What’s the news?

• The growing importance of Corporate Social Responsibility (CSR) and Environmental-Social-Governance (ESG) frameworks in the business world.

Central Idea

• In recent years, Corporate Social Responsibility (CSR) has evolved from a mere obligation into a potent tool for companies to contribute to society and the environment. Concurrently, the ESG disclosures gained prominence as a means to showcase energy conservation efforts and align with global commitments to combat climate change.

What is Corporate Social Responsibility (CSR)?

• CSR refers to the practice of companies and businesses taking on initiatives and actions that contribute positively to society, the environment, and various social causes beyond their core profit-making activities.
• CSR has become a legal requirement for certain companies under the Companies Act of 2013 in India.

What is Environmental-Social-Governance (ESG)?

• The ESG framework assesses a company’s performance and impact in three key areas: environmental sustainability, social responsibility, and corporate governance.
• ESG goes beyond traditional financial metrics to measure a company’s efforts and policies related to issues such as energy conservation, carbon footprint reduction, diversity and inclusion, employee well-being, community engagement, ethical business practices, and more.

The significance of ESG

• Addressing Climate Change: ESG provides a structured approach for businesses to tackle environmental issues, particularly climate change. It helps companies mitigate risks, enhance sustainability, and contribute to global climate goals.
• Social Responsibility: ESG encompasses social aspects such as diversity, employee well-being, and community engagement. Prioritizing these areas fosters ethical practices and positive relationships with stakeholders.
• Strong Governance: The “G” in ESG underscores effective corporate governance, which promotes transparency, accountability, and ethical business conduct. This builds investor trust and long-term sustainability.
• Financial Performance: Companies emphasizing inclusion and diversity tend to achieve financial goals more consistently. Additionally, ESG integration enhances resilience during crises and supports innovation.
• Meeting Stakeholder Expectations: ESG aligns with consumer and investor preferences for environmentally and socially conscious practices. Companies embracing ESG attract responsible consumers and investors.
• Regulatory Compliance: ESG disclosure requirements are evolving, reflecting their increasing importance. Adhering to ESG standards positions companies to comply with changing regulations.
• Long-Term Value: ESG contributes to long-term value creation by managing risks, fostering stakeholder relationships, and positioning companies for sustainable growth.

The confluence of ESG and CSR and their advantages

• Enhanced Sustainability: By aligning sustainable business goals with the established CSR framework, companies can expedite the transition to environmentally friendly and socially responsible practices. This alignment ensures that sustainability becomes a central tenet of the company’s operations.
• Multi-Stakeholder Approach: Implementing both ESG and CSR requires the collaboration and shared vision of internal and external stakeholders. This approach fosters better communication, cooperation, and effective execution of CSR initiatives, which benefits the company’s overall impact.
• Boosted Brand Recognition: The combination of ESG and CSR efforts enhances a company’s brand image, portraying it as environmentally conscious, socially responsible, and committed to ethical practices. This positive perception resonates with customers and stakeholders alike.
• Risk Mitigation: Effective CSR practices coupled with ESG considerations help companies manage risks associated with environmental and social factors. This proactive approach minimizes potential negative impacts on the business’s reputation and bottom line.
• Supply Chain Optimization: The confluence of ESG and CSR prompts companies to rethink and optimize their supply chains, from procurement to production. This transformation encourages environmentally friendly practices and reduces the overall environmental footprint.

Case Studies: Embodied Synergy

• Global giants such as Google and the luxury brand Chanel exemplify the positive outcomes of blending CSR and ESG principles.
• Google’s substantial investment in an energy-efficient supply chain significantly boosted its brand while catalyzing its green transition.
• Similarly, Chanel’s partial stake acquisition in a natural fiber manufacturer demonstrates a commitment to sustainable supply chain practices.
• These examples illustrate the potential of combining CSR and ESG for transformative impact.

What are the concerns raised?

• Transition Costs: The transition from traditional to sustainable business practices can be accompanied by high costs. Integrating ESG principles and expanding CSR initiatives might require substantial investments in infrastructure, technology, and employee training, which could strain financial resources.
• Risks and Uncertainties: Certain environmental or social initiatives might not yield immediate returns or could face opposition from stakeholders.
• Smaller Businesses: The smaller businesses might find it challenging to prioritize ESG given their limited resources. Balancing ESG considerations alongside day-to-day operations could be more difficult for smaller enterprises compared to larger corporations.
• Legitimacy of Self-Regulation: CSR is legally mandated in India but is self-regulated and voluntary in some regions, like the EU, UK, and US. Some experts raise concerns about the legitimacy of private self-regulation compared to regulation imposed by legislative bodies.

Way forward

• Advocating Regulatory Mandates for ESG: Push for regulatory mandates for ESG similar to CSR to ensure a structured approach. Collaborate to define legal integration, especially for smaller businesses.
• Incentivizing ESG Investments: Reforms in economic policies and taxation can offer incentives like tax concessions, spurring ESG investments for sustainable practices.
• Comprehensive Policy Frameworks: Implement organization-wide policy frameworks, embedding sustainability into all decisions, ensuring accountability, and facilitating regulatory compliance.
• Holistic Integration: Infuse CSR across supply chains, led by transparent, larger corporations setting standards for others.
• Digital connectivity and financial inclusion: with a projected 40 percent of the population transitioning to urban life by 2030, the aspirations of rural regions are harmonizing with urban benchmarks. However, the translation of intentions into action necessitates addressing crucial imperatives such as digital connectivity and financial inclusion.
• Unified Approach: Blending CSR and ESG aligns business goals with sustainability, benefiting consumers, investors, employees, and society overall.

