In today’s rapidly evolving business environment, Environmental, Social and Governance (ESG) considerations have shifted from being optional to an essential strategic pillar for companies worldwide. For Indian businesses, ESG is no longer just about regulatory compliance—it is about building resilience, fostering innovation and securing stakeholder trust in a globally interconnected market.

However, ESG commitments cannot be limited to a company’s direct operations. The real impact—and the biggest challenges—lie within the value chain. From raw material sourcing to product delivery, every supplier, distributor and logistics partner plays a role in shaping a company’s overall ESG footprint.

In this blog, we will break down why value chain partners are critical in ESG, key Indian regulations driving accountability and practical strategies Indian businesses can adopt to align with evolving sustainability expectations.

Understanding ESG: Environmental, Social and Governance

ESG (Environmental, Social and Governance) is a framework that assesses how businesses operate across three key areas:

 i. Environmental (E): This aspect focuses on how a company manages its impact on the planet. It includes carbon emissions, water conservation, waste management and resource efficiency. Companies that prioritize environmental responsibility adopt sustainable practices such as reducing greenhouse gas emissions, using renewable energy and minimizing pollution.

 ii. Social (S): The social component examines how a company interacts with employees, customers, suppliers and communities. It covers issues like labor practices, workplace diversity, human rights and community engagement. Businesses that excel in social responsibility ensure fair wages, safe working conditions and corporate social responsibility (CSR) initiatives that benefit society.

 iii. Governance (G): Governance refers to the systems and processes by which a company is managed and controlled. It includes corporate ethics, board diversity, anti-corruption measures and regulatory compliance. Strong governance ensures transparency, accountability and fair decision-making, fostering investor confidence and long-term success.

Understanding the Value Chain in ESG

A company's value chain includes all activities involved in delivering a product or service, from sourcing raw materials to final distribution. Most businesses focus on ESG within their own operations, but a company’s true sustainability performance is determined by its entire supply chain. Consider these examples:

·  A garment manufacturer may ensure ethical labor conditions in its factories, but if its suppliers rely on child labor in cotton farming, its Social (S) performance is compromised.

·  A tech company may commit to carbon neutrality, but if its suppliers use coal-based electricity, its Environmental (E) goals remain unfulfilled.

Engaging with value chain partners such as suppliers, distributors and retailers ensures transparent and sustainable supply chains. This collaboration is vital for identifying and mitigating risks, and promoting ethical practices throughout the business ecosystem.

The Role of Value Chain Partners in ESG Success

1. Environmental Responsibility

- Many Indian businesses rely on extensive supply chains that significantly impact carbon footprints, water consumption and waste generation. Collaborating with suppliers to reduce emissions, optimize resource usage and adopt circular economy principles can drive long-term sustainability.

- Example: Tata Steel has integrated sustainability into its procurement process via its Responsible Supply Chain Policy in FY20 encouraging supply chain partners to integrate sustainability principles in their decisions and processes. 

2.  Social Responsibility

- Companies must ensure that their value chain partners adhere to ethical labor practices, workplace safety and diversity initiatives.

- Example: ITC Limited's e-Choupal empowers farmers by offering free access to reliable weather, input and market information, low-cost quality inputs and high-paying buyers for their produce.

3.  Governance and Compliance

- Value chain partners must align with corporate governance practices, anti-corruption policies and regulatory compliance to mitigate risks.

- Example: Infosys implements rigorous due diligence processes for third-party vendors, including pre-contract evaluation and periodic assessments, to ensure adherence to ethical business conduct and compliance with relevant laws and regulations.

Case Study: Revival of Indigenous Cotton

A compelling example of ESG integration within the value chain is the revival of India's native cotton varieties. Historically, indigenous cotton like "phuti karpas" was renowned for producing exquisite fabrics such as Dhaka muslin. However, colonial practices and the advent of industrial-scale farming led to the decline of these native strains, giving way to genetically modified crops that have contributed to environmental degradation.

Recognizing the need for sustainable practices, initiatives like Khamir in Kutch have focused on reviving "kala cotton," a drought-resistant native variety. By connecting farmers, spinners and weavers, Khamir has established a sustainable supply chain that supports local communities and promotes environmental stewardship.

