Beyond Compliance: The Social Dimension of ESG

The ‘S’ in ESG

Environmental, Social and Governance (“ESG”) initiatives of organisations have become the X factor for investors and consumers over the past few years. In addition to social responsibility, organisations have immense power and capability to positively contribute to the society. In the context of an organisation, the ‘S’ in ESG primarily means consumer satisfaction, human capital enhancement, community relationships, and human rights. While environmental and governance concerns are of utmost importance, this article intends to focus on the social pillar of ESG. It analyses the laws and practises in existence in India and the scope for improvement.

Existing laws governing the ‘S’ in ESG

Though there is no umbrella legislation encompassing the different aspects of ESG, there are various legislations that govern organisations’ social responsibilities. Dating back to the independence era, the labour laws of the country were laid down under various legislations, each governing the law on subjects such as minimum wages, industrial disputes, employees’ pension schemes, employees’ insurance schemes, maternity benefits, migrant workers, equal remuneration etc. Presently, the labour laws of the country have been combined into 4 (four) different codes, namely the Code on Social Security 2020, Occupational Safety, Health and Working Conditions Code 2020, Industrial Relations Code 2020, and Code on Wages 2019 (“Code(s)”), and are expected to be enforced in the near future. The Consumer Protection Act, 2019 ensures the protection of consumer rights and provides a mechanism for the redressal of consumer disputes. The Companies Act, 2013 and Companies (Corporate Social Responsibility Policy) Rules, 2014 govern the law regarding Corporate Social Responsibility (“CSR”) and how CSR activities are to be undertaken. The Companies Act, 2013 and the rules laid down under it also contain provisions that prescribe the responsibility of directors to make disclosures to the shareholders regarding CSR initiatives[i], the duties of directors to act in good faith and the best interests of the company, its employees, shareholders, and the community and for the protection of the environment[ii] and mandate the inclusion of women on the board of directors[iii].

Need for focus on the social responsibilities of organisations

The various labour laws mentioned above have been in place for decades, even before ESG developed into a popular concept. Nevertheless, these laws and even the Codes are with shortcomings. For instance, the Codes broadly apply only to the organised sector. The status of platform workers and other gig-workers is ambiguous to a great extent. There needs to be more clarity as to whether gig workers will be treated as employees, in the absence of which they may not be able to avail many benefits under the Codes. This is increasingly concerning since, with the rapid pace of technological advancement, platform and gig workers form an integral part of many organisations.

The Code on Wages has been criticised for setting broad standards, such as skills and geographical location, arduousness of the work, as the criteria for determining minimum wages, despite the Apex court[iv] having held that minimum wage should be determined on a need basis (which extends beyond physical needs such as nutrition requirements, closing and housing needs, medical and family expenses, education, fuel, festival expenses and other miscellaneous expenses). This has been condemned since such skill based minimum wage has the potential to result in the prescription of lesser minimum wage for women since women’s work has the tendency to be associated with lesser skill or arduousness[v].

Moreover, the laws do not provide for paternity leave in the private sector[vi] and the concept of menstrual leave is not mentioned. The financial burden on the employer to finance maternity leave is opined to be counterproductive and result in hiring fewer women.

With respect to diversity, equity and inclusion (“DEI”), while India has showcased growth according to studies[vii], the road ahead is long. As per the World Economic Forum’s (“WEF”) Global Gender Gap Index 2023, India was ranked 127^th (one hundred and twenty-seventh) out of 146 (one hundred and forty-six) nations. Further, women’s membership on the board of directors of companies constituted only 17.10%, firms with majority ownership by women constituted only 1.80% and only 8.90% of firms had females as top managers[viii]. Similarly, in a 2023 Report by NASSCOM and AON[ix], it was observed that only about 11.3% of Persons with Disabilities (“PwD”) were working in the organized sector, the unorganized sector, government-led schemes or are self-employed. It has also been noted that, though organisations have been trying to track different types of diversities, women account for 34% of average diversity representation while, PwD and LGBTQIA+ account for only 1.48% and 1.5%, respectively. The “invisible” existence of caste discrimination in workplaces is yet another concern. Studies have revealed the dominance by upper caste and lack of caste diversity at the top executive level[x]. It has been observed that the boards of most Indian companies are dominated by a single caste and when a board has a dominant caste, it is likely that the CEO is also of that caste[xi]. There does not exist any specific law or policy directed at making workplaces more caste inclusive or for the redressal of grievances of employees in this regard, except for the penal provisions under law that render caste discrimination punishable.

