In November 2021, Prime Minister Modi stated that India would achieve net-zero emissions by 2070, and announced a number of interim steps including increasing the capacity of its non-fossil fuel energy generation, reducing its carbon emissions and reducing its carbon intensity, by 2030.1 In August 2022, India submitted its updated Nationally Determined Contributions (NDCs) to the UNFCCC for the period up to 2030. The updated NDCs target the reduction of emissions intensity of its GDP by 45% by 2030, from 2005 levels, and achieving about 50 percent cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030, with the help of transfer of technology and low-cost international finance.2 In furtherance of India’s climate commitments, the Government of India also issued a framework for Sovereign Green Bonds.3 This may indicate the direction of government policies in the future, and the context in which Indian corporates operate.
Indian financial regulators are becoming increasingly attuned to the magnitude and breadth of climate-related financial risks. In April 2021, the RBI joined the Network of Central Banks and Supervisors for Greening the Finance System (NGFS).4In July 2022 it published a discussion paper reviewing climate risks for entities regulated by it and providing guidance on climate change related governance, strategy, risk management and financial disclosure and reporting. The discussion paper recognises the critical role of the board in identifying climate risks, reviewing their impact on strategy, guiding and implementing climate policy, and overseeing risk management and reporting.5 In February 2023, the RBI Governor stated that the RBI will issue guidelines for regulated entities on (i) a broad framework for acceptance of Green Deposits; (ii) disclosure framework on Climate-related Financial Risks; and (iii) guidance on Climate Scenario Analysis and Stress Testing, which was followed by a framework for Acceptance of Green Deposits in April 2023.6 The framework builds on the discussion paper and among other things, mandates a board-approved policy and a board-approved financing framework for funds raised through investment in green deposits. In addition, a review report is required to be placed before its board of directors within three months of the end of the financial year.7
For the financial year 2022-23, the newly introduced business responsibility and sustainability reporting requirements (BRSR) of the Securities and Exchange Board of India (SEBI) came into effect on a mandatory basis. These require the top 1,000 listed companies (by market capitalization) to report on several ESG indicators, including climate change risks. .8 The guidance note for such reporting draws from India’s National Guidelines on Responsible Business Conduct, Global Reporting Initiative (GRI) Sustainability Reporting Standards and various Indian laws.9 In May 2022, SEBI constituted an advisory committee to review Business Responsibility and Sustainability Reporting (BRSR) requirements, ESG ratings and ESG investing.10 SEBI’s continued focus on ESG issues is clear from the recently released consultation paper on ESG Disclosures, Ratings and Investing.11 This paper makes many reform proposals regarding mitigating risks of greenwashing, disclosures and enhanced stewardship for ESG funds, among others. In particular, it proposes phased assurance requirements for ‘core’ BRSR indicators, ESG disclosures for supply chains, contextual ESG parameters, ‘core’ ESG ratings, and voting disclosures by ESG schemes. SEBI has also consulted on a draft regulatory framework for ESG ratings providers which prescribes registration, disclosure, governance and conflict avoidance, transparency and rating process related obligations for such entities.12 SEBI has also been proactive in enhancing the framework for green debt securities. Projects such as pollution control (including emission reduction), circular economy adapted products, blue bonds, yellow bonds and transition bonds have all been recognised as green debt securities.13 Heightened disclosure and other obligations have been introduced for issuers of green debt securities in alignment with the updated Green Bond Principles recognised by IOSCO.14 SEBI has also issued a list of ‘Dos and Don’ts’ for issuers to avoid greenwashing.15
In July 2021, the International Financial Services Centre Authority (IFSCA), which is the unified regulator for International Financial Services Centres (IFSCs), issued regulations (the IFSCA Regulations) pertaining to the issuance and listing of securities, including ESG debt securities in the nature of ‘green’, ‘sustainability’ or ‘sustainability-linked’ debt securities. The IFSCA Regulations also provide inter alia for external review to ascertain that ESG debt securities are aligned with specified international frameworks.16 IFSCA also published a ‘Guidance Framework on Sustainable and Sustainability linked lending by financial institutions’ which directs registered IFSC Banking Units and Finance Companies/Finance Units (undertaking lending activities from IFSCs) to develop board-approved policies on green/ social/ sustainable/ sustainability-linked lending in line with recognised international frameworks and also introduces monitoring and reporting requirements.17 IFSCA’s Expert Committee on Sustainable Finance submitted its report on 3 October 2022.18 This report provides “a roadmap for IFSCA to develop GIFT-IFSC as a global hub for sustainable finance”. Among other things, the report recommends ESG and sustainable finance capacity training for boards and key managerial personnel of banks and financial institutions so that they can evaluate key risks and opportunities and provide adequate direction to their respective organisations. This would involve sensitising them on the importance of ESG, best-in-class practices and opportunities to avail low-cost sustainable finance.
