ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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ESG Disclosure Strategies in the Indian Capital Markets


In a pioneering shift and in line with a broader growth and risk management strategy, domestic and international institutional investors are placing substantial portfolio focus on corporations with a positive track record of performance on environmental, social, and governance (“ESG”) parameters. Seeking to enjoy the upsides of long-term value resulting from factors including greater social licensing and reduced regulatory intervention, ESG-focused funds manage over $35 trillion in assets and whose total assets under management (AUM) stand to rise to 33% of the global AUM by 2025. In response to such a fundamental change in investment culture and to facilitate positive ESG behaviour, traditional legal structures have been challenged and compelled to evolve. This is evidenced by the emergence of enhanced disclosure benchmarks and consumer litigation discourses in the European Union and the proposed ESG Disclosure Simplification Act, 2021 in the United States.

As compared to the Global North’s relatively coherent ESG governance models, India’s model suffers from misplaced priorities and an ineffective enforcement and liability strategy. The top 1,000 Indian listed companies by market capitalisation are required to disseminate voluntary annual disclosures of their performance on a common set of ESG parameters prescribed by the Securities and Exchange Board of India (SEBI). This obligation extends to listed companies only irrespective of their sector or scale of operation. The primary punitive consequence, once such reporting requirements are made mandatory, is the imposition of monetary fines. In line with the current Indian economic outlook of facilitating stakeholder value through socially responsible business, it is critical to design an effective legal structure for facilitating positive ESG behaviour.

I discuss four key propositions below that utilise the Indian securities and disclosure framework to achieve this ESG objective.

First, all companies desirous of accessing the Indian capital markets should, irrespective of the listing status or market capitalisation, be obligated to disclose historic ESG practices and risk-mitigation processes in their prospectus. This would serve the three-pronged objective of (i) negating information asymmetry between issuers and ESG-focused investors by spotlighting corporations with low ESG credibility and their mitigation strategies to counter-concomitant risks; (ii) casting a due diligence obligation on the underwriters who are mandated by the SEBI to verify the accuracy of prospectus disclosures; and (iii) extending criminal and civil liability to issuers and their key officers for misstatements in the prospectus, a liability construct that is already applicable to issuers accessing the public markets in India. The SEBI and the Indian stock exchanges would, as part of their routine review process, be required to assess the adequacy of such disclosures and the extent of due diligence carried out before permitting a capital raise.

Second, the mandatory reporting requirement should also apply to unlisted corporations (depending on the potential ESG impact of their business) irrespective of their intention to tap the market. Several privately held Indian corporations either (i) retain their private status while carrying on full-fledged operations in impact sectors, or (ii) choose to list themselves on foreign bourses; in both cases, insulating themselves from Indian compliances. To counter this regulatory vacuum, private corporations in at-risk sectors should be required to publish key ESG metrics in annual shareholders’ reports.

Third, to appreciate material sectoral differences between corporations in at-risk sectors, namely ESG practices, it is critical for the SEBI to design distinct sector-wise disclosure guidelines as opposed to the present “one-size-fits-all” model. To address individual circumstances of corporations, the SEBI must formulate a model that assigns varied weightage to ESG parameters in different sectors. For instance, a coal-mining corporation would need to make lengthier disclosures on ethical labour sourcing and raw material procurement, while a tannery would need to do so for effluent discharge and waste processing.

Fourth, ESG performance should—for corporations operating in sectors with large environmental and social impact, such as mining and construction—be made a continuous disclosure requirement (such as quarterly, like insider trading and takeover reporting) to the stock exchanges and in shareholders’ reports, regardless of materiality. This will enable ESG-conscious investors to monitor their performance continuously and holistically. This is crucial given that several ESG-focused investors are long-, short-term funds that have the ability to quickly move capital to outperforming corporations.

While aligning internal corporate processes to meet the expectations of this revised structure could be expensive, primary research and market momentum have established the likelihood of an overall increase in stakeholder value through an enhanced, defined ESG disclosure and liability regime.

Devarshi Mukhopadhyay




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Updated On : 4th Jun, 2022
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