Quantitative Insights

i. Time-Variant Impact of ESG Practices (2019-2022): A 2024 study published in Cleaner Production Letters analysed Indian manufacturing firms from 2019 to 2022, finding that investments in ESG commitments led to improved financial performance over time. Specifically, environmental and social initiatives positively influenced earnings.

ii. ESG Disclosure and Firm Performance: Research featured in The Quarterly Review of Economics and Finance examined 167 companies listed on the National Stock Exchange from 2010 to 2020. The study found a positive relationship between ESG disclosure and firm performance, suggesting that enhanced ESG transparency can lead to better financial outcomes.

A Localized Approach to ESG Implementation

Unlike Western markets, where ESG adoption is largely investor-driven, Indian businesses must consider social and economic factors unique to the region. Sustainable supply chain financing, capacity-building programs for suppliers and government-backed incentives can accelerate ESG adoption.

For example, the Indian government’s PLI (Production Linked Incentive) scheme for High Efficiency Solar PV Modules, implemented by the Ministry of New and Renewable Energy, seeks to build an ecosystem for manufacturing high-efficiency solar panels in India, thereby reducing import dependence in the renewable energy sector.

Regulatory Landscape in India

The Securities and Exchange Board of India (SEBI) has been instrumental in promoting ESG disclosures. In May 2021, SEBI introduced the Business Responsibility and Sustainability Reporting (BRSR) framework, mandating the top 1,000 listed companies to include ESG disclosures in their annual reports.

1) This framework requires companies to disclose key ESG metrics—not only for their own operations but also for their supply chain partners.

2) Companies must report on scope 3 emissions (indirect emissions from suppliers and logistics), responsible sourcing and labor practices across their value chains.

3) Investors and consumers increasingly use these disclosures to evaluate companies' long-term sustainability and risk exposure.

SEBI Circular dated March 28, 2025 on ESG Disclosures for Value Chain Partners

In a move aimed at easing compliance and supporting small businesses in the value chain, SEBI has introduced key changes to the disclosure and assurance requirements under the BRSR Core framework:

1. Revised Thresholds for Disclosures: Listed entities will now be required to disclose ESG information for their top upstream and downstream partners that individually account for 2% or more of the entity’s purchases and sales (by value), respectively. However, the disclosures may be limited to cover 75% of the entity’s total purchases and sales (by value).

2. Applicability Timeline:

- ESG disclosures for value chain partners will apply on a voluntary basis to the top 250 listed entities by market capitalization starting FY 2025-26.

- The assessment or assurance of these disclosures will be voluntary from FY 2026-27.

3. Voluntary Disclosure of Historical Data: For the first year of value chain ESG reporting (i.e., FY 2025-26), the disclosure of prior year data (FY 2024-25) will be voluntary.

4. Coverage Transparency: If an entity opts to disclose ESG information for its value chain, it must also report the percentage of its total purchases and sales covered by these disclosures.

These updates aim to strike a balance between transparency and practicality, enabling a smoother transition for companies and their partners into value chain ESG reporting.

Conclusion

The importance of value chain partners in ESG cannot be overstated. Indian businesses must actively engage suppliers, distributors and stakeholders in sustainability initiatives to build resilient, future-ready enterprises. The benefits ranging from enhanced reputation to financial gains far outweigh any concerns. As ESG regulations tighten, companies that proactively integrate sustainability into their value chains will gain a competitive edge in the evolving market.

References

https://www.itcportal.com/media-centre/press-reports-content.aspx?id=439&type=C&news=Rewarding-resourcefulness-lifting-lives#:~:text=The%20e%2Dchoupal%20scheme%20initiates%20a%20reversal%20in,the%20small%20farmer%20instead%20of%20exploiting%20poverty.

 https://www.infosys.com/investors/corporate-governance/documents/supplier-code-conduct.pdf

https://www.khamir.org/crafts/kala-cotton?utm_source=chatgpt.com

https://www.sciencedirect.com/science/article/pii/S2666791624000228?utm_source=chatgpt.com

https://www.sciencedirect.com/science/article/abs/pii/S1062976924000474?utm_source=chatgpt.comom

https://mnre.gov.in/en/production-linked-incentive-pli/#:~:text=Aims%20and%20Objectives,generation%20and%20technological%20self%2Dsufficiency

https://www.sebi.gov.in/legal/circulars/mar-2025/measures-to-facilitate-ease-of-doing-business-with-respect-to-framework-for-assurance-or-assessment-esg-disclosures-for-value-chain-and-introduction-of-voluntary-disclosure-on-green-credits_93102.html