Introduction
The concept of Environmental, Social and Governance(ESG) had been gaining prominence among the investors and companies over the years, however, the advent of the pandemic has highlighted the growing importance of ESG considerations for the global financial ecosystem. ESG refers to the three key elements (environmental, social and governance) that define how morally responsible a business or investment will be. The ESG debt market is estimated to be worth around
While term "ESG" is not often used in project financing, it does appear in a number of project development-related areas as well as in sponsors' and developers' policies. For instance, large-scale infrastructure projects have a significant impact on the environment and on the neighborhood community. Compliance with environmental regulations may have significant financial ramifications, having a direct influence on the project's planned cash flows. The focus of infrastructure projects has shifted from short-term profitability and financial return to long-term sustainability as a result of the ESG considerations.
ESG considerations impacting Project Financing
For their financial viability and sustainability, long-term projects, particularly those involved in the mining and processing of fossil fuels or minerals, heavily rely on ESG aspects. Any interruption or termination of the project's operations could have disastrous social and financial repercussions, including mass layoffs for locals and non-performing assets for financiers, as was the case when Vedanta's copper processing facility in Thoothikudi (previously Tuticorin) was shut down due to environmental concerns.
'Environmental' considerations have always been a key component of project development, right from project inception to effluent disposal during the entire project lifecycle. For instance, the establishment of any project might necessitate clearing of forest, regrading of land, relocating of utilities, interfering with the natural flow of rivers, excavating farmland, etc., all of which have an immediate effect on the habitat and ecology of the surrounding area and the local community. Therefore, strict environmental regulations are in place across jurisdictions that require the developer to complete an "Environmental Impact Assessment" study and acquire the necessary clearances from the relevant authorities before moving forward with the project in order to reduce this impact. The impact on indigenous populations and their rights is another issue that is frequently brought up and if this remains unaddressed their hostility to the project increases. To address such issues, proper consultation and confidence-building measures can be used.
Next consideration is 'social' aspect of the project which includes human rights, labour rights (including the rights of the employees engaged by one's contractors and suppliers), diversity and heterogeneity of human capital. There are laws and established mechanisms already in place to ensure dignity of workers at workplaces. However, proper arrangements should be made to address the concerns of the workforce at the earliest to avoid any loss due to disruptions as we recently witnessed in the case of
The term 'governance' now also includes challenges outside the corporate governance regime, such as data privacy issues, financial transparency, cyber security, and lender-imposed transaction restrictions. Project companies may also be constrained by transaction requirements agreed to with lenders, who may include anti-money laundering monitoring as part of financing documentation.
ESG rating and sustainable finance
As demand for ESG reporting grows among stakeholders, banks and financial institutions have also started resorting to 'sustainable/ESG-based lending'. Large Indian banks have begun implementing ESG practices in their daily operations. They are updating their framework for lending and investing in ESG. For instance,
ESG Regulatory Mechanism in
While different laws have been introduced in
The
The duties of directors with regard to their responsibilities towards the society and environment have been codified in the Indian Companies Act, 2013 (Companies Act). A director of the company must "act in the best interest of the community as well as the environment," as per Section 166 of the Companies Act. Also, the annual board report must detail the board of directors' efforts to conserve energy, use alternative energy sources, and make financial investments in energy-saving equipments.
In
The aforementioned legal developments show that Indian regulatory bodies are now catching up to global ESG trends that have been ongoing.
Conclusion
With
"The authors would like to acknowledge the research and assistance rendered by Mr.
Footnotes
1. https://m.bankingexchange.com/recent-articles/item/9103-global-esg-assets-to-hit-50-trillion-by-2025
2. https://www.livemint.com/market/mark-to-market/nifty-esg-beats-nifty50-in-last-one-year-amid-focus-on-conscious-investing-11629780211287.html
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