Mainstreaming ESG In India's Industrial Policy: Transitioning From Compliance To Strategic Growth

Kanika Avasthi

Abstract

As India pursues its vision of becoming a $5 trillion economy while fulfilling its Net Zero commitment by 2070, integrating Environmental, Social, and Governance (ESG) principles into national industrial policy is no longer optional—it is a strategic necessity. While regulatory bodies like the Securities and Exchange Board of India (SEBI) have mandated Business Responsibility and Sustainability Reporting (BRSR), ESG adoption remains largely siloed from broader industrial initiatives, including Production Linked Incentive (PLI) schemes. This policy article examines the imperative to shift from “compliance-driven” to “strategy-driven” ESG adoption. It highlights key bottlenecks faced by Micro, Small, and Medium Enterprises (MSMEs), explores global carbon-trade pressures, and proposes a data-driven policy roadmap to embed sustainability into the core of India’s industrial framework

Introduction

India stands at a critical juncture in its economic journey. Driven by flagship initiatives such as Make in India and various Production Linked Incentive (PLI) schemes, the country is rapidly accelerating its manufacturing footprint. Simultaneously, India has committed to achieving Net Zero emissions by 2070

However, a fundamental disconnect exists between industrial expansion goals and national climate commitments. Currently, Environmental, Social, and Governance (ESG) practices are treated predominantly as corporate compliance measures rather than foundational elements of industrial strategy. Mainstreaming ESG into national industrial policy is essential to ensure that economic growth does not come at the expense of environmental sustainability or social equity.

The Regulatory Dilemma: BRSR vs. Industrial Schemes

In recent years, India has made significant strides in regulatory disclosures. The Securities and Exchange Board of India (SEBI) introduced the Business Responsibility and Sustainability Reporting (BRSR) framework, requiring top-listed companies to disclose non-financial, sustainability-related metrics.

While BRSR is a positive step forward, its reach remains constrained. Mainstream industrial schemes—such as the PLI scheme, which provides financial disbursements based on incremental sales—do not formally integrate ESG or decarbonization performance into their evaluation criteria. Consequently, industries are incentivized to maximize volume rather than sustainability. Without structural alignment between industrial incentives and sustainability metrics, national climate targets will remain isolated from on-the-ground manufacturing realities.

Global Pressures: The Vulnerability of India’s Supply Chains

The urgency to embed ESG into industrial policy is further compounded by shifting global trade dynamics. Key international export markets are increasingly enacting non-tariff, sustainability-driven regulations.

A prime example is the European Union’s Carbon Border Adjustment Mechanism (CBAM), which levies tariffs on carbon-intensive imports such as steel, aluminum, and fertilizers. If Indian manufacturers rely on a “compliance-only” mindset without actively measuring and reducing scope emissions, they risk being priced out of global supply chains. Mainstreaming ESG is therefore not merely an environmental responsibility; it is an economic strategy to safeguard the international competitiveness of Indian exports.

A major hurdle in scaling ESG adoption across India is the structure of its industrial ecosystem, which relies heavily on Micro, Small, and Medium Enterprises (MSMEs). As large corporations face BRSR mandates, they increasingly require their supply chain partners—predominantly MSMEs—to deliver emission and labor data.

However, Indian MSMEs face distinct structural challenges:

Financial Constraints: Limited access to low-cost capital for green technology upgrades.
Resource and Technical Deficits: A lack of specialized talent to navigate complex ESG frameworks.
Fragmented Metrics: A proliferation of overlapping audit requirements that increase operational burdens.

Without targeted state support, top-down ESG mandates risk burdening small enterprises rather than enabling sustainable growth.

Policy Recommendations: A Data-Driven Roadmap

To bridge the gap between high-level policy vision and ground-level execution, India requires a comprehensive policy strategy centered on three core interventions:

Incentive Alignment in Industrial Policy: The Ministry of Commerce and Industry should revise existing PLI guidelines to incorporate ESG performance indicators. Payouts could be tied not only to production targets but also to verifiable metrics such as energy intensity reductions or waste recycling rates.
Standardized Digital Reporting Infrastructure for MSMEs: Building on existing initiatives like the MSME Sustainable (ZED) Certification, the government should introduce standardized, subsidized digital reporting platforms. This would allow smaller suppliers to track, verify, and report basic Scope 1 and 2 emissions seamlessly.
Targeted Green Financing Pathways: Green financial frameworks must be created specifically for MSMEs participating in major manufacturing supply chains. Concessional loans and capacity-building grants can help small units transition from passive compliance to proactive technology modernization

Conclusion

Transitioning from a reactive compliance model to a strategic ESG framework is crucial for securing India’s economic future. By embedding data-driven ESG incentives into national industrial schemes, India can build resilient, sustainable supply chains that attract global capital while advancing its Net Zero goals. A sustainability-first industrial policy will prove that economic expansion and environmental governance can reinforce one another, ensuring long-term resilience for the Indian economy.

References (APA 7th Edition Style)

Ministry of Commerce and Industry. (2023). Make in India and sustainable industrial growth frameworks. Government of India

Organisation for Economic Co-operation and Development. (2023). ESG investing and climate transition in emerging economies. OECD Publishing. https://www.oecd.org

Securities and Exchange Board of India. (2023). Business Responsibility and Sustainability Reporting (BRSR) Core framework. . https://www.sebi.gov.in

About the Contributor: Kanika is a Fellow in the IMPRI Public Policy Fellowship (PPYF 2.0). With a background in project coordination and corporate strategy, she is transitioning into Data Analytics and ESG, focusing on data-driven governance and sustainable industrial policy in emerging economies.

Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.