Will EU's stringent ESG regulations impact Indian companies?

The European Union's (EU) stringent Environmental, Social, and Governance (ESG) regulations are set to have a significant impact on global businesses, including those based in India. These regulations, such as the Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD), are aimed at promoting sustainable business practices and accountability across global value chains.

Under the CSRD, large public-interest entities operating within the EU are required to disclose detailed ESG information, while the impending CSDDD imposes stringent due diligence obligations on companies, emphasizing accountability across global value chains.

CSRD aims to enhance transparency and comprehensiveness in sustainability reporting for EU-based companies. Entities falling under the CSRD regulation must conduct a robust financial and impact materiality assessment to disclose all relevant sustainability information to meet regulatory objectives. The CSRD applies to various companies, including those engaged in the following sectors:

On the other hand, the Corporate Sustainability Due Diligence Directive (CS3D), recently endorsed by the EU Council, mandates companies to address negative environmental and human rights impacts comprehensively.

Impact on Indian firms

The impact of these regulations extends beyond EU borders, affecting non-EU companies conducting business activities within the EU's jurisdiction. Compliance with ESG disclosure and due diligence requirements is mandatory for such companies, with potential penalties for non-compliance including fines and exclusion from public tenders.

As India is a major player in the global economy, it is not immune to the reverberations of EU ESG regulations. Indian companies with subsidiaries or significant activities in the EU will have to comply with these directives, with non-compliance leading to penalties.

Navigating these regulations will require Indian companies to review their current ESG practices, invest in robust data collection and reporting systems, and enhance stakeholder engagement. While compliance may be resource-intensive, embracing sustainability as a strategic imperative can position Indian companies as leaders in responsible business conduct, driving long-term value creation and resilience in an increasingly interconnected and sustainability-driven world.

Challenges and opportunities

For Indian companies, these regulations pose both challenges and opportunities. While compliance may require significant operational adjustments and resource allocation, embracing ESG principles presents opportunities to gain a competitive edge in EU markets, attract international investment, and enhance brand value through sustainable practices.

Indian companies, especially those with a global presence and access to the EU market, have to navigate the complexities of EU ESG regulations. This includes assessing current ESG practices, investing in robust data collection and reporting systems, and enhancing stakeholder engagement to ensure compliance.

Detailed requirements

Meeting the detailed reporting requirements of the CSRD, which encompass areas like greenhouse gas emissions, social impact, and gender pay gap, presents a resource-intensive challenge for many companies. Despite variations across industries, firms must independently report and potentially verify substantial amounts of sustainability data.

India's existing SEBI Business Responsibility and Sustainability Reporting Framework, while a step forward, may not adequately capture industry-specific ESG metrics, urging companies to transcend mere compliance with domestic regulations to thrive.

On the competitive front, EU ESG regulations level the playing field, favouring companies committed to sustainable practices. Indian firms that proactively embrace ESG principles and align with EU standards gain a competitive edge in accessing EU markets and attracting investment that prioritizes sustainability.

Demonstrating genuine commitment to ESG principles enhances brand value and appeals to environmentally and socially conscious consumers. Strong ESG practices throughout the supply chain not only mitigate risks but also improve operational efficiency. By embracing sustainability as a strategic imperative, Indian companies can position themselves as leaders in responsible business conduct, fostering long-term value creation and resilience in a sustainability-driven global economy.