Safeguarding Sustainable Investments: Green Audits as the New Baseline for Due Diligence

Over the past decade, there has been a growing emphasis on the need for investors to consider environmental, social, and governance (ESG) factors as part of their investment strategy. However, this process becomes challenging when companies engage in “greenwashing”—misleading disclosures that exaggerate or falsely claim ESG credentials.

For Indian publicly listed companies and large corporates, ESG disclosure under BRSR (Business Responsibility and Sustainability Reporting) is now mandatory, increasing the need for objective external ESG audits. Firms that neglect ESG criteria face significant risks, including consumer boycotts, difficulties in attracting and retaining talent, and restricted access to capital. Therefore, adherence to ESG principles is not only a matter of legal compliance but also one of strategic importance for business sustainability.

This article discusses the ESG audit landscape in India, its relevance, and the regulatory developments driving this shift towards compulsory external ESG audits.

The term ‘greenwashing’ refers to a scenario, where companies create a misleading impression of their ESG efforts, typically by exaggerating or misrepresenting the company’s commitment to sustainability, thus threatening consumer trust and the global push for sustainability.

As more stakeholders look for options that reflect their environmental, social, and governance (ESG) values, the demand for sustainable funds has risen sharply. Unsurprisingly, this surge in interest has also led to a rise in deceptive practices, with some organisations caught red-handed making false sustainability claims just to capitalise on the growing ESG movement. For example, in 2015, Volkswagen fitted vehicles with software to cheat on emissions tests, which negatively affected its business reputation.

While greenwashing may give companies competitive gains and positive brand image in the short run, it also has serious downsides such as misleading consumers, environmental degradation, lost opportunities for sustainable growth, and possible legal penalties. In addition, greenwashing damages the image of stakeholders, which negatively affect consumers and investors that are misled into investing in the company.

In India, ESG initiatives have been actively promoted through robust frameworks such as SEBI’s BRSR, which has been made mandatory for the top 1,000 listed companies. The BRSR framework emphasizes uniform ESG disclosures by these companies. Similarly, the Companies Act, 2013, champions ESG compliance through key provisions—Section 134 mandates sustainability reporting, and Section 135 requires certain companies to spend on corporate social responsibility (CSR) activities.

The ESG framework offers a comprehensive method to evaluate corporate performance across environmental, social, and governance parameters, serving as a measure of success for a firm's sustainable development efforts. Section 135 of the Companies Act, 2013, along with the Companies (Corporate Social Responsibility Policy) Rules, 2014, and Regulation 34 of SEBI's Listing Obligations and Disclosure Requirements (LODR), makes CSR compliance mandatory for businesses that meet the specified threshold.

Some other key frameworks are the National Guidelines on Responsible Business Conduct (NGRBC), which are in alignment with international standards such as the UN Sustainable Development Goals, and environmental laws such as the Environment Protection Act, 1986, and the Energy Conservation Act, 2001. The Extended Producer Responsibility (EPR) of the Plastic Waste Management Rules, 2016, also support governance, resource management, and responsibility of the lifecycle of waste. Notably, none of the laws or frameworks specifically mandate green audits, thereby leaving a regulatory gap that could potentially expose investors to the risk of greenwashing.

However, it is important to note that while these legislative and regulatory frameworks strongly advocate for ESG disclosures and compliance, none of these provisions specifically mandate or address the requirement for external, independent “green audits.” The current regulations focus on self-disclosures and internal compliance, leaving the area of formal external ESG audits largely unaddressed by law.

The efforts made in India have been guided to a significant degree by the global move towards improved and standardized reporting, i.e., by implementing standard CSR systems and the evolving types of ESG reporting. Though India has taken several regulatory measures to increase transparency and prevent greenwashing, the gaps in enforcement remains.

The Consumer Protection Act provides a platform for consumers who have been negatively affected by misleading and deceptive advertising to seek remedies. Although Central Consumer Protection Authority Guidelines are a step forward in explaining and prohibiting greenwashing, rigorous enforcement of guidelines remains to be seen. The Advertising Standards Council of India Guidelines address only the advertising and marketing aspects of greenwashing. These guidelines do not cover greenwashing in corporate reporting, investor communication, or other business operations. As a result, the consumer protection guidelines are limited to consumers, and the advertising guidelines focus only on advertising.

The BRSR framework does not necessitate third-party review of ESG disclosures to make them complete and more credible, which is where there is a need for a mandatory audit of these ESG reports to tackle the problem of greenwashing. Moreover BRSR, only addresses the listed top 1000 entities, and the greenwashing activities of small or un-listed entities are not subject to scrutiny of the ESG requirements. These mandated disclosures represent an important step toward transparency and accountability in Indian corporate behaviour. This move helps to limit corporate greenwashing to some extent. However, despite these positive changes, there are still notable gaps in the existing ESG and related legal regulations. As a result, these measures alone are not sufficient to fully address the problem.

SEBI could play a crucial role in promoting responsible business practices by introducing ESG reporting requirements for all publicly traded companies and mandating external ESG audits. At the same time, smaller businesses should be encouraged to adopt ESG principles in their operations. Making third-party certification mandatory for all disclosures under the BSRS framework, along with supporting evidence, would go a long way in enhancing transparency and strengthening public trust.

There is an urgent need for a clear and robust legal framework to prevent companies from resorting to greenwashing and to ensure that those who do so are held accountable through effective enforcement mechanisms and meaningful penalties. Raising awareness among the public, investors, and consumers is equally important, as their collective scrutiny can push companies toward greater accountability—at least until comprehensive and stringent anti-greenwashing laws are firmly in place.

The ESG and CSR frameworks have been instrumental in guiding companies toward higher sustainability. India, however, remains in the infancy phase of addressing the problem of greenwashing. Green audits are emerging as a critical component of the due diligence process for investors, as they provide an objective assessment of a company’s actual sustainability practices and guard against the pitfalls of greenwashing. For investors, the existence of an independent green audit serves as reliable evidence of a company's genuine commitment to environmental, social, and governance (ESG) principles, enabling more informed investment decisions and reducing the risk of reputational or financial losses associated with misleading sustainability claims.

Moreover, companies that proactively adopt green audits before such assessments become statutory stand to gain a market advantage by demonstrating transparency, accountability, and adherence to best practices. This foresight helps establish a track record of responsible conduct, reassuring stakeholders of the company’s integrity and preparedness for future regulatory requirements, thereby projecting a clean image and fostering long-term investor confidence.

About the authors: Rahul Deodhar is a Partner and Sudhanshu Singh is an Associate at Phoenix Legal.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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