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Substituting CSR u/s 135 CA, 2013 With ESG Reporting

ESG Reporting is a disclosure made by companies on the basis of three major factors Environment, Social and Governance. Where companies take lot from society, ESG factors requires companies to grow as a community whole. These factors have their origin from three P's of Triple Bottom Line. People, Planet, Profit (3 P's) are supplementary to growth of business and cannot be taken as substitute of each other.

The Indian Regulatory system presently mandates ESG Reporting by only top 1000 listed companies by Market Capitalisation. Investors of Contemporary world are more conscious about their investee's contribution in these three factors primarily. It is thus, not the top 1000 companies but, for every company to look for this reporting to ensure its longevity and sustainability. One might consider CSR and ESG similar; this article distinguishes and further highlights the idea of replacing CSR with ESG.

Companies need ceaseless flow of funds for expansion and modernization of their businesses. They are the significant contributor to the economic growth of the country. Where companies using resources of society, creating both positive and negative impact of its operations and the World changing its focus to sustainable development, it is good time companies adopt for this comprehensive disclosure in its reporting.

The Three facets of ESG
  1. Environment:
    The environmental reporting assists companies analyse how efficiently company uses the resources and the environmental impact on it. It helps organization highlight its commitment towards environment protection. The Indian Legislature through its diversified laws ensured regulation of companies and protection of environment most important being Environment Protection Act, 1986. Some of the other significant environmental rules and regulation framed includes Hazardous Wastes (Management and Handling) Rules (1989), Public Liability Insurance Act (1991), Bio-Medical Waste (Management and Handling) Rules (1998), Manufacture, Storage and Import of Hazardous Chemicals Rules (1989),The Ozone Depleting Substances (Regulation and Control) Rules (2000), Noise Pollution (Regulation and Control) Rules (2000). Companies in order to oblige them meet various legislative requirements and install an environment management system (EMS) have obtained ISO 14001 certification. Nevertheless pollution is growing at rapid rate and soon its either the executive or judiciary shall have to respond. 'The Indian Supreme Court has actively intervened in many environmental issues on public complaints.

    In such a situation, industries find their investment most threatened. Therefore, for a country such as India, it is in the industry's own interest to adopt a proactive role in environmental management.'[1]
     
  2. Social:
    Social reporting is defined as reporting of some relevant, segment of a business enterprise's activities that have social impact. Keeping it another way, social reporting implies the reporting of, information concerning the impact of activities of business whether internal or external on society. Human Resource Contribution, Net Income Contribution, Development of Nearby Areas, Product Contribution are some of the factors of Social Reporting. Contribution hereby does not only imply benefits but also financial contribution in terms of costs too. The report signifies where the company has been, where the company is and where the company aims to be but, 'Improving corporate citizenship performance is not about having a good social report. Instead, a social report must reflect what is going on within a company.'[2]
     
  3. Governance:
    This element is the least paid attention compared to the aforesaid factors. Governance involves reporting of corporate governance, legal compliances, policies and practices, organizational structure of its board etc. It informs stakeholders about the company duly fulfilling its legal obligations. Understanding the "G" in ESG reporting is paramount, as many of the Indian Companies face legal challenges due to deficiency or improper governance reporting. This will drive away governance risk and create opportunity.
'The three components of ESG are profoundly interrelated and demand a cohesive methodology to amplify overall benefits and synergies. Environmental and social concerns are ultimately interconnected, and good corporate governance is the structure that links them together'.[3]

Existence of ESG Standards in India
It was in year 2012 when SEBI issued guidance note on disclosure which required companies to provide ESG Disclosure in their Annual Reports. It was further updated in year 2015. In 2020, SEBI took a major step towards mandating the top 1,000 listed companies to disclose their ESG-related information in their annual reports from the financial year 2021-22 onwards and introduced new Business Responsibility Sustainability Reporting Framework. Thought, ESG Standards are undergoing evolution but, there are no specific standards of ESG in India currently but few provisions to guide reporting.

For instance, Section 166(2) of the Companies Act states that a director of a company shall 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 134(m) requires Board of Directors to include in Board Report, content on conservation of energy, along with annual financial statement. This is further explained under Rule 8(3)(A) of the Companies (Accounts) Rules, 2014.

Companies are also mandated to disclose opportunities, threats, risks in their annual reports under Regulation 34(3) of the SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015, yet, such disclosure requirements do not seek details about processes adopted for such charting such disclosure and its progress. The lack of standardization of ESG in India makes it inconvenient for investor to compare and difficult for companies to report.

Corporate Social Responsibility u/s 135 of CA, 2013
The scope of CSR started extremely precarious manner, but has since widened to include many more issues. What started as a movement for businesses to give to charity has transformed into an initiative that changed the way business is done. Due to greater deregulation of business, meaning corporations had to engage in more self-regulation and take responsibility for the social impact of their operations[4].

Section 135 of Companies Act, 2013 provides for Corporate Social Responsibility. It mandates the responsibility on companies eligible as per the provision. What distinguishes ESG from CSR is that it provides for quantitative measure of sustainability and is more data intensive. The activity of CSR is undertaken only when there is profit. This implies that company having losses no responsibility towards society or should not fulfill it despite it exploits the same resources as profitable one!

