Environmental, Social and Governance (ESG) - Principles and Practice · Sustainability Audit, ESG Rating and Emerging Mandates from Government and Regulators

Government Initiatives and Companies Act Mandates for ESG

Updated 11 October 2026

These are the legal and policy pushes that make Indian companies act on ESG. The main ones are CSR under Section 135 of the Companies Act, 2013, the National Guidelines on Responsible Business Conduct (nine principles), SEBI's BRSR disclosures and the Carbon Credit Trading Scheme. Answer by naming the instrument, its binding force and its effect on the company.

Understand Government Initiatives and Companies Act Mandates

ESG in India is not left to goodwill. The government and regulators push companies through three routes: binding law, mandatory disclosure and voluntary guidance that is slowly hardening into expectation. Your first job in an exam is to place each initiative on this scale.

Binding law. Section 135 of the Companies Act, 2013 requires qualifying companies to adopt a CSR policy and spend at least 2% of average net profit of the preceding three financial years on CSR. The threshold is any one of: net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more during the immediately preceding financial year. A qualifying company must constitute a CSR Committee, but under Section 135(9) this is not required where the company's CSR obligation does not exceed ₹50 lakh. In that case the Board discharges the Committee's functions. A company that ceases to meet the thresholds for three consecutive financial years is no longer required to comply with Section 135 until it meets them again. Section 134(3)(o) requires the Board's report to contain CSR details, with project details as the CSR Rules require. Section 135(2) requires the report to disclose the composition of the CSR Committee. Section 135(4) requires the Board to approve the CSR policy, disclose its contents in the report and display it on the company's website. Environmental statutes such as the Environment (Protection) Act, 1986 sit alongside these.

Guidance that shapes conduct. The Ministry of Corporate Affairs issued the National Guidelines on Responsible Business Conduct (NGRBC) in 2019, replacing the 2011 National Voluntary Guidelines. They are built on nine principles: ethics, transparency and accountability; safe and sustainable goods and services; employee well-being; stakeholder responsiveness; human rights; environment; responsible public policy advocacy; inclusive growth and equitable development; and consumer value. The guidelines are voluntary in themselves, but SEBI's BRSR format is structured around these nine principles, so listed companies report against them.

Market-based tools. India's Carbon Credit Trading Scheme was notified under the Energy Conservation Act, 2001, as amended in 2022. It sets up a compliance market for greenhouse gas emission intensity targets for notified sectors and a framework for an offset mechanism. Entities that beat their target can earn carbon credit certificates; those that miss it must buy certificates or face penalty. Treat the details of sectors and targets as notified by the Government, and quote only what the study material gives you.

The link between them is simple. CSR is a spending duty, NGRBC is the conduct framework, BRSR is the reporting channel and carbon trading prices environmental performance. A good answer shows how one company meets all four.

Key rules to remember

CSR spending obligation: Minimum CSR spend = 2% × average net profit of the immediately preceding three financial years; Net profit is computed as per Section 198. Under the CSR Rules it excludes profits arising from overseas branches and dividends received from other companies in India that are themselves covered under and complying with Section 135. Apply this only to companies that meet the Section 135 thresholds.
Section 135 applicability: Net worth ≥ ₹500 crore OR turnover ≥ ₹1,000 crore OR net profit ≥ ₹5 crore, during the immediately preceding financial year; Meeting any one condition is enough. Check the thresholds on the basis of the preceding year's financial statements. A company that fails to meet the thresholds for three consecutive financial years need not comply until it meets them again. Under Section 135(9), if the CSR obligation does not exceed ₹50 lakh, the CSR Committee is not required and the Board discharges its functions.
NGRBC principles: Nine principles: ethics; sustainable goods and services; employee well-being; stakeholder responsiveness; human rights; environment; public policy advocacy; inclusive growth; consumer value; Voluntary guidelines issued by MCA in 2019. BRSR reporting is organised around them.
Carbon market logic: Actual emission intensity < target → credits earned; actual emission intensity > target → credits must be bought; Describes the compliance mechanism of the Carbon Credit Trading Scheme. Targets are notified by the Government for specified sectors.

How to solve Government Initiatives and Companies Act Mandates questions

Use this sequence for any question on government initiatives and Companies Act mandates. It keeps the answer in the provision, facts, conclusion format examiners expect.

1Identify the instrument the question tests: Section 135, NGRBC, BRSR, an environmental law or carbon trading.
2State whether it is binding law, mandatory disclosure or voluntary guidance. This one line earns marks.
3Quote the rule in plain words with its exact condition, such as the three thresholds or the 2% rate.
4Apply the rule to the facts given. Do the arithmetic or the threshold test, and show it.
5Link the instrument to ESG: say whether it serves the social, environmental or governance pillar.
6Add the compliance action: committee, policy, Board's report disclosure, website disclosure or reporting.
7Conclude clearly, for example 'the company must comply', or 'the guideline is voluntary but its principles feed into BRSR'.

Quickest way: Classify, quote, apply, conclude

When to use it: Use this when you have limited time on a short-note or a case-based question.

Write the label: binding, disclosure-based or voluntary.
Write the one rule or figure that decides the issue.
Apply it to the facts in one or two lines.
Close with the compliance step and the ESG pillar it serves.

