ESG compliance refers to the adherence of a company to principles concerning Environmental, Social, and Governance (ESG) factors. These principles are used to evaluate how a company operates with regard to sustainability, ethical practices, and internal governance mechanisms. ESG compliance has become an important benchmark for assessing a company's long-term viability and its responsibility toward the environment, society, and its shareholders. For example, a company that reduces its carbon footprint, treats employees fairly, and ensures transparent corporate governance would be considered ESG-compliant.

In the context of corporate law, ESG compliance has gained significant relevance, particularly in the governance and disclosure obligations of companies. In India, the Companies Act, 2013, and various guidelines issued by the Securities and Exchange Board of India (SEBI) lay down frameworks that intersect with ESG principles. SEBI mandates the top 1000 listed companies to file a Business Responsibility and Sustainability Report (BRSR), which requires companies to disclose their performance in areas related to environmental protection, employee welfare, stakeholder relations, and governance practices. This obligation effectively brings ESG considerations into the legal domain for large listed entities.

Corporate governance, one of the pillars of ESG, is directly regulated under company law. Provisions such as Section 166 of the Companies Act impose fiduciary duties on directors to act in the best interests of the company, which includes considering ESG risks and opportunities. Furthermore, the law mandates certain companies to spend a portion of their profits on Corporate Social Responsibility (CSR) activities under Section 135. These CSR initiatives often overlap with the social and environmental objectives of ESG, such as promoting education, healthcare, gender equality, and environmental sustainability.

Additionally, compliance with existing environmental and labour laws, such as the Environment Protection Act, 1986 and the Factories Act, 1948, forms an integral part of ESG adherence. Any failure in these areas not only results in legal penalties but can also harm a company’s reputation and investor trust. With growing awareness and investor activism, companies are now expected to go beyond minimum legal requirements and proactively incorporate ESG strategies as part of their corporate governance models.

Thus, ESG compliance is not just a matter of ethical choice but increasingly a legal necessity. It has become a crucial aspect of corporate governance, stakeholder trust, and regulatory compliance, particularly for large companies and those accessing capital markets. Corporate law in India continues to evolve to embed ESG values within the legal structure governing companies.

ESG (Environmental, Social, and Governance) compliance refers to a company's adherence to regulations and standards regarding its environmental impact, social responsibility, and corporate governance practices. It's essentially about ensuring a business operates ethically and sustainably, not just for profit, but also for the betterment of society and the planet. ESG compliance is increasingly intertwined with corporate law, as regulators and investors are demanding greater transparency and accountability in these areas.
Elaboration:
ESG compliance is a framework that assesses a company's performance across three key areas:
Environmental:
This includes a company's impact on the environment, such as its carbon footprint, waste management, resource consumption, and pollution levels.
Social:
This focuses on a company's relationships with its employees, customers, suppliers, and the communities where it operates. It includes issues like labor practices, diversity and inclusion, human rights, and community engagement.
Governance:
This pertains to a company's internal structure, leadership, and decision-making processes. It includes issues like executive compensation, board diversity, transparency, and ethical business conduct.
Relationship to Corporate Law:
ESG compliance is becoming increasingly important in the context of corporate law for several reasons:
Increased Regulation:
Governments and regulatory bodies are introducing new laws and regulations related to ESG, such as mandatory climate-related disclosures and requirements for companies to address human rights risks in their supply chains.
Investor Pressure:
Investors are increasingly incorporating ESG factors into their investment decisions, seeking companies that demonstrate strong ESG performance and are committed to sustainable practices. This means companies that fail to comply with ESG standards may face difficulties in attracting investment.
Reputational Risk:
Companies with poor ESG performance can face reputational damage, leading to loss of customers, decreased employee morale, and difficulty attracting talent.
Legal Liability:
Failure to comply with ESG regulations can lead to legal penalties and fines. Additionally, companies may face lawsuits from stakeholders who allege harm caused by the company's ESG practices.