Yet another concern is the practise of ‘social washing’. Social washing refers to the efforts by organisations to create perception among consumers that the organisation is socially responsible without any real basis for such portrayal. An example would be if an organisation represented that it valued gender inclusivity and equality without actually taking steps to ensure the same within the organisation. At present, the only protection that may safeguard consumers against ‘social washing’ is by way of a complaint under the Consumer Protection Act, 2019 for unfair trade practices or misleading advertisements.

The discussion surrounding the ‘S’ in ESG traverses beyond mere legal compliance. Investors and consumers are ambitious and are on the lookout for ESG practices that set organisations apart from the rest and accomplish more than just labour and consumer law compliance. The Business Responsibility and Sustainability Reporting (“BRSR”)[xii] introduced by the Securities and Exchange Board of India (“SEBI”) in 2021 is a step forward in recognising the demand of aspirational investors and stakeholders.

The BRSR is a reporting format that presently requires the 1000 (one thousand) top listed companies (based on market capitalisation) to disclose ESG related information as part of their annual report with SEBI. This has been introduced to bring in transparency to ESG initiatives and compliances of companies and provide investors and shareholders with more information regarding the ESG initiatives taken by companies. Reporting under the BRSR was introduced as a voluntary practice in FY 2021-’22 and made mandatory from FY 2022-’23. The BRSR framework envisages social principles such as conducting business with integrity, ethics, transparency and accountability; promoting well-being of employees including employees in value chains; and promoting inclusive growth and equitable development.

Learnings from foreign jurisdictions

United Kingdom (UK)

The UK enacted the Equality Act in 2010 whereby age;disability;gender reassignment;marriage and civil partnership;pregnancy and maternity;race;religion or belief;sex; and sexual orientation are recognised as protected characteristics[xiii]. The Act prohibits discrimination based on the protected characteristics. The Equality Act aims to prevent discrimination not only in terms of pay but also in the job application process, offers made for employment, training and promotion process, etc. As per the Equality Act, the value of the work is the standard for determining equal pay. Additionally, organisations with more than 250 (two hundred and fifty) employees must annually report on their gender pay gap[xiv]. Listed entities should also make disclosures on diversity[xv].

In addition to the Equality Act, the Commission for Equality and Human Rights has enacted Codes of Practice[xvi] supplementary to the Equality Act with respect to employment, equal pay and discrimination in services, public functions and associations. These codes explain the law and its scope with examples of practical situations.

The Modern Slavery Act, 2015 mandates all entities with turnover above GBP 36,000,000 (Thirty Six Million Pound Sterling) to prepare a modern slavery and human trafficking statement for each financial year, reporting the steps that it has taken during the financial year to ensure that slavery and human trafficking are not taking place in its own operations or supply chain[xvii].

Further, the UK Paternity and Adoption Leave Regulations, 2002 grants eligible employees the right to take 1 (one) to 2 (two) weeks leave within 56 (fifty six) days of the birth of a child[xviii].

Organisations in the UK have also adopted compensation and remuneration linked incentives to achieve ESG targets. According to a research published by PwC (in respect of disclosures made in 2020, relating to the 2019 performance year), almost half of FTSE 100[xix] companies at that time had an ESG target in the annual bonus and the Long-term Incentive Plan or both[xx].

There is a growing trend of B Corporations[xxi] (“B Corps”) which are corporations that have been certified by B Lab to meet high standards of social and environmental performance, transparency and accountability. B Lab is a non-profit organisation created with the mission to inspire and enable people to use business as a force for good.
United States of America (USA)

In the USA, there are federal and state laws that govern various aspects of the ‘S’ in ESG. The US labour laws include many legislations such as the Title VII of the Civil Rights Act, 1991; the Americans with Disabilities Act, 1990; the Age Discrimination in Employment Act, 1967; the Equal Pay Act, 1963; the Family and Medical Leave Act, 1993; the Occupational Safety and Health Act, 1970; the Pregnancy Discrimination Act, 1978; the Genetic Information Non-discrimination Act, 2008, etc.

