As the Hon’ble Finance Minister Nirmala Sitharaman prepares to present the comprehensive union budget for 2024-25 on July 23, 2024, various sectors are abuzz with expectations for significant policy changes and financial allocations.
Environment, Social and Governance (ESG) is not only vital to enable sustainability and resilience for the fast growing economy of India, but it is also a measure of stability and an essential tool to cope with the disruptions brought by innumerable factors. Sustainability is a crucial indicator of growth and an essential instrument in key decision making.
As India surges ahead to become the third largest economy, ESG will play an important role in its growth and development. One of the key drivers for such exponential growth in recent years is the Indian MSME sector. Indian MSMEs are catapulting the economy of India monumentally. The biggest way for MSMEs to contribute and work with the government is with adherence to the ESG standards, which can be achieved by making available cheap financing, boosting investor confidence and regulator outlook.
With the ESG standards gaining momentum and specified Indian companies having to mandatorily comply with the ESG regulatory framework prescribed under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, sustainability advocates are expecting significant funding allocation and meaningful steps towards ESG and sustainability initiatives in the union budget.
The existing regulatory compliance standards for investment in green and ecologically sustainable technologies are prohibitively expensive. It is expected that the union budget will introduce ESG friendly policies for companies and facilitate availability of green technologies to MSMEs and others by providing incentives in the form of subsidies, grants, direct and indirect tax exemptions and other benefits that will enable, simplify and support such companies in adopting sustainable technologies and practices.
The government has issued Sovereign Green Bonds (SGBs) and notified the Green Credit Rules, 2023, to incentivise environment positive actions by entities and encourage investment in renewable energy projects and sustainable infrastructure development. In April 2023, the Reserve Bank of India (RBI) also released a framework for acceptance of Green Deposits by financial institutions. We expect the budget to include enabling provisions to encourage green deposits.
The budget may bring amendments to the current CSR provisions under the Companies Act, 2013 to increase the present CSR spend of at least 2% and also bring the necessary amendments to include ESG approved projects in the activities listed in Schedule VII, to enable the companies to directly fund such projects that are required to be undertaken by entities who otherwise cannot afford them.
Further, we expect clear incentives to be spelt out whether in the form of subsidies, grants or tax benefits along with funding availability through schemes, co-operative bank loans and other debt financing options for entrepreneurial ventures particularly which have innovation, skilling and which are connected to essential sectors such as agro, healthcare and education.
The government is now in the process of implementation and enforcement of the 4 Labour Codes and framing of rules thereunder, to enable ease of business and respond to the need of the significant social transformation and the evolving work environment. It is expected that labour welfare policies will be introduced in the budget which will foster a culture that will bring about improved working conditions, nurture talent and strengthen community engagement. The budget is also expected to introduce incentives to facilitate skilling programmes for skills development and entrepreneurship and encourage employee-friendly schemes to combat unemployment.
In respect to the governance standards, the Ministry of Corporate Affairs (MCA), the Securities and Exchange Board of India (SEBI) and RBI have already set the tone for responsible corporate governance and efficiency. The budget is expected to promote businesses engaged in emerging technologies which will support the digital and technological transition necessary in the companies for compliance, operating systems, record-keeping, regulatory filings and other technological enhanced capabilities.
As a part of efficient and effective governance, we will see a lot of technology involvement, data analytics, artificial intelligence and blockchain, which will aid and assist in creating comprehensive digital records, facilitating record management and monitoring by companies and regulators.
The entire thrust on the government is going to be to provide financial and non-financial aid to encourage adherence with the ESG standards by MSMEs and other entities, considering that ESG is rapidly becoming an essential ingredient for value creation in any organisation. Through the Business Responsibility and Sustainability Report (BRSR) and ESG rating standards, SEBI has also created urgency in corporate India to create structures and adopt practices in an organisation to fulfil necessary requirements under a sustainability regime.
We see this budget as a critical foundation to the major technological, social and geopolitical transition seen worldwide that will have a lasting impact on global ESG and Sustainability initiatives that have already commenced and are pivoted on the principles of co-operation and responsible action.
These are exciting times when our Finance Minister will no doubt provide for specific incentives to encourage adoption of the ESG principles for a more receptive outlook, making it a preferred choice and also create an enabling framework to bring in regulatory changes that will go a long way in improving ease of doing business and boosting investor confidence.
Radhika M Dudhat, Partner, Shardul Amarchand Mangaldas & Co