Conclusion

• The amalgamation of CSR and ESG provides a dynamic route towards sustainable growth. This synergy encapsulates responsible corporate citizenship and offers a transformative pathway to address challenges collectively. By harmonizing these two pillars, businesses contribute to a future where progress is intertwined with responsibility, promising a thriving world for all.

Also read:

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Context

• Since the establishment of the Corporate Social Responsibility (CSR) regime in India under Section 135 of the Companies Act 2013, CSR spending in India has risen from RS.10,065 crore in 2014-15to Rs.24,865crore in 2020-21.But there is no data to verify whether this increase is commensurate with the increase in profits of Indian and foreign (having a registered arm in India) companies.

What is Corporate Social Responsibility (CSR)?

• Voluntary spending: Corporate social responsibility (CSR) is a form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethically oriented practices.
• Ministry Corporate Affairs: The National Corporate Social Responsibility Data Portal is an initiative by Ministry of Corporate Affairs, Government of India to establish a platform to disseminate Corporate Social Responsibility related data and information filed by the companies registered with it.
• Companies Act, 2013: The Corporate Social Responsibility concept in India is governed by Section 135 of the Companies Act, 2013 (‘Act’), Schedule VII of the Act and Companies (CSR Policy) Rules, 2014 wherein the criteria has been provided for assessing the CSR eligibility of a company, Implementation and Reporting of their CSR Policies.

How CSR helps in achieving social justice?

• Sustainable Goals: India having the most elaborated CSR mechanism and implementation strategy has started its journey to set a benchmark in attaining sustainability goals and stakeholder activism in nation building.
• Corporate philanthropy: company donations to charity, including cash, goods, and services, sometimes via a corporate foundation.
• Community volunteering: company-organized volunteer activities, sometimes while an employee receives pay for pro-bono work on behalf of a non-profit organization
• Socially-responsible business practices: ethically produced products that appeal to a customer segment.
• Corporate social marketing: Company-funded behaviour-change campaigns, Company-funded advocacy campaigns, donations to charity based on product sales.

Why there is need to review the CSR?

• Declining number: There was also a decline in the number of companies participating in CSR 25,103 in FY2019 to 17,007 in FY2021.
• Flaw in the law: If a company spends an amount in excess of the minimum 2%, as stipulated, the excess amount is liable to be set off against spending in the succeeding three financial years. Ideally, companies should have been shown courage to spend more than this.
• Own trusts: many private companies have registered their own foundations/trusts to which they transfer the statutory CSR budgets for utilisation. It is unclear if this is allowed under the Companies Act/CSR rules.
• Geographical bias: The first proviso to Section 135(5) of the Act is that the company should give preference to local areas/areas around it where it operates. This is logical. However, a report by Ashoka University’s Centre for Social Impact and Philanthropy says that 54% of CSR companies are concentrated in Maharashtra, Tamil Nadu, Karnataka, and Gujarat(receiving the largest CSR spends) while populous Uttar Pradesh and Madhya Pradesh receive little.
• Spending on environment: Item (iv) of Schedule VII of the Act deals with broader environmental issues to create a countervailing effect. However, an analysis of CSR spending (2014-18)reveals that while most CSR spending is in education (37%) and health and sanitation (29%), only 9% was spent on the environment even as extractive industries such as mining function in an environmentally detrimental manner in several States
• Incomplete information: The Standing Committee on Finance had observed that the information regarding CSR spending by companies is insufficient and difficult to access. As per the ‘Technical Guide on Accounting’ issued by the Institute of Chartered Accountants of India, a company is only required to mention its CSR spends, non-spend, under-spend, and overspend in the ‘Notes to Accounts’.

What are the suggestions to improve the mechanism of CSR?

• Centralized platform: There is a need to curate a national level platform centralised by the MCA where all States could list their potential CSR admissible projects so that companies can assess where their CSR funds would be most impactful across India with, of course, preferential treatment to areas where they operate.
• India Investment Grid: Invest India’s ‘Corporate Social Responsibility Projects Repository’ on the India Investment Grid (IIG) can serve as a guide for such efforts. This model would be very useful for supporting deserving projects in the 112aspirational districts and projects identified by MPs under the Government’s Sansad AdarshGram Yojana.
• Increase environment spending: Companies need to prioritise environment restoration in the area where they operate, earmarking at least 25% for environment regeneration.
• Public participation: All CSR projects should be selected and implemented with the active involvement of communities, district administration and public representatives.
• Transparency: Recommendations by the high-level committee in 2018 should be incorporated in the current CSR framework to improve the existing monitoring and evaluation regime. These include strengthening the reporting mechanisms with enhanced disclosures concerning selection of projects, locations, implementing agencies, etc.; bringing CSR within the purview of statutory financial audit with details of CSR expenditure included in the financial statement of a company, and mandatory independent third party impact assessment audits.
• Monitoring by government: The MCA and the line departments need to exercise greater direct monitoring and supervision over CSR spend by companies through the line ministries (for public sector undertakings) and other industry associations(for non-public units) instead of merely hosting all information on the Ministry’s website.

Conclusion

• Corporate social responsibility is an effective tool to address the social and income inequality. Present legal arrangements are toothless and based on voluntary actions. For an effective change CSR spending should be made more transparent and accountable.

Mains Question.

Q.Present arrangement of CSR is not yielding the desired result. Enlist the current weakness in CSR spending Suggest the changes needed for efficient implantation of CSR.

UPSC 2023 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now