Environmental, Social and Governance Policy (the “ESG policy”) is not a mandatory requirement under the Indian regulatory regime but is formal documentation in the form of policy governing the internal operational aspects with respect to environment, labour, health safety and executive functions. It aims to provide the mechanism and procedures which govern the internal practices of the company to ensure that the entity is compliant with the applicable laws all the while fulfilling the objectives of the visions and mission of the entity. Having an ESG policy checklist for the Indian private companies is essential to ensure that the entity is compliant with the applicable laws all the while ensuring an internal oversight and the control that is reasonable.
The article aims to shed light on framework on the ESG policy by providing a comprehensive checklist for the ESG policy of a private company in India. The checklist aims to provide a guide to ensure that the framework is legally compliant, ensure that all disclosures are as per the updated regulations and the governance mechanism encapsulates the impact on investors and other stakeholders. . While the regulatory mandates require the listed companies to establish a Business Responsibility and Sustainability Report (BRSR), such requirements are absent in the unlisted companies. However, it is suggested that such entities have implemented similar mechanism for reporting of corporate sustainability India.
Is ESG policy a requirement of Indian privately-owned companies?
No, the implementation of the ESG policy in India by the private companies is not a regulatory compliance and the same is limited to public companies. The private companies are however required to adhere to various environmental, social and governance compliances and obligation. To this effect, an ESG policy will provide a comprehensive provision governing the internal obligations and procedure to ensure that the employees and other stakeholder ensure that company is legally compliant.The ESG policy for the private companies thereby does not stand as direct regulatory requirement stemming from a single law but is a regulatory requirement developed from various sectoral laws. These sectoral laws may include but are not limited to:
- Environmental laws
- Labour laws.
- Companies Act, 2013.
- RBI regulations.
Thus, ESG policy while not legally mandated under the Indian regulations, any private company which is engaged in multi-sectoral industries must establish the policy to ensure efficiency and effective compliance of the laws in India.
Which Indian laws indirectly require ESG compliance?
While there is no mandatory requirement to implement an ESG policy, the nexus of the policy is derived from the statutory ESG compliance under the following:
Environmental obligations
The laws which create the environmental compliance requirements are as follows:
- Environment (Protection) Act, 1986;
- Air (Prevention and Control of Pollution) Act, 1981;
- Water (Prevention and Control of Pollution) Act, 1974; and
- Management Rules of Hazardous Wastes.
Social and labour obligations
The laws which create the social and labour compliance requirements are as follows:
- The Industrial Relations Code, 2020;
- The Code on Wages, 2019;
- The Code on Social Security, 2020;
- The Occupational Safety, Health and Working Conditions Code, 2020; and
- The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013.
Governance obligations
The laws which create the internal governance requirements are as follows:
- Companies Act, 2013;
- RBI regulations; and
- Prevention of Corruption Act, 1988.
These obligations cumulatively create the grounds for the establishment of the ESG policy by the private company in India.
Is BRSR framework at SEBI applicable to unlisted companies?
No, the private unlisted company are not required to establish a Business Responsibility and Sustainability Report (“BRSR”) as per the SEBI regulations. The Business responsibility and sustainability Report is mandated to public companies which are among the top 1,000 companies in terms of market capitalisation.
BRSR is not applicable on the private companies, however the private companies are advised to conduct the following:
- The implementation of the BRSR at the private company stage ensures ease in strategising and implementation of the IPO by private companies.
- Ensures that the internal practices of the company are aligned with the requirements of the group companies.
- BRSR are often one of the documents which is requested by private equity investors during the process of investment.
In light of the following the voluntary implementation of BRSR is recommended to ensure that company is equipped for future actions.
When do lenders or investors require ESG adoption?
When a private company either approaches or is approached by a lenders or investor such entities often require the following documents from the private company:
- Representations and warranties establishing compliance with the ESG requirements;
- Certificates of environmental and labour compliances;
- Anti bribery mechanism and disclosures; and
- Statements emphasising the network of supply chain integrity.
