This year, environment, social and governance norms will be embedded not just in law and regulation but also in business plans and culture, managing partner; and partner, Cyril Amarchand Mangaldas, write
The green transition will not encumber economic growth, but instead catalyse an economic transformation that could propel inclusion and growth
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This a pivot or perish moment for humanity itself, not just businesses. Climate change, extreme weather events, zoonotic diseases, including the current pandemic, are not distant dystopia, but are currently ongoing. It is, therefore, inevitable that the two enduring changes of the pandemic’s last two years are the digital transformation of business and human behaviour, and the embedding of ESG (environmental, social and governance) in all aspects of life—a complete reorientation of business behaviour, and the laws and regulations that govern that. This also presents massive opportunities for Indian businesses. A World Economic Forum-AT Kearney report states that India’s transition to a net-zero economy could create over 50 million jobs and contribute more than $1 trillion in economic impact by 2030 and 15 trillion by 2070.
The Intergovernmental Panel on Climate Change report, published in 2021, underscored significant risks of climate change to India, in recognition of which the prime minister made ambitious and potentially transformational commitments at the Glasgow COP-26. Each of these will require the private sector and companies to act upon the obligations placed on them under Indian public and private law. This is no longer an ‘optional extra’ or ‘good to have for Indian businesses’, but a core strategic priority, with businesses metamorphosing from ‘core’ polluting sectors to ‘green’ ones. The green transition will not encumber economic growth, but instead catalyse an economic transformation that could propel inclusion and growth.
Indian law and regulations have been alive to climate change issues for some time. For instance, the Companies Act, 2013, under section 134(m), mandates companies to include a report by their board of directors on the steps taken for conservation of energy along with the company’s financial statements.
There is therefore certainty about the need for ambitious actions despite prevailing uncertainty regarding the timing and nature of impacts of climate change. The financial sector—as the nerve centre of the economy—bears a special responsibility to drive adoption of sustainability as a core business practice.
The Reserve Bank of India (RBI) joined the central banks’ and supervisors’ Network for Greening the Financial System (NGFS) as a member in April. It released a statement indicating the integration of regulatory priorities with those of climate change, identifying vulnerabilities in its supervised entities’ balance sheets, integrating climate-related risks into financial stability monitoring.
Separately, the Indian Banks’ Association (IBA) released the National Voluntary Guidelines for Responsible Financing, laying down broad principles towards “integrating ESG risk management into financial institutions’ business strategy, decision-making processes and operations”.
In 2022, the RBI could consider specific disclosure standards for banks and their borrowers, a possible audit framework to ascertain the veracity of such disclosures, as carried out in the CBI Initiative or EU Green Bonds disclosure framework. The central bank could consider adopting a scheme similar to the ‘On Tap Targeted Long-Term Repo Operations (TLTRO)’ for enhancing liquidity in the green sector. Under this scheme, banks and NBFCs can be mandated to deploy this liquidity in green and blue bonds, in addition to extending bank loans and advances to green projects that are critical for development, including supporting the electronic charging station infrastructure and MSMEs working on innovative green projects.
Given the RBI’s increasing focus on technology, it could consider deploying technology to widely diffuse green finance. A green digital platform can be designed to bring greater efficiency and transparency across the entire lifecyle of any other green instrument, using artificial intelligence, machine learning, RegTech and SupTech to ensure licensed institutions can comply with regulation, and increase transparency apart from ensuring the delivery of the ESG covenants and other green finance metrics built into the financing documents of various instruments through the combination of technologies such as blockchain, smart contacts and the Internet of Things. Blockchain can be leveraged to distribute such information to investors in a timely manner.
The RBI could mandate banks and NBFCs to deploy liquidity in green and blue bonds, in addition to extending loans and advances to green projects
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A situation where the furthering of financial interest of a corporation results in aggravating climate change, it may similarly transgress section 166. Given this, it is incumbent on the directors to set up mechanisms for assessment of climate risk to discharge their duties under the Companies Act. While the sequitur for violation of the duties under Section 166 are certain fiscal penalties, the ministry of corporate affairs by way of a circular dated March 2, 2020, has helpfully clarified in section 149(12) of the Companies Act, 2013, that independent directors and non-executive directors would be liable only in respect of an act or omission by a company which occurred with their knowledge, attributable to board processes, and with their consent, or where they have not acted diligently. However, a decision such as that in the case of the bustard has meant that directors and boards must put in place processes to demonstrate that relevant questions were asked and possible climate risks were mitigated for all board decisions.
Under section 245 of the Companies Act, 2013, it has been stated by scholars that India has enacted one of the most robust private enforcement regimes for securities fraud violations. Umakanth Varotill, associate professor, faculty of law, National University of Singapore, in a white paper titled ‘Directors’ Liability and Climate Risk’ states that in the context of climate change in order to initiate action under section 245, apart from meeting threshold requirements, all that petitioning shareholders need to establish is that the breach of directors’ duties results in prejudice to the company or to shareholders. This provision cannot be used by other stakeholders identified in Section 166 currently, since it can only be initiated by a shareholder.
The duty of directors of a corporation to the environment will increasingly be tested within India and across jurisdictions, and the law will evolve and expand through judgements. Companies and directors must be prepared to put in place water-tight processes to defend the sustainability and ‘greenness of their actions’.
Cyril Shroff is managing partner and Richa Roy is partner at Cyril Amarchand Mangaldas
(This story appears in the 14 January, 2022 issue of Forbes India. To visit our Archives, click here.)