The evolution: From actual concern to a strategical approach

The concept of corporate social responsibility (“CSR”) came to light during the industrial revolution, when it was observed that companies exist, function and succeed because of the society they operate in, and therefore they should “give back” to the society. However, over time this concept has managed to evolve itself from an activity focused on actual concerns about the worker’s wellbeing to a strategic approach adopted by companies, which not only leads to the betterment of the society as a whole but helps these companies increase their visibility amongst the masses as well.

Even before the term “Corporate Social Responsibility” was coined, Robert Wood Johnson, the Chairman of Johnson & Johnson (“J&J”) in the year 1943, crafted a credo which went beyond their corporate responsibilities. He believed that the credo, which challenged the company to put the needs of the people they serve first, was more than just a moral compass, and that it would be their recipe to success. Marking his words, this company has had its CSR objectives aligned socially as well as strategically, for well over a century.

Concept of CSR: Different jurisdictions across the globe

Given that CSR is the fuel needed to drive sustainable development, this concept has been implemented by corporates across the globe in different forms, but there are some jurisdictions whose policies stand out more than others.

For instance the mission of the local corporate regulator in the United States of America (“US”) has always been to promote a holistic approach to CSR and also to complement the Bureau of Economic and Business Affairs’ mission of building economic security and fostering sustainable development at home and abroad. The aim is also to provide guidance and support. Whereas, in the United Kingdom (“UK”), CSR is a part of Corporate Governance Guidelines. The Companies Act 2006 of UK has added to those pressures by requiring directors to have responsibilities towards various community and environmental issues. Similarly, the European Commission’s CSR agenda for action is enhancing the visibility of CSR, providing market rewards, disseminating good practices, improving and tracking levels of trust in business and self and co-regulation processes.

Amongst this league of nations, Brazil is one of the countries that has taken the lead in making businesses adopt policies that are socially responsible, environmentally conscious, compassionate in their human dimensions and thrifty in their use of natural resources. There are other countries like France, Denmark, South Africa and China who have a mandatory reporting obligation on the amount spent on CSR activities.

According to a report by the Financial Times, which was published on October 12, 2014, companies in US and UK in the Fortune Global 500 have spent a whopping USD 15.2 billion on average a year on CSR activities. The research carried out, also showcased a clear difference in approach between the CSR activities carried out by US and UK, but the one common theme across was that the spending was dominated by a handful of leading groups.

Anything that crosses a scale this large, calls for some form of benchmarking. Different countries have different ways of application of CSR responsibilities and most of these countries use the London Benchmarking Group (“LBG”) model to assess the real value and impact of their community investment to both, the business and the society. The LBG model was formed in 1994 in the United Kingdom as an initiative of large companies that wanted to organize and manage social programs and measure their effectiveness. It allows for measuring not only the overall commitment of the companies, but also verifies the impact it will leave.

Two-fold purpose of CSR: The Indian perspective

As per the provisions of the Companies Act 2013 (“2013 Act”), in India, every company crossing the below mentioned thresholds in the previous financial year:

  1. Net worth of Rupees Five Hundred crore or more; or
  2. Turnover of Rupees One Thousand crore or more; or
  3. Net profit of Rupees Five crore or more.

is required to spend at least 2% of the average net profits that the company made during the three immediately preceding financial years, or where the company has not completed the period of three financial years since its incorporation, during such immediately preceding financial years, in pursuance of its CSR Policy.

However, if the company fails to spend such amount, the board shall, in its report, specify the reasons for not spending the amount and, unless the unspent amount relates to any ongoing project referred (as defined in the Section 135(6) of the 2013 Act), transfer such unspent amount to a fund specified in Schedule VII, within a period of six months of the expiry of the financial year.

While the law does place the companies under radar to comply with spending a minimum of 2% of their profits on CSR, or explain such non-spending, it remains in the interest of the companies to go over and beyond this specified limit. Those that are left with having to explain the non-spending on CSR, often find themselves questioned and without a political approach that could have been easily exploited.

