Environmental, Social, and Governance (ESG) criteria have gained significant importance in the global investment landscape in recent years. In India, investors, particularly institutional investors, are looking at funds that align with the ESG framework. However, ESG implementation is facing some bottlenecks in the country.
Listed below are some critical challenges:
Lack of knowledge about ESG and long-term benefits: There is a lack of understanding among Indian companies and investors about ESG frameworks and the long-term benefits they offer. As a result, ESG is not a priority for many companies. And investors may not get ESG-compliant investments.
Inadequate frameworks: The current regulatory framework in India does not have effective ESG mandates or incentives to encourage companies to prioritize ESG practices. A lack of clear and enforceable regulations and standards makes it difficult for companies to justify the costs of implementing ESG practices.
Penalties: Penalties for non-compliance vary across different countries. While ESG non-compliance is a criminal offence in some countries, it is still evolving in India.
The Securities and Exchange Board of India (SEBI) has introduced several measures to promote ESG compliance among listed companies. SEBI mandated the top 1,000 listed companies to disclose their ESG performance in their annual reports. Failure to disclose ESG performance may result in penalties and other regulatory actions by SEBI. Additionally, SEBI has also proposed the introduction of ESG scores for listed companies, which will be used to determine their eligibility for inclusion in certain indices. While there is still a long way to go, these measures are a step in the right direction towards promoting ESG compliance in India.
Globally, some countries have even gone as far as making ESG non-compliance a criminal offence. For instance, France has introduced a law that criminalizes misleading information about ESG performance and imposes heavy fines and imprisonment for non-compliance.
India’s dependency on fossil fuels: India heavily dependent on fossil fuels for its energy needs. The country is the world’s third-largest consumer of oil and the fourth-largest consumer of coal. This dependency on fossil fuels is the biggest challenge for Indian companies wanting to align with ESG—particularly in the environment and climate change.
Energy transition a long way: While India has set ambitious targets to transition to renewable energy sources, the transition will likely take several years. Until then, companies in energy-intensive sectors may struggle to meet ESG standards, and investors may struggle to find ESG-compliant investments.
To overcome these challenges, there must be a concerted effort by the government, companies, and investors to prioritize ESG. This can be achieved by introducing strong regulatory frameworks and incentives to encourage compliance. These efforts must be backed with greater awareness and education about the benefits of ESG practices and their long-term impact on businesses and society.
By taking these steps, India can become an attractive destination for ESG investments and contribute to a more sustainable future.