Directors' Duties and Climate Change
Indian directors’ duties are largely codified in section 166 of the Companies Act. The most relevant duties in the context of climate change are, broadly speaking, the duties of trust and loyalty and the duty of competence.19 The duties of trust and loyalty include the duty to act in good faith in the best interests of the company and its stakeholders, as well as the duty to avoid conflicts of interest. Regarding the duty to act in good faith and best interests, section 166(2) of the Companies Act provides:
A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
Accordingly, in discharging this duty, directors must balance various stakeholder interests under a pluralistic corporate governance paradigm. Often, the interests of these stakeholders conflate to some degree when a long-term perspective is adopted, thereby simplifying the balancing act directors must undertake.
In the context of climate risk, it is notable that the provision requires directors to act “for the protection of the environment”. The Supreme Court has clarified the broad meaning of the term ‘environment’ under section 166(2) of the Companies Act, and demonstrated that there is no hierarchy between the duties owed to the company and the other stakeholders under section 166(2).20 Therefore, consideration of matters such as climate risk and environmental protection is not optional for directors of Indian companies. Rather, it is an obligation which, if ignored, may create significant liability risk. However, this liability risk can be reduced if directors undertake a detailed assessment of climate risk facing their company, consider expert advice where appropriate, determine strategies to address the risks, implement those strategies, and consistently review the risks and the efficacy of such strategies.
Regarding the duty of competence, section 166(3) of the Companies Act stipulates that directors of a company shall exercise their “duties with due and reasonable care, skill and diligence and shall exercise independent judgment”. As such, Indian directors must inform themselves sufficiently about the business of the company and its associated risks. They must also employ adequate monitoring and oversight over the management of the company. Importantly, the duty of competence is assessed objectively. Hence, an honest failure on the part of directors to account for climate risk cannot be raised as an excuse against a breach of the duty. Therefore, the duty of competence will in many cases require Indian directors to investigate and engage with climate risks. Prudent engagement will likely involve integrated risk frameworks, comprehensive disclosures and considered responses from boards.
In addition to the duty of competence in section 166(3) of the Companies Act, the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (SEBI LODR Regulations) also impose several duties on directors which include adequately framing, implementing and monitoring systems of risk management.21 These regulations require the board of directors of listed companies to specify a risk management framework and large listed companies to also establish a risk management committee.22 It is also specified that the risks to be identified by such a committee include sustainability risks, especially those pertaining to ESG.23 These regulations add further content to the duty of competence and raise the expected standard of risk management, and a fortiori climate risk management.
Directors' Disclosure Obligations and Climate Change
Indian companies may be required to make climate risk disclosures both in relation to securities issuances and their ongoing disclosure obligations.
