It’s time for Indian businesses to start thinking through the ESG lens

India’s ESG-specific disclosures is currently limited to only the top 1000 listed companies by market capitalisation. However, this position may soon change, and newer regulations may mandated other listed and private limited companies above a certain threshold of annual turnover or paid-up capital to make ESG disclosures. While the timeline for this is uncertain, Indian government has already started taking small but significant strides towards it. Irrespective of new regulations, Courts in India have started rendering judicial decisions that clearly indicate that ESG liability will attach to the corporate entity.

India is currently in the process of consolidating 29 existing labour laws into 4 labour codes. These Codes cover critical rights of wages, social security, industrial relations and safety, health and working conditions of workmen and are a move to expand ESG coverage in certain areas. This will see an introduction of a national ‘floor wage’, setting a uniform minimum wage in India for the first time. This will extend social security benefits to unorganised workers, gig workers and platform workers; and will also extend health and safety provisions to all commercial establishments, as opposed to narrowly defined ‘factories’ and ‘mines’, presently.  

As far as law enforcement is concerned, we have seen courts and enforcement authorities, in the absence of any ESG-specific regulations have relied on sector-specific regulations (for instance, penalties under existing environment, corruption and labour laws), and general criminal law to take action against companies that default on generally accept ESG practices. This has often also put senior management at personal risk of prosecution as having been in the charge of, and responsible for, the company’s business. The courts have also evolved legal jurisprudence over the years as a reaction to ESG-based defaults. Indian courts have established the doctrine of ‘absolute liability’ in the aftermath of two major industrial disasters. This vastly expands the ambit of the traditional tortious principle of strict (no-fault) liability. A company operating a hazardous and inherently dangerous industry is automatically brought within the ambit of this doctrine and will be absolutely liable for any and all damage caused by its activities, regardless of intent. There is no defence to the absolute liability doctrine.

While courts in India are typically reluctant to award punitive or exemplary damages, environmental violations have emerged as an exception to this position and the courts have, in several instances of breach of environmental laws, imposed enhanced penalties for deterrent value.

Similarly, we are seeing increasing number of regulatory investigations in to governance lapses such as financial frauds, tax mismanagement, conflicts of interest, supply chain integrity and human rights in private companies. In fact, investigations have dragged in investors of some of these companies, which brings home the fact that regulatory reach is increasing drastically.    

While India lacks a formal ESG reporting framework, it is advisable for companies to actively participate in formulating sustainable policies and to monitor on-the-ground ESG compliance. Risks that may arise in India could trigger reporting obligations in the UK, EU, or US. Instances pertaining to labour welfare and fraud/bribery, have often triggered disclosures to overseas regulators and authorities governing foreign parent entities. Additionally, and as mentioned above, legal precedents in India impose strict liability in many instances of violation of existing labour, environmental and other governance regulations. Even though these regulations are not ESG-specific, the triggers for default here are the same (ESG-based) risks. Therefore, we see that a legal audit, training and reporting requirement becoming more prevalent – particularly for subsidiaries of foreign companies.