How Indian Companies Shall Loose USD 1.3 Billion Export Business - If Not Changing To The European Union Standards On The ESG Compliance

Indian Companies whose export markets are European Union should must be alert. The EU has introduced tough law on the ESG Compliance. Current Indian exporters with  $1.3 billion annually, shall loose the Export Market, if Indian Companies are not changing and improving to the European standard. This requires the Indian companies to go with good practice of Internal Audit on the ESG and mandatory annual social audit assurance on the ESG.  

 *BIRENDRA K JHA                 


Indian Companies whose markets are European Union should must be alert. This is time to change. Either perform or get perished. If not changing for ESG compliance, the time shall change and end the business. The EU’s following countries: Austria, Belgium, Bulgaria, Croatia, Republic of Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and Sweden have adopted as Law on the  European Sustainability Reporting Standards (ESRS). This is now Law. This Law shall stop now "value chain" coming from risky countries including India. It shall impact Indian products from the forest produce to software exported to the EU.  

To ensure that the Indian  products keep flowing to the EU, the Indian Companies will need to improve ESG Compliance and after achieving compliance provide to importers, with export document compulsory third party audit document, that green sustainability has been achieved. For example, any forest products, shall have to submit third party audit assurance, of the company, where Environment factor in the ESG factor is excellent and has full compliance. The third party audit shall assure that there is no  deforestation. This is supported with ground audits including  the satellite imaging data. The proposed regulation potentially affect the Indian exports to the EU worth $1.3 billion annually, as per estimates made by the Global Trade Research Initiative. Main forest commodities what India exports are cattle, cocoa, coffee, oil palm, rubber, soya, and wood, the derived commodities are several such as meat products, leather, chocolate, coffee, palm nuts, palm oil derivatives, glycerol, natural rubber products, soybeans, soy-bean flour and oil, fuel wood, wood products, pulp and paper and printed books. All these products from forest are in the tight zone of regulation. 

There are many Indian Companies where the ESG Compliances are very poor on ground. But, without the third party social audits. CRISIL in its ESG Rating of 2022, has rated excellent compliance of doubtful &  compliance breached companies. For example, the CRISIL has rated the ESG compliance of the Reliance Industries Ltd as "Adequate" in 2022. But the Jamnagar refinery of Reliance is showing methane emission in satellite data since 2021, 2022 and 2023.  This demonstrates the CRISIL data is not reliable and not according to the European standard. Now, any products from Reliance Industries Ltd can't be exported to the European Union countries, if "Environment" compliance is not improved in the ESG.  

Time Line: 

Almost majority of exporters in India are supplying to European Union  companies with manpower between 200 to 500. Their  ESG Compliance of the Indian Companies are extremely poor and fails the European Union standards. So far, the Indian standards are very loose. This is only the SEBI, which has tightened the nose of the Indian Companies, understanding  the importance of the ESG Compliance. Any Indian Companies, can't export now to the European Countries, if they are not meeting the European Standards ESG regulations. The last target date line for such Non Compliant ( NC ) Indian companies, where ESG Compliance is poor are following:     

By December 2024:  NC Indian Companies can't export to the EU exporters company if importer company is within  500 employees.  

By 2025:  NC Indian Companies can't export to the EU exporters company with 250 employees.  

By 2026:  NC Indian Companies can't export to the EU exporters company with any number of employees.  

What Company Should Do In India: 

1) The NC Indian Companies shall have to honestly improve the ESG Compliance. Now short cut or eye wash method shall not work. If Indian Companies need business in the European Countries, such companies shall have to improve Internal Audit on regular ESG Audit, just like the pattern of financial audit with annual third party Social Audit. A good and qualified  Social Auditor who is well versed in the ESG Compliance, shall identify many weak points and areas, which are required to be improved honestly. 

2) Companies should must be ready with the  comprehensive ESG readiness assessment and map the relevance of ESG regulations.

3) Identify measurement, reporting, and capability gaps.

4) Identify the actions Indian companies  must take to improve ESG performance in order to remain cost competitive in key markets and avoid penalties and stoppage of export business. 

The Mandatory Contents of ESRS

The Law contains 12 ESRS standards. Out of which there are 2 “cross-cutting” standards and 10 topical standards covering various sustainability issues. They are following:

ESRS 1: General Requirements

ESRS 2: General Disclosures

Environmental Information: 

ESRS E1: Climate

ESRS E2: Pollution

ESRS E3: Water and Marine Resources

ESRS E4: Biodiversity and Ecosystems

ESRS E5: Resource Use and Circular Economy

Social Information: 

ESRS S1: Own Workforce

ESRS S2: Workers and the Value Chain

ESRS S3: Affected Communities

ESRS S4: Consumers and End Users

Governance Information:

ESRS G1: Business Conduct

Audit- Assurance: 

All the audit and assurances, of above compliances are rigorously conducted with third party external assurance audit at the importer side and assured that the supply value chain has robust audit system. The assurances must cover both the substantive information disclosed for each topic, as well as the materiality impact assessments.

( Birendra K Jha,  is a Pan India Practitioner on the "Social Impact Assessment Audit" & "ESG Audit".  He is a Qualified & Certified  Social Auditor from the ISAI (ICAI). He is Director of HR Lab, a Social  Audit firm.  He is based at Delhi-NCR. He overlooked at senior position as General Manager and Deputy General Manager in the previous South Korean MNC Company in India handling human resource and social audit of ESG practices for more than a decade. He may be approached at: birendrajha03@yahoo.com )


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