As per a CRISIL report dated February 28, 2019, companies through the CSR initiatives have spent close to INR 53,000 crore in the four financial years up to 2019. CRISIL further analyzed this and stated that estimates show spending by listed companies rose by 12% in 2018 to Rs 10,000 crore. Assuming the same rate of growth, spending by unlisted companies is estimated to be Rs 5,100 crore for the year, taking the total for the year to a massive amount of Rs 15,100 crore.

While the data stated above does showcase the empathetic side of the corporate world, the Director of CRISIL is of the opinion that the spending on CSR by companies should be curbed as it restricts them from enhancing their own development.

The reports further said that a third of the 1,913 listed companies which qualify for CSR spends did not spend the money due to various reasons. Out of the lot, 341 said they were unable to spend because of reasons like a delay in identifying projects, setting up the requisite in-house expertise, 45 did not report CSR activity and 163 said they were not required to spend either because they did not meet the criteria or were loss-making. An additional amount of INR 2,380 crore would have been spent had all the listed companies spent the stipulated 2 percent of profit, it said, adding to the total unspent amount of INR 60,000 crore over the last four years.

Another company which has managed to well align its CSR objectives with its vision and matched the same to the relevant scarcity of resources is Hindustan Unilever (“HUL”). Just like the coming together of the pieces of a jigsaw puzzle, HUL, has managed to accelerate its growth, reduce its environmental footprint and increase its positive social impact. Following the intent of the CSR model, HUL took it up a notch by setting up a not-for-profit company Hindustan Unilever Foundation (“HUF”) that anchors water management related community development and sustainability initiatives of HUL. HUF operates the ‘Water for Public Good’ program, with specific focus on empowering local community institutions to govern water resources and enhancing farm-based livelihoods through adoption of judicious water practices. Through the Foundation’s water conservation and farm-based livelihoods initiatives, cumulatively, more than 450 billion liters of water was conserved in the Financial year (“FY”) 2017-18, and the bar was raised to 750 billion liters in the next FY. HUF has projects set up across nearly 2,400 villages in 57 districts with 20 partners in India. Now whether HUL intended to benefit the society at large or meant to build its own brand image, when it first started this project, is a question that need not be answered because exemplarily, it has managed to achieve both.

While some corporates end up spending to solely comply with the law, many are seen trying to go over and beyond the requirements. Many companies are conducting impact assessment and research studies of their CSR activities to ensure long-lasting impact and optimal use of funds. The Piramal Group has been one of the pioneers in implementing CSR initiatives through its philanthropic arm Piramal Foundation since 2008 and periodically conducts impact assessments.

The approach that has been followed by the corporates mentioned above, is to ensure that the CSR initiatives are in line with the company’s vision and the areas that are focused on require attention for the development of the society.

Just like the change in the approach followed by the corporates, the Governments across the world have also been using the concept to help them address various issues during challenging times. One such instance was the dynamic methods adopted by the Government of India amidst the Covid19 storm.

CSR amidst Covid19 outbreak: A common thread between Government and corporates

While CSR activities seem to be a win-win situation throughout the world, given that we are all currently engulfed in the Covid19 storm, the Government of India has tried to address this issue and clarified that spending of CSR funds for Covid19 is an eligible CSR activity. It has been stated that contribution to any fund set up by the Central Government for socio economic development and relief will be tantamount to a CSR expenditure. Further, the PM-Cares fund that has been set up, will specifically cater to the needs of those affected badly by any kind of emergency or distress situation in the current pandemic. Any contribution to this fund will also be considered as a valid CSR spend.

Following the CSR initiative by the Ministry of Corporate Affairs, Infosys Foundation extended their support to help fight the Covid19 pandemic by announcing to donate approximately INR 20 crore to the state of Karnataka’s education department by helping them to establish smart classes in 1,000 government higher primary schools, along with the provisions of other supplies including medical equipment. The Adani Foundation too, turned everyone’s heads with their massive contribution of INR 100 crore. The Tata Sons however, seemed to have topped it all off with a pledge of INR 1500 crore.

Whether these efforts will help curb the economic situation or just contain it, is something that will become clear with the passage of time. However, with so much energy focused in just one direction, a positive outcome doesn’t seem to be so far off.

 

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