Thus, the ESG compliance plays a vital role in the investors and lenders decision with respect to the private company.
What should an ESG policy for an Indian private company include?
The ESG policy to be effective, it must comprise of detailed internal mechanism which is dealing with the procedure and obligations for the following governance structures, environmental compliance, and internal accountability with respect to the labour matters.
The ESG policy must thereby comprise of the following provisions:
- ESG committee to oversee the compliance;
- Establish environmental protection commitments and obligation under the law;
- Social and labour compliance requirement and the procedure for adherence;
- Mechanism for board and other internal governance mechanisms; and
- Monitoring and review the effectiveness of the ESG Policy.
What environmental commitments must be addressed?
An ESG policy must address the following environment related requirements:
- Compliance with applicable environmental laws ensuring that the private company has all the permits;
- Ensure that the company has a waste management mechanism;
- Emission reduction and energy conservation strategy if and when applicable; and
- Resource consumption to promote safeguarding of the environment.
Companies which are falling under the scope of industries must ensure that it has incorporated all the environmental compliance requirements into its ESG policy.
Such industries must ensure that it has the following incorporated into its policy to promote compliance:
- Valid Consent to Establish (CTE) and Consent to Operate (CTO);
- Hazardous waste disposal methodology; and
- Environmental audit.
What social governance standards are expected in India?
The Social pillar of the ESG policy must address the following:
- Labour law certification and compliance;
- Workplace safety i.e. POSH and health and safety; and
- Promote equal opportunity and diversity in the company.
The key obligations under the labour law which falls under the scope of social pillar of the ESG policy are as follows:
- POSH compliance and reporting;
- Conducting of the health and safety audit;
- Ensuring its wage is compliant with the Code on Wages; and
- Implementing of a grievance redressal mechanism.
These are obligation form the foundation of the social aspect of the ESG policy.
What governance controls should be formally documented?
The private company to ensure compliance with the best industry practices may implement the following policies to ensure establishment of comprehensive overview of the governance standards:
- Code of conduct;
- Anti-bribery and anti-corruption policy;
- Conflict of interest policy;
- Whistleblower policy; and
- Related party transaction policy.
These policies must establish the obligations and related liabilities of the directors.
How should ESG responsibilities be allocated within the company?
The policy must ensure establishing the following for the mechanism to ensure its effectiveness is reviewed and improved upon:
- Mandate that the board review the actions being conducted with respect to the ESG
- Establish the obligations of the senior management to meet the objectives of the ESG policy;
- Appoint a compliance officer to coordinate, enforce and review the ESG policy; and
- Conduct internal audit.
The establishment of a comprehensive review mechanism ensures defensibility and supports with respect to the risk arising from the ESG.
How do CSR obligations under the Companies Act, 2013 interact with ESG policies?
The CSR and ESG are separate and distinct requirements under the law. The CSR and ESG may be harmoniously constructed to ensure that these overlap with one another. CSR is a statutory requirement established under the Section 135 of the Companies Act, 2013 promoting corporate’s social responsibility once it meets the requirements whereas ESG for a public company is a voluntary action undertaken to mitigate risk.
Is CSR the same as ESG?
No, CSR and ESG are separate obligations under the law. The key factors which differentiate the two concepts are as following:
CSR obligation focuses on the following requirements:
- Mandates that the prescribed percentage of turnover be used for the social benefits.
- Activities must be implemented for the betterment of the society at large.Ensure that the private company is making the statutory disclosures.
ESG is a broader policy which is voluntary and focuses on the following:
- Environmental law compliance and other internal practices;
- Governance mechanism implemented by the private company; and
- Social welfare and other labour law compliance.
CSR may be deemed as an obligation which may form a part of a broader ESG policy.
Can CSR spending be integrated into an ESG framework?
Yes, a private company may at its discretion integrate the CSR into the ESG policy. However, the following must be taken into consideration:
- Sustainability of the CSR requirements being integrated into the ESG policy;
- Impact metrics of such integration; and
- Environmental restoration initiatives being harmonised with the CSR requirements.
