For US-based multinationals, recent US and European developments have taken up most of the mental energy devoted to global ESG and CSR compliance. Among other compliance topics, these include California climate disclosure, EU Corporate Sustainability Reporting Directive and Corporate Sustainability Due Diligence Directive omnibus simplification and changes to the European Sustainability Reporting Standards and Taxonomy Regulation reporting, the EU Deforestation Regulation and pending European Commission environmental omnibus proposal, UK sustainability disclosure and UK modern slavery act reform and mandatory human rights and environmental due diligence legislation (all the links are to recent Ropes & Gray posts).
Putting aside Australia, ESG and CSR compliance developments in the Asia-Pacific region have historically received less attention from US-based multinationals, although that is beginning to change. For example, most recently, in June, mandatory human rights and environmental due diligence legislation was re-proposed in South Korea (see this Ropes & Gray post). Bills also are forthcoming in Thailand and Indonesia.
India is one of the earlier adopters of CSR legislation in the Asia-Pacific region. It is unique in that it is the only country that requires companies to spend a portion of their profits on authorized corporate social responsibility activities, as further discussed below.
Earlier this month, the Parliament’s Standing Committee on Finance released a report discussing the actions taken by the Indian government in response to observations and recommendations the Committee provided to the Ministry of Corporate Affairs in March. The Committee’s August report also contains its recommendations flowing from the government’s responses, which were provided by the Ministry to the Committee in June. As discussed in this post, some (but not all) of those recommendations pertain to CSR and ESG matters (the full Committee report is available here).
The Committee’s recommendations do not change current law and they may not ever result in legislative proposals. However, the report is part of the broader mosaic for understanding the push and pull of CSR and ESG compliance and its possible future direction.
Section 135 of the Companies Act
Section 135 of the Companies Act requires companies with a net worth of Rs. 500 crore, turnover of Rs. 1000 crore or net profit of Rs. 5 crore to spend a specified portion of their average net profits on approved corporate social responsibility activities. For a more detailed discussion of Section 135, see Ropes & Gray posts here and here (note that there have been subsequent amendments not discussed in these posts).
The Committee notes in its report that significant progress has been made under Section 135, particularly with regard to the required expenditures by both public and private sector companies. However, the Committee is concerned about several perceived gaps in enforcement and compliance monitoring. To address these gaps, the Committee recommends that:
- Companies be required to submit, and the Ministry to publish, analytical reports detailing the actual socio-economic impact of CSR projects, not just how much was spent;
- A public system be created that transparently tracks all unspent CSR funds to ensure they are properly used;
- Exhaustive data on all enforcement actions be made available, including the type of non-compliance, penalties collected and their effectiveness; and
- A clear policy for monitoring and accountability of all agencies that carry out CSR projects be implemented, to ensure that funds are used wisely and as intended.
In its June response, the Ministry noted among other things the disclosure and governance requirements of Section 135 and the related penalties for non-compliance. The Ministry concluded that “the cited framework of CSR provides accurate mechanism of reporting, monitoring, penalty for non-compliance and proper utilization of CSR funds.”
In its report, the Committee disagreed with the Ministry, indicating that:
“[T]he Committee observe that the Ministry's response, while adeptly enumerating these statutory facets, conspicuously sidesteps the paramount concern regarding the demonstrable efficacy, transparent execution, and verifiable societal impact of CSR disbursements on the ground. The assertion that the ‘cited framework of CSR provides accurate mechanism of reporting, monitoring, penalty for non-compliance and proper utilization’ remains an unquantified claim, devoid of empirical substantiation, or performance metrics on project outcomes, utilization of all unspent funds, or specific, impactful enforcement actions.”
ESG Regulations
In its report, the Committee acknowledges India’s significant strides in promoting ESG practices, but it believes there are several challenges that are hindering the full effectiveness of India’s ESG framework. These include the persistent risk of greenwashing, inconsistent implementation across sectors and difficulties faced by small businesses in adopting ESG practices.
To address these challenges, the Committee is recommending the following actions:
- Creation of a dedicated ESG oversight body within the Ministry of Corporate Affairs to strengthen monitoring and enforcement. This body would be responsible for monitoring ESG disclosures to ensure compliance with reporting standards through specialized forensic expertise. It also would be tasked with introducing penalties for greenwashing and formulating sector-specific guidelines.
- Amending the Companies Act to expressly include ESG objectives as part of directors’ fiduciary duties. This would make it mandatory for boards to oversee the integration of ESG considerations into their business strategies.
- Requiring that boards have independent ESG committees, similar to audit committees, to ensure that ESG strategies are effectively implemented and monitored.
In its response, the Ministry concluded that ESG principles already are embedded within the existing Companies Act, including through statutory provisions addressing energy conservation, gender diversity in directorships, workplace harassment disclosures, maternity benefits, directors' duties and the CSR framework of Section 135 of the Companies Act. The Ministry also indicated that it does not believe a dedicated board-level ESG oversight body is needed since the current disclosure requirements and board accountability mechanisms are adequate.
The Committee also disagreed with this assessment by the Ministry:
“However, the Committee find the Ministry's response to be fundamentally defensive and a mere recapitulation of the status quo, failing to address critical concerns regarding greenwashing, inconsistent ESG implementation, and challenges faced by nascent enterprises in adopting robust ESG practices. While the Ministry meticulously itemize existing provisions, it provides no empirical substantiation, analytical insights, or tangible data to corroborate that these provisions are effectively mitigating deceptive ESG claims, ensuring harmonious ESG adoption, or proactively supporting smaller entities.”
The Committee therefore reiterated its call for the measures discussed above.
