ESG

Also called: Environmental, social and governance · Topic: Industrial Policy, Public Sector, MSMEs and Disinvestment · NCERT: Beyond NCERT

Meaning

ESG (Environmental, Social and Governance) is the way investors judge a company's non-financial risks and performance. They look at three areas: the environment (for example, carbon emissions), people and society (for example, worker safety) and governance, meaning how the company is run (for example, the quality of its board). They use this next to the usual financial numbers.

It matters because a company can make profits today while building up hidden risks, such as pollution cases, worker accidents or promoter fraud. ESG brings these risks into the open. In India, SEBI (Securities and Exchange Board of India, the stock-market regulator) makes large listed firms report ESG data through a format called BRSR.

Explanation

The three pillars

• E – Environmental: how the firm affects nature.
• Examples: carbon emissions, water use, energy use, waste and pollution.

• NCERT example (Class 8): effluents (dirty waste water) from Tamil Nadu leather factories polluted rivers and soil. A high "E" risk looks like this.

• S – Social: how the firm treats people.

• Examples: labour safety, fair wages, training, respect for workers' rights, and the effect on communities.

• G – Governance: the rules by which the company is directed and controlled.

• Examples: board quality, independent directors (board members with no money or family ties to the company or its promoters) and checks on related-party transactions (deals between the company and its own promoters, directors or group firms).

How ESG works in practice

• Disclosure → rating → investment choice.
• The company discloses ESG data in a set format (in India, BRSR).
• ESG rating providers (ERPs) turn this data into scores. In India they have been SEBI-regulated since 2023.

• Investors, including ESG mutual funds, use the data and the scores to decide where to put money.

• Checking the data (assurance): ESG numbers are only useful if they are true.

• Reasonable assurance is a high level of checking by an outside party, close to a financial audit.

• BRSR Core is a short list of key ESG measures (emissions, water, energy, safety) that must be checked by an outside party.

• Value-chain disclosure: ESG data on a firm's major suppliers and buyers, not only its own factories and offices. This matters because much of the pollution or labour abuse can sit with suppliers.

What makes a firm's ESG standing better or worse

• Better: lower emissions, safer workplaces, a strong and independent board, and clear reporting that has been checked.
• Worse: pollution, accidents, tunnelling (promoters moving value out of the listed firm to firms they own privately), hidden beneficial owners (the real people who control shares held under another name), and greenwashing (false green claims).

In India

• Regulator: SEBI sets the ESG reporting rules for listed firms.
• Path from BRR to BRSR:

Year	Step
2012	BRR (Business Responsibility Report)
2019	NGRBC (National Guidelines on Responsible Business Conduct). Its 9 principles form the base of BRSR
May 2021	BRSR introduced by SEBI circular [4]
FY 2022-23	BRSR mandatory for the top 1,000 listed firms by market capitalisation
July 2023	BRSR Core + value-chain ESG disclosure framework [2]
March 2025	Ease-of-doing-business changes; voluntary green credits disclosure [3]

• BRSR Core glide path (a step-by-step phase-in): the top 1,000 listed entities move to reasonable assurance of BRSR Core over 4 years, starting FY 2023-24 [2].
• 2025 changes [3][1]:
• Firms can choose "assessment", a lighter check, in place of "assurance".
• Assessment follows standards set by the Industry Standards Forum (ISF).

• The checker need not be a Chartered Accountant (the rule is "profession-agnostic"), but must have sustainability expertise.

• Value chain: this applies to the top 250 listed entities. After 2025, both the disclosure and its assessment or assurance are voluntary [3].

• ESG rating providers: SEBI-regulated since 2023. SEBI issued FAQs on ERPs in 2025 [5].
• ESG mutual funds: a separate SEBI category of funds that invest using ESG criteria.
• Governance ("G") laws behind ESG: Companies Act 2013 (independent directors under s. 149, related-party transactions under s. 188) and SEBI LODR Regulations, 2015 (the rules every listed company must follow).

Don't confuse with

• CSR (Corporate Social Responsibility): CSR is a legal duty to spend at least 2% of the average net profit of the preceding 3 years on Schedule VII activities (s. 135, Companies Act 2013, in force from 1 April 2014). ESG is about measuring and disclosing risk and performance. It does not fix any amount of spending.
• BRR vs BRSR: BRR (2012) was the older Business Responsibility Report. BRSR (2021) replaced it and is based on the NGRBC (2019).
• Corporate governance: this is only the "G" of ESG, meaning how a company is directed and controlled. ESG also covers environmental and social factors.
• Greenwashing: this is false or inflated ESG claims, not ESG itself. Independent checking under BRSR Core is meant to catch it.

Prelims Hooks

• ESG = Environmental, Social, Governance. It is the investor's way of judging non-financial risk and performance.
• BRSR is SEBI's mandatory ESG disclosure format. It is not issued by MCA or RBI. It was brought in by a May 2021 circular [4] and became mandatory for the top 1,000 listed firms (by market cap) from FY 2022-23.
• BRSR rests on the 9 principles of NGRBC (2019) and replaced the BRR (2012).
• BRSR Core (July 2023) requires third-party reasonable assurance, phased in over 4 years from FY 2023-24 for the top 1,000 listed entities [2].
• Value-chain ESG disclosure covers the top 250 listed entities, and it has been voluntary since the March 2025 changes [3].
• Trap: ESG rating providers have been SEBI-regulated since 2023. After 2025, the BRSR Core checker need not be a Chartered Accountant [3][1].

Mains Points

• Ease of doing business vs investor protection: SEBI's 2025 moves lower compliance costs [3].
• "Assessment" in place of "assurance" → the check is lighter.
• Voluntary value-chain disclosure → less data on suppliers.

• Result: cheaper for firms, but ESG data may become less reliable. This weakens trust in India's capital markets, a concern already raised by the Adani-Hindenburg episode (2023).

• ESG as a link to global capital and industrial policy:

• Global investors and supply chains (e.g. EU rules) ask for sustainability data. BRSR and BRSR Core help Indian firms meet these demands.
• ESG supports India's Net Zero 2070 goal.

• Risks: greenwashing, and a compliance burden on MSMEs that supply large firms and must now provide ESG data.

• "G" is India's special challenge: most Indian firms are promoter-controlled, so the main risk is majority vs minority shareholders (tunnelling), not managers vs owners. Strong ESG scoring in India must therefore weigh related-party transactions, beneficial-ownership openness and real independence of directors, as the Satyam (2009) and IL&FS (2018) failures show.

Related concepts

• Corporate governance
• Independent director
• Related-party transaction
• Beneficial ownership
• Proxy advisory firm
• Shareholder activism
• Corporate social responsibility
• Business responsibility and sustainability reporting

Read more

• Corporate governance, CSR and ESG: disciplining private corporate power