Mandatory ESG disclosures under Sebi and menace of greenwashing in India

As India strides toward a more sustainable and re- sponsible financial ecosys- tem, the Securities and Ex- change Board of India (SEBI) has assumed a pivotal role in integrating environmen- tal, social, and governance (ESG) considerations into corporate reporting. With the implementation of mandatory ESG disclosures under the Business Respon- sibility and Sustainability Reporting (BRSR) frame- work, SEBI aims to foster transparency, accountability, and long-term value creation in corporate India. However, these noble intentions are shadowed by the specter of greenwashing, a growing concern that threatens to undermine the credibility of the ESG movement. This article critically ex- amines the evolution, scope, and implications of SEBI’s ESG disclosure norms while scrutinizing the risks of gre- enwashing that have started to plague India’s sustain- ability narrative. It explores whether the current regu- latory approach is robust enough to curb deceptive practices or if India is merely painting its economy green with insufficient checks on corporate conduct.

Genesis of ESG Disclosures in India: From Voluntary to Mandatory

India’s journey with ESG disclosures began on a modest note in 2012 when SEBI introduced the Busi- ness Responsibility Report (BRR) for the top 100 listed entities based on market capitalization. Over the years, the scope was gradu- ally widened, culminating in the rollout of the Business Responsibility and Sus- tainability Report (BRSR) framework in May 2021. The BRSR framework marks a significant departure from its predecessors by inte- grating sustainability indi- cators with standardized metrics and requiring more granular disclosures across environmental, social, and governance pillars. Effective from FY 2023–24, ESG reporting under BRSR Core has been made man- datory for the top 1,000 listed companies by market capitalization. This move is designed to ensure com- parability, standardization, and consistency in ESG disclosures while enhanc- ing stakeholder confidence. SEBI also introduced the concept of assurance, re- quiring external validation for BRSR Core metrics to further strengthen data re- liability.

Ambitious Objectives and Regulatory Evolution

SEBI’s motivations for en- forcing mandatory ESG dis- closures are commendable. They include: Enabling investors to make informed decisions based on non-financial performance. Aligning India with global ESG standards such as GRI (Global Reporting Initiative), SASB (Sustainability Ac- counting Standards Board), and TCFD (Task Force on Climate-related Financial Disclosures). Encouraging responsible business conduct that sup- ports India’s climate goals, including net-zero emissions by 2070. In theory, these disclosures should help create a virtu- ous cycle where transpar- ent companies attract ESG- focused capital, thereby incentivizing sustainable practices. However, in prac- tice, the effectiveness of this regulation hinges not only on corporate compliance but also on the authenticity of the disclosed information— a domain increasingly mud- died by greenwashing.

Understanding Greenwashing: The New Corporate Camouflage

Greenwashing refers to the act of misleading stakehold- ers by presenting an overly positive view of a company’s environmental or social per- formance, often through selective disclosure, vague language, or outright misin- formation. In a country like India, where ESG literacy is still nascent among both investors and regulators, greenwashing poses a par- ticularly insidious threat. In recent years, several In- dian corporations have been accused—either directly or implicitly—of overstating their sustainability creden- tials. For instance: Companies have touted carbon neutrality goals while continuing to expand fossil-fuel-based operations. ESG reports often cite to- ken CSR activities or low-im- pact initiatives as major en- vironmental achievements. Some firms engage ESG rating agencies to embellish their scores without sub- stantial improvements on the ground. With India witnessing a surge in ESG-themed mu- tual funds and investor interest, greenwashing is becoming not just a risk but a systemic vulnerability.

