Impact of ESG Regulations on Corporate Governance in India

This article is written by Mohammad Azhar, Ideal Institute of Management and Technology , School of Law affiliated to GGSIPU , B.A. LL.B. (5th Year) during his internship at LeDroit India

Abstract

Environmental, Social, and Governance (ESG) regulations are significantly influencing corporate governance in India. These regulations compel companies to integrate sustainability into their operations, affecting board responsibilities, transparency, and accountability. The Securities and Exchange Board of India (SEBI) has mandated ESG disclosures for top-listed companies, while the Companies Act 2013 emphasizes ESG considerations in directors’ duties. This article examines the evolution of ESG regulations in India, their impact on corporate governance, and the challenges and opportunities they present. It also discusses illustrative cases and examples to understand practical implications for Indian businesses.

Introduction

In recent years, ESG regulations have emerged as a pivotal force shaping corporate governance practices worldwide, and India is no exception. ESG principles require companies to go beyond mere profit generation and integrate sustainability, social responsibility, and ethical management into their core business strategies. The “E” (Environmental) aspect emphasizes reducing carbon footprints, responsible resource utilization, and mitigating climate-related risks. The “S” (Social) dimension focuses on employee welfare, diversity and inclusion, community development, and labor rights. Meanwhile, the “G” (Governance) component addresses board structure, transparency, accountability, ethical conduct, and compliance with legal and regulatory frameworks.

India’s corporate sector has witnessed significant reforms in response to these global and domestic pressures. The introduction of the Companies Act 2013, particularly the Corporate Social Responsibility (CSR) provisions, marked the beginning of formal regulatory attention toward social responsibility. Later, SEBI mandated ESG-related disclosures for listed companies through frameworks such as the Business Responsibility and Sustainability Report (BRSR), making ESG reporting a compliance requirement.

The impact of ESG on corporate governance is profound: it redefines the roles of boards, influences executive decision-making, and embeds a long-term perspective into corporate strategy. Companies are now evaluated not just by financial performance but by their ESG performance, making ESG an essential factor for attracting investors, mitigating risks, and maintaining reputation in a competitive business environment.

Evolution of ESG Regulations in India

India’s ESG journey started with the National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business (NVGs) in 2011, which provided a framework for responsible business conduct. These voluntary guidelines encouraged businesses to adopt sustainability and social responsibility practices even before regulatory mandates existed.

The Companies Act 2013 was the next major step, introducing CSR obligations under Section 135, mandating companies above certain financial thresholds to allocate at least 2% of their net profits to social initiatives. This move institutionalized social responsibility and ensured boards were accountable for CSR strategy and reporting.

In 2022, SEBI introduced the Business Responsibility and Sustainability Report (BRSR) framework for top-listed companies, which requires comprehensive ESG disclosure, including environmental metrics, employee welfare, social initiatives, and governance standards. These regulations signal a shift from voluntary compliance to mandatory ESG accountability, ensuring that companies actively integrate ESG considerations into governance structures.

Impact on Corporate Governance

Board Responsibilities

Boards now have a more complex role. Beyond traditional oversight of financial performance, directors must evaluate ESG risks and opportunities, ensuring the company adheres to environmental, social, and governance standards. For instance, boards must consider climate risk in long-term strategy, supervise CSR initiatives, and ensure ethical corporate practices.

Example: A board deciding on expansion plans must evaluate the environmental impact of new facilities, the welfare of local communities, and governance practices related to procurement and subcontracting. This integration makes governance more forward-looking and stakeholder-centric.

Transparency and Disclosure

ESG regulations significantly enhance transparency. Companies must report on metrics like carbon emissions, energy efficiency, workplace safety, diversity statistics, and governance practices. These disclosures enable investors, regulators, and consumers to make informed decisions and promote accountability.

Example: Under SEBI’s BRSR framework, companies like Reliance Industries and Tata Steel are required to publicly report ESG performance, which investors use to evaluate risk and sustainability before investing.

Risk Management

ESG factors are now core to risk management. Environmental issues like pollution or climate change, social issues such as labor unrest, and governance failures such as fraud can materially affect a company’s performance and reputation. Boards must integrate ESG into risk assessment, internal controls, and strategic planning.

Illustration: The 2019 Vizag gas leak case highlighted environmental risk, while governance lapses were criticized for inadequate safety oversight. Proper ESG frameworks could mitigate such risks and protect both stakeholders and shareholders.

Challenges and Opportunities

Challenges

Compliance Costs: Implementing ESG strategies, monitoring systems, and reporting mechanisms can be expensive, especially for SMEs.
Data Collection and Standardization: Many companies struggle with obtaining accurate ESG data, and lack of standardized metrics complicates reporting.
Evolving Regulatory Landscape: ESG rules are continuously evolving, requiring constant adaptation by corporate boards and compliance teams.

Opportunities

Attracting Investors: Strong ESG performance is increasingly used by institutional investors as a selection criterion.
Reputation and Brand Value: Companies demonstrating sustainable practices gain customer trust and brand loyalty.
Long-Term Sustainability: ESG adoption ensures companies are resilient, mitigating regulatory and reputational risks, and fostering long-term growth.

Illustrations

M.C. Mehta v. Union of India (1987)
The Supreme Court held companies strictly liable for environmental damage, establishing absolute liability in environmental law. This judgment paved the way for stricter environmental regulations and governance oversight in India. Link
SEBI ESG Rating Norms (2025)
SEBI clarified withdrawal norms for ESG ratings if companies fail to provide adequate disclosures. This enforces compliance and emphasizes the importance of consistent reporting. Link
CSR Integration under Companies Act 2013
Example: Infosys’ CSR initiatives in education, health, and environmental sustainability illustrate how boards integrate ESG factors into corporate governance.

Conclusion

ESG regulations are transforming corporate governance in India. Boards are more accountable, transparency has increased, and ESG risk management is central to corporate strategy. Companies that integrate ESG considerations effectively attract investors, enhance brand value, and achieve sustainable growth. While challenges like compliance costs and data collection exist, the opportunities for long-term stability and stakeholder trust outweigh these hurdles. ESG regulations are no longer optional—they are essential for robust corporate governance, long-term sustainability, and ethical business practice.

References