companies become more attractive to impact-driven investors and also save and preserve our planet, our Gaia, in the long run. It is for Indian companies to carefully analyse with the help of their advisors the compliances and disclosures applicable to them under the CSR and ESG norms to ensure nil hiccups occur on their pathway towards growth.
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