Critical Gaps in SEBI’s ESG Framework

While SEBI’s BRSR frame- work is a step forward, it is not without its limitations, which may inadvertently enable greenwashing:

1. Reliance on Self-Re- ported Data Despite the assurance re- quirement for BRSR Core metrics, much of the data in the broader BRSR report remains unaudited and self- reported. This leaves ample room for manipulation or selective omission of adverse data.
2. Ambiguity in Material- ity Determination Companies are allowed significant discretion in de- termining what is “material” for disclosure. Without clear guidance, this can result in cherry-picking metrics that paint a favorable picture while ignoring more perti- nent or damaging issues.
3. Lack of Enforcement Mechanisms There are currently no stringent penalties for mis- reporting or omitting ESG information. Unlike finan- cial disclosures governed by tight accounting stan- dards and auditing norms, sustainability disclosures lack the same rigor or con- sequences.
4. Limited Coverage of Supply Chain Practices Many ESG risks, especially environmental and labor- related, reside deep within supply chains. The current framework offers only lim- ited oversight or incentive for companies to report on their suppliers’ ESG perfor- mance.
5. ESG Ratings Arbitrage The unregulated ESG rating ecosystem allows companies to engage with multiple rating providers, selectively highlighting favorable ratings while ig- noring unfavorable ones. This practice, akin to credit rating arbitrage seen during the 2008 financial crisis, erodes investor trust.

Investor Implications: Mispricing Risks and Credibility Erosion

For investors, greenwash- ing leads to misallocation of capital. ESG funds may end up investing in companies with poor real-world im- pact, undermining both eth- ical and financial returns. The illusion of sustainabil- ity also poses reputational risks, particularly for global investors who operate under stricter ESG mandates. Furthermore, unchecked greenwashing can lead to a credibility crisis. If stake- holders begin to view ESG claims with skepticism, it may reduce the pressure on companies to genuinely improve their sustainability performance, thereby de- feating the entire purpose of ESG integration.

Global Comparisons: Lessons for India

Countries like the Europe- an Union have introduced more robust legislation to combat greenwashing. The EU’s Sustainable Fi- nance Disclosure Regula- tion (SFDR) and Corporate Sustainability Reporting Directive (CSRD) mandate comprehensive ESG dis- closures with third-party audits, materiality map- ping, and clear taxonomies of sustainable activities. India, by contrast, still lacks a taxonomy akin to the EU Green Taxonomy, which categorizes economic activities based on their en- vironmental sustainability. Without such standardized definitions, companies in In- dia can freely label projects as “green” or “sustainable” without objective justifica- tion. Recommendations: Strengthening the ESG Landscape To truly realize the prom- ise of ESG disclosures and guard against greenwash- ing, India must pursue a multi-pronged regulatory overhaul:

1. Stronger Auditing Norms Mandate third-party au- diting for all major ESG disclosures—not just BRSR Core—using accredited sus- tainability auditors. These audits must follow globally recognized standards to ensure consistency and re- liability.
2. Centralized ESG Data- base Create a publicly acces- sible ESG disclosure re- pository regulated by SEBI or MCA. This can allow analysts and watchdogs to independently assess data, increasing transparency and comparability.
3. Green Taxonomy and Labeling Standards Develop an Indian Green Taxonomy that clearly de- fines what qualifies as an environmentally sustain- able activity. This will help eliminate ambiguity and provide a benchmark for ESG labeling.
4. Penalties for Mislead- ing Claims Introduce financial and le- gal penalties for companies found guilty of intentional misrepresentation in ESG disclosures. This will create deterrence and foster ac- countability.
5. Stakeholder and Civil Society Engagement Encourage NGOs, aca- demic institutions, and citi- zen groups to participate in ESG monitoring, much like the role of proxy advisory firms in corporate gover- nance.

Conclusion: Walking the Talk on ESG

SEBI’s mandatory ESG disclosure framework is a landmark reform in In- dia’s corporate regulatory landscape, aligning with global trends and investor demands. However, with- out stringent oversight and mechanisms to curb gre- enwashing, the framework risks becoming a box-tick- ing exercise rather than a transformative tool. As India positions itself as a climate leader on the global stage, it must ensure that its ESG ambitions are matched by integrity, enforcement, and impact. Transparency cannot be performative. Accountability cannot be optional. And sustainability cannot be superficial. In the final analysis, the success of ESG integration in India will depend not on how many companies dis- close, but on how many are willing to change. Pankaj Chhuttani, Assistant Professor, School of Law, GD Goenka University, Gurugram