ESG Norms in Corporate Governance: A Legal Mandate or Market Trend?

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ESG Norms in Corporate Governance: A Legal Mandate or Market Trend?

Written by Mokshada Agarwal

Table of Contents

Introduction

In the modern business landscape, the integration of Environmental, Social, and Governance (ESG) norms into corporate strategy and decision-making has moved from a niche concept to a mainstream priority. Increasingly, investors, regulators, and consumers are scrutinizing companies not only for their financial performance but also for their environmental stewardship, social responsibility, and governance structures. This shift prompts a key question: Are ESG norms becoming a legal mandate, or are they still predominantly a market-driven trend?

In India, the conversation around ESG has gained significant momentum, especially with regulatory bodies like SEBI introducing ESG-related disclosures and compliance requirements. While the global trend is toward a convergence of legal and market expectations around ESG, the Indian framework is still evolving. This article explores the development of ESG norms in corporate governance, assesses their current legal standing, and evaluates whether they are transforming into binding mandates or remaining largely guided by market forces.

What is ESG in Corporate Governance?

Environmental, Social, and Governance (ESG) represents a set of non-financial performance indicators used to evaluate a company’s ethical impact and sustainability practices:

  • Environmental (E): Climate change, carbon footprint, resource management, waste disposal, biodiversity.
  • Social (S): Labor practices, human rights, diversity and inclusion, customer satisfaction, community engagement.
  • Governance (G): Board structure, audit practices, anti-corruption policies, executive compensation, shareholder rights.

These factors reflect how a company manages risks and opportunities in areas that affect not only its stakeholders but also the broader society and environment.

Globally, ESG norms are being integrated into regulatory frameworks and investment criteria:

  • European Union: The Corporate Sustainability Reporting Directive (CSRD) mandates ESG disclosures for large companies and listed SMEs.
  • United States: The Securities and Exchange Commission (SEC) has proposed rules for climate-related disclosures.
  • Task Force on Climate-related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) are leading voluntary standards.

These developments indicate a shift from voluntary compliance to regulatory oversight in ESG reporting.

India is witnessing a regulatory shift towards mainstreaming ESG principles, particularly in corporate governance and disclosures.

1. SEBI’s Business Responsibility and Sustainability Reporting (BRSR)

In 2021, the Securities and Exchange Board of India (SEBI) introduced the BRSR framework, replacing the earlier Business Responsibility Reporting (BRR).

  • Applicability: Mandatory for the top 1000 listed companies (by market capitalization) from FY 2022–23.
  • Objective: To enhance ESG transparency and enable investors to assess non-financial performance.
  • Structure: Disclosures are structured around Leadership, Governance, Environment, and Social metrics.

The BRSR has both essential (mandatory) and leadership (voluntary) indicators, encouraging progressive adoption of ESG best practices.

2. Companies Act, 2013

The Act indirectly supports ESG through:

  • Section 134(3)(m): Requires reporting of conservation of energy and sustainability efforts.
  • Corporate Social Responsibility (CSR): Section 135 mandates qualifying companies to spend at least 2% of net profits on CSR activities.
  • Independent Directors (Section 149): Promotes ethical governance and oversight.

Though not labeled as “ESG,” these provisions reflect foundational ESG elements in corporate law.

3. National Guidelines on Responsible Business Conduct (NGRBC)

The Ministry of Corporate Affairs (MCA) issued these guidelines in 2019, encouraging businesses to operate responsibly across nine principles, covering human rights, environmental sustainability, transparency, and inclusive growth.

While not mandatory, they inform SEBI’s BRSR framework and influence company policies.

ESG as a Market Trend: Investor and Stakeholder Expectations

Even in the absence of comprehensive legal mandates, market forces are accelerating ESG integration.

1. Investor Pressure

  • Domestic and foreign institutional investors now assess ESG risks and performance in their investment decisions.
  • ESG-themed mutual funds and green bonds are gaining popularity in Indian capital markets.

2. Stock Exchanges

  • BSE and NSE have launched ESG indices, showcasing companies with strong sustainability practices.
  • Companies listed on these indices receive greater investor visibility and credibility.

3. Credit Rating and Risk Assessment

  • Credit rating agencies are factoring ESG into their risk evaluations.
  • ESG-compliant firms may enjoy better credit terms and lower cost of capital.

4. Consumer and Talent Preferences

  • Consumers are gravitating towards ethical brands.
  • Employees, particularly millennials and Gen Z, prefer working with companies that reflect their values on climate, diversity, and equity.

Governance, the “G” in ESG, is a legal and regulatory cornerstone of corporate compliance in India.

  • Board Diversity and Independence: SEBI mandates at least one independent woman director for top listed entities.
  • Audit Committees and Whistleblower Policies: Required under SEBI (LODR) Regulations to ensure ethical oversight.
  • CEO-Board Separation: Although deferred, SEBI has proposed mandatory separation of roles to improve governance integrity.

Thus, ESG governance practices are increasingly codified into binding obligations, setting the stage for deeper legal regulation of environmental and social factors as well.

Challenges in ESG Adoption and Compliance

  1. Lack of Uniform Standards
    • The absence of globally consistent ESG metrics makes comparison and compliance difficult.
  2. Data and Disclosure Quality
    • Many companies lack the expertise to collect, measure, and report ESG data accurately.
  3. Greenwashing Risks
    • Companies may exaggerate or misrepresent ESG efforts to attract investment or improve reputation.
  4. Cost of Compliance
    • Smaller firms may find ESG reporting and implementation financially and operationally burdensome.
  5. Evolving Regulatory Landscape
    • The legal framework is still in flux, making it hard for businesses to anticipate future obligations.

The trajectory suggests that ESG is transitioning from a voluntary, market-led initiative to a quasi-mandatory legal framework.

  • Environmental and climate risks are increasingly recognized as systemic risks, warranting legal scrutiny.
  • SEBI and MCA are gradually introducing more detailed ESG disclosure norms.
  • A new ESG Rating Providers regulation is under consideration to ensure consistency and accountability.

India may not yet have a comprehensive ESG legislation, but its regulatory and policy momentum clearly signals a move toward codification.

Conclusion

The question is no longer whether ESG matters but how deeply and effectively it is integrated into corporate governance. While ESG began as a market-driven trend, driven by investor pressure and global best practices, it is fast becoming a regulatory imperative in India.

Startups, large corporates, and investors alike must prepare for a future where ESG compliance is not just a differentiator but a necessity. Businesses that proactively align with ESG principles—beyond mere checklists—will not only gain stakeholder trust but also build resilience, reputation, and long-term value in an increasingly responsible economy.

In the evolving landscape of corporate governance, ESG is not an optional add-on; it is the new baseline—poised at the intersection of legal mandates and market expectations.

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