What is ESG compliance?
Environmental, social, and governance (ESG) compliance refers to a set of guidelines and standards that a company implements in its internal policies that are mandated by regulatory bodies.

For a company, being ESG-compliant means following ESG principles and taking action in three dimensions:

Environmental - Environmental criteria imply a company’s impact on the environment and the risk management practices it takes to reduce it. This includes the company’s carbon footprint, its practices to address climate change, toxic chemicals in manufacturing, and sustainability efforts that make up its business and supply chains.
Social - Social ESG considerations take into account the way a company improves its social impact and manages relationships with employees, customers, stakeholders, suppliers, and communities in the area of its operations. Among the ESG issues that this criterion tackles are racial diversity, LGBTQIA+ equality, work ethics, and inclusion programs.
Governance - Governance regarding ESG practices considers everything related to the way the company is managed and led, and how the management drives positive changes. It includes executive pay, shareholders’ rights observance, and internal controls to promote corporate transparency.

How it relates to corporate law:
Increased regulatory oversight: Governments and regulatory bodies are increasingly incorporating ESG factors into corporate law.
Enhanced reporting requirements: Companies may be mandated to disclose their ESG performance, impacting their financial reporting and transparency obligations.
Evolving director duties: Directors may face increased scrutiny and legal obligations to consider ESG factors when making decisions, potentially impacting their fiduciary duties.
Stakeholder expectations: Investors, customers, employees, and other stakeholders are increasingly prioritizing ESG factors, creating pressure on companies to demonstrate their commitment to sustainability and social responsibility.

ESG certifications :
Certifications recognizing ESG compliance are legal assurance for regulatory bodies that a company adheres to ESG risk and compliance practices.
Furthermore, ESG certifications serve as a guarantee that an organization uses sustainable practices in its operations and follows the anti-bribery, anti-forced, and enslaved labor laws.

To ensure compliance, a company should also:
Appoint a chief sustainability officer to be responsible for establishing company-wide ESG goals and working together with professional reporting and compliance teams.
Integrate ESG goals into a corporate strategy, including short- and long-term compliance business practices.
Establish a compliance roadmap that will be regularly updated.

ESG compliance frameworks and standards
Before delving into the essence, it’s important to explain the difference between an ESG compliance framework and standard.

ESG framework is a broader concept. It stands for the set of principles that guide and build the understanding of a particular issue. A framework provides a direction for reporting, but doesn’t provide a concrete methodology.
The ESG standard is a more specific requirement. It provides detailed criteria of what actions should be taken for reporting and dictates what data can be collected and how it can be structured.

Common ESG compliance frameworks
Carbon Disclosure Project (CDP): This framework focuses on forest health and preservation, water security, and the carbon footprint of an organization. It asks companies for voluntary disclosure of data that isn’t related to financials, such as company environmental performance and greenhouse gas emissions.
Global Reporting Initiative (GRI): Reporting principles of this framework include various ESG factors, such as inclusiveness and diversity of stakeholders, integrity, and sustainability.
Bloomberg Terminal ESG Analysis:This framework aggregates and assesses a company’s data from publicly displayed CRS reports, annual and sustainability reports, and on official websites.
Sustainalytics:This framework aggregates and assesses the company’s data based on media reports and public findings.
Climate Disclosure Standards Board (CDSB): The CDSB focuses on the “E” in ESG and aims to standardize the company’s data related to climate change and environmental impact.

To conclude
Environmental, social, and governance compliance refers to a set of guidelines and principles a company must follow that are required by regulatory bodies.

Therefore, ESG compliance is essential for organizations to manage risk and stay competitive. Being ESG compliant does not mean only being aware of the environmental impact and taking care of social issues inside the company. It also means demonstrating concern for global problems, being active in trying to solve them, and staying in demand in investment markets.

If your company is considering implementing ESG compliance practices, Ideals Board can be a great help with ESG compliance management.