Regarding the issuing of shares, the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (SEBI ICDR Regulations) mandate disclosure of several types of corporate information which are likely to relate to climate risk. For example, the SEBI ICDR Regulations mandate disclosure of management’s discussion and analysis of the financial condition of the company, alongside a discussion of various factors (including infrequent events or known trends or uncertainties) which may have a material adverse impact upon the company’s revenue or profit.24 The SEBI ICDR Regulations also require that a company’s prospectus contain the company’s material internal and external risk factors,25 with climate risk likely being a foreseeable factor for many companies. SEBI, in its framework for issuance and listing of non-convertible securities, has also specified certain conditions for the issuance of ‘green debt securities’ which pertain to debts linked to specific end-uses, including renewable and sustainable energy, clean transportation, and climate change adaptation. These include making disclosures on the proposed environmental sustainability objectives, project evaluation procedures and the environmental impact of the financed project.26
As well as disclosure with respect to share issuances, disclosure of climate risks is relevant to annual reports, continuous disclosure obligations and BRSR requirements. Notably, the annual reports of Indian companies must contain a discussion regarding the company’s risk management policy and the means by which the company identifies and addresses risks that pose an existential threat to the company.27 Furthermore, the report must address the company’s approach to energy conservation,28 and more particularly, use of alternative forms of energy and investments made in company energy conservation initiatives.29 The BRSR framework published in May 2021, which came into effect for reporting for FY 2022-2023, places great emphasis on disclosure of sustainability issues. In-scope listed companies under the BRSR framework are required to disclose an overview of their business conduct and sustainability issues, which includes material climate change-related
risk, in their BRSR reports.30 Particularly, companies are required to disclose details of energy consumption, scope 1 and scope 2 greenhouse gas emissions, emission reducing projects, environmental clearances and impact assessments, renewable energy usage and details of any business continuity and disaster management plans.31
Indian companies also have continuous disclosure obligations with respect to material information to ensure the market is properly informed.32 The definition of material information expressly includes information arising from the impacts of climatic events, such as flooding and fires.33
India is recognised as a mega-biodiverse country which accounts for about 7-8% of species on Earth.34 The CCLI has published a report on how companies in India and other jurisdictions may depend on biodiversity for the functioning of their business models.35 Biodiversity loss may constitute a material financial risk which boards are required to consider within the purview of directors’ duties.
Indian courts have recognised the country’s biodiversity, and it is reflected in a number of its laws and case law. This includes: the extension of the constitutional right to life to the protection of the environment;36 court decisions that the state holds nature in trusteeship for the benefit of not only the public but also nature itself;37 and the recognition of the legal personality of natural bodies such as lakes, glaciers and animals.38 Indian courts have also previously adopted the higher standard of absolute liability for companies involved in environmental harms such as the introduction of harmful substances into the environment.39 In certain cases, violations of environmental laws may also risk liability of directors.
Additionally, the BRSR reporting requirements include a company’s significant impacts on biodiversity.
The position of the courts in environmental cases, the directors’ duty to act in the best interest of the environment, and the BRSR requirements indicate that directors should at least consider, and potentially take steps to mitigate, risks posed by biodiversity loss to their company in order to meet their legal duties.
Practical Implications for Directors
Given that regulators in India have become increasingly emphatic regarding the need for companies and their directors to adopt climate resilience measures in business practices and disclosure, and in particular the above-noted recognition of the role of the board in climate strategy by the Reserve Bank of India, and SEBI’s current BRSR requirements, well-counselled boards will:
- delegate climate risk identification and evaluation to a clearly-identified team in management which reports directly to the CEO and board;
- put on the agenda for the board as a matter of priority a process to start developing a climate transition roadmap to 2070 with transparent carbon neutrality or reduction targets, with clear interim targets and within the current rolling multi-year strategic plan, and periodically thereafter report back to the board on climate performance;
- delegate to the appropriate committee(s) of the board, such as risk, audit, legal and governance, scenarios/strategy, nominations/remuneration, or sustainability/corporate responsibility, the task of translating the long-term strategy into a clear decision-making process for each aspect that is relevant to each committee;
- set a climate conscious ‘tone at the top’ and oversee climate strategy and the implementation of risk management and mitigation processes;
- seek information from management on material climate risks and related policy initiatives, and participate in ESG capacity building and training programmes;
- discuss with disclosure counsel, to develop an external engagement and communications plan and to oversee rigorous disclosure and accounting; and
- use the BRSR assessment and disclosure process as a climate consciousness check and have goals mapped to any shortfalls identified and/ or “leadership indicators” as provided in the BRSR framework.
- Dr. Umakanth Varottil, Associate Professor of Law, National University of Singapore
- Anchal Dhir, Cyril Amarchand Mangaldas
- Aman Deep Borthakur, Cyril Amarchand Mangaldas