ESG and Climate Change

Climate change is a defining characteristic of the Anthropocene epoch, a proposed geological timescale in which the Earth’s ecosystem is witnessing radical changes due to human impact. The human induced climate change is being considered as a global emergency. To tackle climate change and its impact, world leaders entered into the Paris Agreement. One of the long-term goals agreed under the Paris Agreement is to “reduce global greenhouse gas emissions to hold global temperature increase to well below 2°C above pre-industrial levels and pursue efforts to limit it to 1.5°C above pre-industrial levels.”

Government agencies and business organisations have an important role to play in the fight against climate change. In this regard, disclosures on Environment, Social and Governance (“ESG”) norms by business entities become important. ESG disclosures have become important for making investment decisions. This is evidenced by Principles of Responsible Investing, a UN supported network of investors, which requires its signatories to inter alia incorporate ESG issues into investment analysis and decision-making processes [Principle 1 of PRI] and require investors to seek disclosure on ESG issues of investee entities [Principle 3 of PRI].   

ESG disclosures, particularly those related to environmental aspects, help investors assess the functioning of an entity and its impact on the environment. Frameworks on ESG typically require an entity to inter alia disclose - its greenhouse gas emissions and projects initiated to reduce greenhouse gasses, capital investments made in technologies to improve environmental aspects, water consumed and the sources from where it is consumed, actions taken to avoid negative impacts on biodiversity, etc. These disclosures act as a catalyst to - identify a business’s exposure to environmental risks; assess the sustainability profile; compare the ESG profile with a similar placed business, etc. This helps an investor in decision making and in turn motivates an entity to move towards a sustainable path, thereby having a positive impact on the fight against climate change. ESG disclosures also help in directing capital towards companies with robust climate strategies, thereby contributing positively to climate change.

Article 21 of the Constitution of India recognises the right to life and personal liberty of a person. It is well settled that the right to life includes the right to basic and clean environment, that is, the right to clean air, water, soil, etc. The Hon’ble Supreme Court in MC Mehta v. Kamal Nath held that any disruption to essential environmental elements such as air, water, and soil, which are vital for life, would be considered hazardous to life under Article 21.

Article 48A of the Constitution of India inter alia imposes a duty on the State to protect and improve the environment. The Hon’ble Supreme Court in Virender Gaur v. State of Haryana, recognising the duty of the Government to provide clean environment, stated, “there is a constitutional imperative on the State Government and the municipalities, not only to ensure and safeguard proper environment but also an imperative duty to take adequate measures to promote, protect and improve both the man-made and the natural environment."

A cleaner environment, inter alia, entails the reduction of greenhouse gasses. International courts and organisations have started upholding the duty of a State to reduce greenhouse gas emissions. In State of the Netherlands v. Urgenda Foundation, the Hon’ble Dutch Supreme Court ruled in favor of the respondent who sought directions to the State of the Netherlands directing it to reduce the emission of greenhouse gases. The Hon’ble Dutch Supreme Court held that pollution impacts the right to private life and hence a State is required to implement reasonable and appropriate measures to safeguard individuals from significant environmental harm.

In Sacchi. Et al. v. Argentina, et al, the UN Committee on Rights of the Child observed that States have a responsibility to reduce their own share of emissions and that individual States are accountable for their actions or inactions on climate change and their contribution to its effects.

It is well established that it is the duty of the government to provide for a clean environment. One of the steps taken by the government to move towards a cleaner environment is introducing the ESG framework in India.

As a part of the ESG framework, SEBI had introduced the Business Responsibility and Sustainability Report (“BRSR”) reporting, which is mandatory for top 1,000 listed companies by market capitalization [Regulation 34(2)(f) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015]. The BRSR incorporates principles of responsible business conduct [Principles of responsible business conduct are enumerated in National Guidelines on Responsible Business Conduct issued by Ministry of Corporate Affairs]. Further, the introduction of BRSR Core, a sub-set of the BRSR consisting of a set of Key Performance Indicators (KPIs) under 9 ESG attributes, has strengthened the reporting under BRSR. The introduction of BRSR Core casts responsibility on the reporting entity to- (a) undertake third party assurance of KPIs forming part of BRSR Core and (b) make disclosure for its value chain under KPIs highlighted in BRSR Core.

Reporting under ESG frameworks has a positive impact on climate change. In a study conducted on disclosures made by heavily polluting enterprises in China, it was found that ESG information disclosure enhances the carbon performance of heavily polluting enterprises and that a higher level of ESG disclosure helps heavy polluters achieve better carbon performance. In another study, it was found that when firms follow the GRI standards to prepare their ESG reports, a reduction in carbon emissions is observed in the subsequent period. In other words, ESG reporting standards have a real effect on carbon abatement.

Without a clean environment which is not impacted by vagaries of climate change, the right to life is not fully realized. ESG disclosures do have a positive impact on climate change. Disclosure requirements pressurize an entity to improve its environmental performance in order to maintain a positive image. It also brings media attention to disclosures made by entities thereby making their disclosures a point of discussion, which can have a positive or negative impact on the goodwill of the entity.

About the authors: Rajesh Narain Gupta is the Founder and Chairman of SNG & Partners. Manan Pant is an Associate at the Firm.

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