In the case of minimum wages, the USA prescribes a national minimum wage and states are at liberty to prescribe a minimum wage higher than the national standard[xxii]. It may be noted that Indian law does not provide for a national minimum wage benchmark.

As far as DEI is concerned, in addition to general federal prohibitions on employment discriminations, discrimination in hiring decisions is prohibited[xxiii]. This includes avoiding questions during the job selection process that may reveal that an applicant is from a protected category of the Act[xxiv]. Further, the USA has enacted the Age Discrimination Act, 1975 to prevent discrimination in employment on the basis of age.

The Equal Pay Act, 1963 uses inclusive language to prohibit paying different wages to employees of different sexes and uses the standard of “equal work under similar conditions” to determine discrimination in this regard[xxv]. The Immigration and Nationality Act, 1952 states that that employers should not seek documents aside from what is necessary to verify employment eligibility[xxvi]. The Americans with Disabilities Act, 1990 classifies the failure to make reasonable accommodations to applicants or employees with known physical or mental limitations as discrimination, unless such failure can be justified on specified grounds[xxvii].

Learnings from trailblazers – example of Salesforce

It is a common practice of organisations to limit actions on the social front to merely ensuring regulatory compliance. While this may be due to fear of increased short-term costs, studies reveal that ESG has “a positive and highly significant relationship with profitability”[xxviii]. Amidst such organisations, initiatives by companies such as Salesforce is inspiring[xxix]. With employee benefits such as providing extensive healthcare support for employees and their dependents, supporting adoption, surrogacy and fertility journeys of employees, financially enabling learning and growth and implementing a meaningful equal pay initiative, Salesforce is an example of a company that has recognised that satisfied employees are a true asset to an organisation in the long run. In February 2022[xxx], Salesforce partnered with GiftAbled in India to launch the “Salesforce Developer Catalyst Programme” whereby PWD trainees were to be given training and the opportunity to join Salesforce as a developer thereafter, making impactful contribution through CSR initiatives.

The way forward

With the growing demand for socially responsible organisations, there is a need for laws to evolve and encourage responsible organisations. The SEBI BRSR framework surely sets the tone for discussion. However, due to its limited applicability, unaffected organisations may shy away from their potential to contribute to the society. It may not be possible for every organisation to match the capabilities of the top listed companies in the country, but every organisation has the ability to effect change. Therefore, sector specific parameters may have to be devised in order to bring more organisations within the ESG disclosure regime. Mandatory disclosures are expected to inspire voluntary ESG initiatives as well, since organisations are expected to realise the long- term benefits of keeping the environment, society and stakeholders satisfied. Inspiration may be drawn from the practices in foreign jurisdictions as mentioned above.

As noted, investors are increasingly interested in ESG positive opportunities. Crafting transaction agreements with ESG-specific clauses can go a long way. These may include, representations and warranties relating to compliance of ESG laws and practices in supply chains and labour law compliance. The Agreements can include provisions to ensure that the investee company does not associate with or engage in identified activities with negative ESG implications. Fair treatment of employees, anti-discriminative practices, DEI measures and the existence of a grievance redressal mechanism are few other areas where the investor may seek compliance in the transaction agreements.

It is also necessary to spread awareness about the impact of ESG on the long term profitability of organisations. Training sessions and internal policies in organisations can instil a sense of responsibility and desire to contribute to the society. Effective leadership is crucial for driving successful ESG initiatives within organizations. Leaders, along with robust legal frameworks, can create a powerful and mutually reinforcing cycle that fosters continuous improvement in ESG performance. This collaborative approach can lead to the development of strong and competitive ESG regulations and policies.