The ESG reporting provides for more comprehensive and detailed view of measures taken, policies formed, responsibilities fulfilled by company no matter whether it is profitable or not which aids investors to conduct meaningful analyses. The objective of ESG reporting is often to satisfy the information requirements of investors and key stakeholders. On the other hand, CSR activities (and even reporting based on these activities) is often designed to engage employees, and build a positive corporate reputation in the eyes of consumers and invested communities.[5]

Furthermore, the activities of CSR are restricted to ethical and moral responsibilities of company more particularly described in Schedule VII of Companies Act, 2013. Since ESG reports summarize the qualitative and quantitative benefits of a company's ESG activities, investors can screen investments, align investments to their values, and avoid companies with the risk of environmental damage, social missteps or corruption.[6]

Substituting Section 135 of Companies Act, 2013
It is often said that 'It is burden to be Responsible.' It is something you can always withdraw yourself from, substitute it or transfer it to others. Creating Responsibility on Corporate is one of the lacunae of CSR benefits not being implemented in society. In addition to this lack of effective enforcement is a major reason. Simply mandating provision does not ensure its enforcement.

The hindrance is finding credible projects that companies can support under its CSR requirements. Amount of 2% of profit mandated by section 135 is seen as another way of burning their pockets but not as contribution for development of society.

Moreover, geographical bias is also an obstacle for implementation of CSR. It is because company tend to distribute their funds to the locations where they are located i.e. the location of headquarters. Where companies have units at different areas of nation the contribution is made by headquarter at one place leading to development of area that is already developed.

The resources are extracted from several areas and parts of nations which are in ardent need of those resources but development of only few selected ones. Thus, CSR has now reduced to mere collection of projects, a source for advertisement of their little and mandated contribution without any social benefit.

Social Contribution should considered equivalent as contribution in monetary terms along with protecting the interest of stakeholders and being accountable to those from whom resources are extracted from. Stakeholders and Capital Providers should have upper hand. ESG Reporting bumps of these setbacks of CSR.

It allows companies to identify potential transition risks, assess its ability to sustain in the future. In case companies are not conscious of this reporting, they not only lose their profit-making ability, but also market reputation. Simultaneously, ESG disclosures help companies in identifying innovative opportunities.

Many organizations are rejigging their business models, re-organizing corporate structures, and spending substantial time, money and resources to embed sustainability into core strategies. As a result of this investment, many have come to see ESG Reporting, not as a regulatory burden, but as a tool to attract investors and financing.[7]

Thus, where legislature is repealing, amending, replacing well framed Colonial laws, it should consider replacing few other corporate laws before it hampers society in large and hinders the target of 1trillion economy. Substituting Section 135 with ESG Reporting will widen the current perspective of Corporate Social Responsibility and provide companies with standardised framework on ESG.

It is CSR only that helped society and environment being recognized as stakeholders of company, but a lot need to be done because achieving CSR objectives still remains a dream. Obviously, companies want to be ethical and responsible but also want to attract investors, build reputation and stand above their competitors. It is highly recognized that companies that has momentum with sentiment of stakeholders are one level up in winning their trust and putting up the reputation of organization.

Government initiatives will all be in vain if the longing to work for benefit of environment and society does not come from innate. This is viable when company perceive this as profit making opportunity as it is human tendency to act for others only when they think it is in their best interest to do so. ESG disclosures thrive towards achieving these objectives of company and prioritizing the interest of stakeholders.

End-Notes:
  1. Arunaditya Sahay, Environmental Reporting by Indian Corporations, Corporate Social Reponsiblity And Environment Management (Aug 13, 2023, 11:00 AM), https://www.researchgate.net/publication/227600772_Environmental_Reporting_by_Indian_Corporations
  2. Belinda Richards David Wood, The Value of Social Reporting Lessons learned from a series of case studies documenting the evolution of social reporting at seven companies, Boston College Centre For Corporate Citizenship (Aug 14, 2023, 2:50 PM), https://iri.hks.harvard.edu/files/iri/files/value-of-social-reporting.pdf
  3. Anonyms, Governance in ESG Reporting, (Aug 14, 2023, 3:20 PM), https://www.ul.com/insights/governance-esg-reporting
  4. Casey Schoff, The Evolution of Corporate Social Responsibility, ECOLYTICS (Aug 13, 2023, 10:02 AM), https://www.ecolytics.io/blog/evolution-of-csr
  5. Novisto, What's the difference between CSR and ESG?, NOVISTO (Aug 16, 2023, 11:54 AM), https://novisto.com/whats-the-difference-between-csr-and-esg
  6. Fabrizio Tocchini & Grazia Cafagna, The ABCs of ESG reporting: What are ESG and sustainability reports, why are they important, and what do CFOs need to know, Wolters Kluwer (Aug 16, 2023, 12:32 PM), https://www.wolterskluwer.com/en/expert-insights/the-abcs-of-esg-reporting.


Award Winning Article Is Written By: Ms.Anukriti Jawandhia
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