However, the resources allocated for the implementation of the ESG objective must not solely be used for the CSR.
What board approvals are required for CSR-linked ESG initiatives?
The board must conduct a meeting to approve the following by passing of resolution:
- Approve CSR policy; and
- Disclose CSR expenditure in Board’s Report in accordance with the mechanism established under the ESG policy.
What environmental compliances must be reflected in an ESG policy?
The environmental section must implement the mechanism which ensures that the statutory compliance obligations are complied with and such companies vide its ESG policy should conduct the following:
- Environmental compliance audit;
- Review of the consent of establishment and the reporting; and
- Verification of the vendors in accordance with the environmental laws.
Which pollution and environmental laws are commonly triggered?
Common provisions in the ESG policy include the following trigger points:
- Consent of establishment under the Air and water pollution regulations.
- Environmental Impact Assessment procedure andapprovals methods.
- Extended Producer Responsibility obligation.
Are climate risk disclosures required for private companies?
- The sample of climate related risk disclosures by a private company includes the following:Financial institutions may require climate risk disclosure;
- Export supply chains may impose climate reporting; and
- Investors may request the private company to submit report on the carbon tracking.
How should companies address waste management and energy use?
The ESG policy in order to be comprehensive and address all environmental issues, it should address the following:
- Waste segregation mechanism.
- Vendor obligation with respect to waste management.
- Promote renewable energy and reduction of waste creation.
Environmental commitments under the policy must be specific and measurable.
What social and labour law compliances should be covered in an ESG policy?
The social aspect of the ESG policy must focus on the compliance with labour laws and workplace practices.
How should workplace safety and POSH compliance be addressed?
The policy should mandate that it should be compliant with the POSH act and must implement the following:
- Setting up of an Internal Committee in accordance with the POSH Act.
- Conduct annual audits and relevant reporting.
- Establish a grievance redressal mechanism.
Failure to comply with POSH requirements attracts not only monetary penalty but also in certain cases criminal proceedings.
What diversity, equity, and inclusion standards are relevant in India?
The private company may at its discretion implement the following policy to follow best practices:
- Equal opportunity policy.
- Non-discrimination Policy.
- Human Right Policy.
How should supply chain labour risks be managed?
Companies may mitigate risk arising out of labour compliance by conducting the following activities:
- Conduct vendor compliance audits.
- Obligate vendor to certify that it has adhered with the labour compliance via clauses in contracts.
- Monitor contractor wage and its compliance with the code on wages.
What governance mechanisms should support ESG implementation?
Governance of the ESG policy can be substantiated by implementing of mechanism and board support.
Should the board formally oversee ESG risks?
Yes, the board must actively undertake steps to ensure that it is promoting the compliance of ESG policies by performing the following:
- Review the ESG objectives as an agenda item.Monitor the risk which has been determined based on the activities arising out ESG policy.
Is a dedicated ESG committee necessary for private companies?
- The establishment of ESG is not a mandatory requirement are only advisable for the following:Large private companies.
- Investor-backed private companies.
- Companies which are converting itself to be a listed company.
Smaller companies with limited financial aid may allocate ESG policy functions to its audit committee or any other committee having the technical knowledge.
How should whistleblower and ethics frameworks be aligned with ESG?
Whistleblower mechanisms must comply with the companies act, 2013 and the rules and regulation therein and should contain the following:
- Permit reporting while ensuring that the whistleblower identity is confidential.
- Conduct inquiry as per the internal policies and impose penalty or disciplinary actions for violations.
How should Indian private companies document and monitor ESG performance?
Companies should maintain the following documentation:
- ESG policy and compliance manual.
- Compliance tracker to ensure the effective implementation.
- Incident register identifying the risk.
- Annual review report of the ESG policies.
This supports structured ESG reporting obligations for private companies, even where not publicly disclosed.
Are internal ESG reports sufficient without public disclosure?