Authors: Nargees Basheer, Aishwarya H

Publication Date: March 21, 2024

^[i]Section 134(3)(o) of the Companies Act 2013. Under section 135 of the Companies Act, 2013, only companies having a net worth of INR 5,00,00,00,000 (Rupees Five Hundred Crores) or more, or turnover of INR 10,00,00,00,000 (Rupees One Thousand Crores) or more or a net profit of INR 5,00,00,000 (Rupees Five Crore) or more during the immediately preceding financial year are required to spend, in every financial year, at least two per cent of the average net profits of the company made during the three immediately preceding financial years towards CSR activities.

^[ii]Section 166 of the Companies Act 2013.

^[iii]Section 149(b) of the Companies Act 2013 and 17(1)(a) of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. It may be noted that Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides that only listed companies and public companies having either paid-up capital of INR 1,00,00,00,000 (Rupees One Hundred Crores) or more or turnover of INR 3,00,00,00,000 (Rupees Three Hundred Crores) or more are mandatorily required to have atsleast 1 (one) woman director on the board of directors.

^[iv]Hydro (Engineers) P. Ltd. v. Workmen (AIR 1962 SC 12); Workmen Represented by Secretary v. The Management of Reptakos Brett & Co. Ltd. and Ors. (AIR 1992 SC 504).

^[v]See https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_008091/lang–en/index.htm

^[vi]See https://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_008091/lang–en/index.htm

^[vii]As per the WTW’s Wellbeing Programmes India Survey, out of 210 (two hundred and ten) employers that were studied, 84% companies in India provide inclusion and diversity programmes. Further, India’s rank in the Global Gender Gap Index 2023 has gone up by 8 (eight) ranks from the previous year. Read more at https://www.wtwco.com/en-in/news/2023/03/inclusion-and-diversity-is-the-top-driver-of-benefit-strategies-in-india-wtw-survey-finds#:~:text=WTW’s%20Wellbeing%20Programmes%20India%20Survey,from%20210%20employers%20from%20India.&text=NEW%20DELHI%2C%20March%2030%2C%202023,critical%20component%20of%20business%20success.; https://www3.weforum.org/docs/WEF_GGGR_2023.pdf

^[viii]See https://www3.weforum.org/docs/WEF_GGGR_2023.pdf

^[ix]See https://nasscom.in/system/files/publication/d-e-i-report-min.pdf

^[x]See https://www.indianet.nl/pdf/120811.pdf

^[xi]https://www.academia.edu/88605232/The_role_of_caste_for_board_membership_CEO_and_interlocking

^[xii]SEBI Circular No. SEBI/HO/CFD/CMD-2/P/ CIR/2021/562 dated May 10, 2021 subsequently incorporated into the Master Circular No. SEBI/HO/CFD/PoD2/CIR/P/2023/120 dated July 11, 2023.

^[xiii]The Act combined various anti-discrimination legislations that were in existence

^[xiv]Regulation 2 of the Equality Act 2010 (Gender Pay Gap Information) Regulations 2017.

^[xiv]LR 9.8.6R(9) of the FCA Listing Rules.

^[xvi]See https://www.equalityhumanrights.com/equality/equality-act-2010/codes-practice

^[xvii]Section 54, Modern Slavery Act, 2015.

^[xviii]Regulation 5, The Paternity and Adoption Leave Regulations, 2002.

^[xix]Established on January 3, 1984, the FTSE 100 Index represents the largest and most tradeable companies listed on the London Stock Exchange.

^[xx]See https://www.pwc.com/gx/en/issues/esg/exec-pay-and-esg.html

^[xxi]See https://bcorporation.uk/b-corp-certification/

^[xxii]Section 206(a) of the Fair Labor Standards Act, 1938.

^[xxiii]Section 703 of the Title VII of the Civil Rights Act, 1964.

^[xxiv]Protected categories are determined based on race, color, religion, sex (including pregnancy, sexual orientation, or gender identity), national origin, age (40 or older), disability and genetic information (including family medical history). Read more at https://www.eeoc.gov/employers/small-business/3-who-protected-employment-discrimination#:~:text=Applicants%2C%20employees%20and%20former%20employees,(including%20family%20medical%20history)