Common mistakes in Government Initiatives and Companies Act Mandates

Calling NGRBC mandatory law
Students see that BRSR reporting is mandatory for top listed companies and assume the guidelines are too.
Fix: Say the NGRBC are voluntary guidelines. The BRSR requirement comes from SEBI's listing regulations, and it is built on the nine principles.
Applying the 2% to the current year's profit
It feels natural to use the latest profit figure.
Fix: Use the average net profit of the immediately preceding three financial years.
Requiring all three thresholds to be met for Section 135
Students read the thresholds as a list and assume they are cumulative.
Fix: Remember the word OR. Any one of net worth, turnover or net profit threshold triggers applicability.
Confusing the 2011 National Voluntary Guidelines with the 2019 NGRBC
Older material still circulates and the names sound similar.
Fix: State that NGRBC of 2019 replaced the 2011 guidelines and add the shift toward responsible business conduct and reporting.
Describing carbon credit trading as a tax or a CSR activity
Students mix up all green measures as one type of obligation.
Fix: Describe it as a market mechanism under the Energy Conservation Act, 2001 where intensity targets lead to tradable credits.
Listing initiatives without linking them to ESG pillars or compliance steps
Students memorise names and stop there.
Fix: For each initiative, add one line on the pillar and one on the action a company secretary takes.

Worked examples

Example 1

Sundaram Textiles Ltd had a net worth of ₹320 crore, turnover of ₹880 crore and net profit of ₹6.4 crore in the immediately preceding financial year. Its net profit for the preceding three years, computed under Section 198, was ₹6.4 crore, ₹5.0 crore and ₹4.6 crore, in that order for the latest, second-latest and third-latest year. Is Section 135 applicable and what is the minimum CSR spend?

Show the solution

Provision: Section 135 applies if any one of net worth ≥ ₹500 crore, turnover ≥ ₹1,000 crore or net profit ≥ ₹5 crore is met during the immediately preceding financial year.
Test net worth: ₹320 crore is below ₹500 crore, so not met.
Test turnover: ₹880 crore is below ₹1,000 crore, so not met.
Test net profit: ₹6.4 crore is at least ₹5 crore, so met. One condition is enough, so Section 135 applies.
Average net profit of three years = (6.4 + 5.0 + 4.6) ÷ 3 = 16.0 ÷ 3 = ₹5.333 crore approximately.
Minimum CSR spend = 2% × 5.333 = ₹0.1067 crore, which is about ₹10.67 lakh.
Compliance: the obligation of about ₹10.67 lakh does not exceed ₹50 lakh, so under Section 135(9) the company need not constitute a CSR Committee and the Board discharges its functions. The company must still adopt a CSR policy and display it on its website under Section 135(4), spend the amount, and give CSR details in the Board's report under Section 134(3)(o) with the CSR Rules.

Answer: Section 135 applies because the net profit threshold of ₹5 crore is met. The minimum CSR spend is about ₹10.67 lakh (2% of the three-year average net profit of about ₹5.33 crore). As this is below ₹50 lakh, no CSR Committee is needed and the Board discharges its functions; the CSR policy and Board's report disclosure still apply.

Example 2

Explain how the National Guidelines on Responsible Business Conduct relate to a listed company's ESG reporting, and whether the company is legally bound to follow them.

Show the solution

Provision: the NGRBC were issued by the Ministry of Corporate Affairs in 2019, replacing the 2011 National Voluntary Guidelines. They rest on nine principles covering ethics, products, employees, stakeholders, human rights, environment, policy advocacy, inclusive growth and consumers.
Nature: the guidelines are voluntary in themselves. They do not carry penalties on their own.
Link to reporting: SEBI's Business Responsibility and Sustainability Report format asks listed companies to disclose their performance against these nine principles, so the principles become part of mandatory disclosure for companies covered by the BRSR requirement.
ESG mapping (indicative only): principles 3 and 5 are mainly social, principle 6 is environmental, and principles 1 and 7 are mainly governance. The NGRBC and BRSR do not formally assign principles to ESG pillars, and many principles span more than one pillar.
Practical point: the company secretary should help the Board adopt policies for each principle and ensure the BRSR data is supported by evidence.

Answer: The NGRBC are not legally binding as such. However, the BRSR format required by SEBI for covered listed companies is organised around the nine principles, so the company must report against them even though the guidelines themselves are voluntary.

Exam tips

Always state whether an initiative is binding, a disclosure rule or voluntary. Examiners reward this classification.
In Section 135 numerical questions, show the three threshold tests and the three-year average separately.
For NGRBC questions, list the nine principles in order and link them to BRSR.
For carbon trading, describe the mechanism in a few lines and avoid quoting sector targets you are not sure of.
Close each answer with the company secretary's compliance action, since the paper is practice-oriented.

Practice questions from Sustainability Audit, ESG Rating and Emerging Mandates from Government and Regulators

Government Initiatives and Companies Act Mandates: frequently asked questions

What are the nine principles of NGRBC?

They cover ethics, transparency and accountability; sustainable and safe goods and services; employee well-being; stakeholder responsiveness; human rights; environment; responsible public policy advocacy; inclusive growth and equitable development; and consumer value. MCA issued them in 2019. Learn them in this order.

How is Section 135 CSR linked to ESG?

CSR is the social-spending part of a company's responsibility. Section 135 makes it a legal duty for qualifying companies, with a CSR policy and a 2% spend. A CSR Committee is required unless the obligation does not exceed ₹50 lakh, in which case the Board performs its functions under Section 135(9). It feeds the social pillar of ESG. CSR details go in the Board's report under Section 134(3)(o), the Committee's composition is disclosed under Section 135(2), and the policy is displayed on the website under Section 135(4).

Is the NGRBC mandatory for companies?

The guidelines themselves are voluntary. But SEBI's BRSR format is built around the nine principles, so covered listed companies must report on them.

What is India's Carbon Credit Trading Scheme?

It is a market-based scheme under the Energy Conservation Act, 2001, as amended. It sets emission intensity targets for notified sectors. Entities that do better than their target can earn credits and those that fall short must buy credits.