Yes, for private companies the ESG policy is voluntary, and it may implement the same without external reporting obligations. However certain investors or lender may require periodic ESG compliance report
What data tracking systems are required for ESG compliance?
Tracking systems should record the following aspects of the ESG:
- Energy consumption by the company.
- Waste management procedures and metrics.
- Workforce diversity and equality.
- Compliance breaches.
- Governance violations.
Data integrity underpins ESG credibility.
How does ESG affect private equity investment and due diligence?
Investors routinely conduct ESG due diligence requiring reporting on the following aspects of the covering:
- Environmental liabilities.
- Labour disputes due to non-compliance or employee disputes.
- Regulatory non-compliance of the environment, labour and corporate regulations.
What ESG representations are typically required in transaction documents?
Common representations of ESG requirements include:
- Compliance with environmental laws.
- Valid labour registrations and compliance with the obligations.
- Anti-bribery compliance and other company law requirements.
ESG policy ensures that the private company has the following well-documented and ensures prevention of the breach of representation and enforcement of indemnity claims.
How does ESG impact valuation and exit strategy?
The material valuation of the ESG policy indicates major financial, legal and operational risk which may:
- Decrease the valuation.
- Delay transaction closing due to failure to substantiate violation.
- Require remediation undertakings.
At exit, buyers may review and scrutinise ESG track record. The buyer may also require corrective measures to be undertaken by the company.
What are the risks of not adopting an ESG policy as a private company?
Failure to adopt a ESG policy may create governance difficulties and exposes the private companies to following risks:
- Penalty arising out of regulatory non-compliance.
- Liability of the director.
- Financial risk.
- Reputational damage.
Can directors face liability for ESG-related non-compliance?
- Yes, the non-compliance of the ESG related compliance may lead to following penalties on the director:Civil and criminal liabilities;
- Disqualification from directorship under Companies Act; and
Personal liability under certain cases.
How can ESG gaps affect financing or procurement eligibility?
- The non implementation of the ESG policy or the gaps in ESG disclosure may create the following difficulties:Exclusion of the companies from procurement lists due to failure of displaying compliance with law; and
- Affect the meeting of the eligibility qualifications with respect to the export of goods.
Are ESG risks relevant in insolvency or restructuring scenarios?
Yes, the ESG related risk is vital in insolvency procedure can on account of the following:
- Operational debt arising out of ESG activities.
- Valuation of the company by substantiating being affected by the risk and non-compliance of ESG activities.
- Delay resolution plans due to subsequent realisation of ESG defaults.
FAQ: ESG Policy Checklist for Indian Private Companies
Do small private companies in India need an ESG policy?
The establishment of the ESG policy is not mandatory on the small private company and such company may only implement such policy based on its own discretion to adhere to the best practices.
Is ESG reporting mandatory for non-listed companies?
No, the ESG reporting is not mandatory on the non-listed companies.
Can a private company adopt SEBI’s BRSR framework voluntarily?
Yes, a private company may conduct BRSR to promote transparency and accountability of its actions.
How often should an ESG policy be reviewed or updated?
It is suggested that the ESG policy may be reviewed at least annually or upon material regulatory change.
Does ESG compliance reduce legal risk for directors?
Yes, the ESG policy ensures compliance with statutory requirements and thereby reduces risk arising out of non-compliance of the law.
Conclusion
ESG Policy for a private company is not mandatory, however to ensure that an effective ESG policy is implemented by the private company it must ensure that it has a well-structured checklist to ensure that the policy covers all the ESG components which include compliance such as environment law, sector specific, labour law, company law and operational compliance. From a governance standpoint the management of the company is responsible for the compliance and monitoring of all the aspects of ESG and thereby shall face liability in the event of default.Commercially, the ESG policy acts as a primary document highlighting the company’s intent towards transparency, discipline and objective towards the ESG increasing the probability of receiving capital, procurement of projects, and valuation benefits. Furthermore, it plays a vital role in the list of documents which are analysed by investors, lenders, and MNC while determining a potential transaction.
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