More than 2%

2%

I was researching India’s recent enactment on Corporate Social Responsibility (CSR). I found that there were mixed views. Some opined that the very concept of CSR is controversial as it is fundamentally an aspirational exercise, and it is very difficult to legislate aspirations. Some however believed that making CSR mandatory was a good step to ensure that business behaved responsibly, contributed to the interest of society and complemented the government’s efforts by channeling part of its profits.

India is taking pride in the fact that it is the first country in the world to have made CSR mandatory. The question to ask is why other countries have not done so? There must be good reasons. In fact, India is actually not the first country mandating CSR. Attempts have been made in Indonesia, as early as in 2007, and not been so effective because of ambiguities, poor guidance and involvement of overlapping agencies. (See Manager’s Perspective on Corporate Social Responsibility: A Case in Indonesia, Kartika Dewi Sri Susilowati, World Journal of Social Sciences, Vol. 4. No. 1. March 2014 Issue. Pp. 207 – 223, http://www.wjsspapers.com/static/documents/March/2014/16.%20Kartika.pdf)

The new Companies Act of India requires companies above a certain size to ensure that they spend at least 2 percent of annual profits on CSR activities. (Why 2%? Perhaps, the Ministry of Corporate Affairs wanted to follow the magic figure of Income Tax surcharge levied on the rich income bracket of India) Some precedence!

In many ways, this 2% imposition is kind of a ‘cheeky’ way to increase corporate tax. The corporate tax rate in India is 32.45 percent—already one of the highest, compared to the global average of 24%. The Income Tax Act does not yet allow CSR spending as a deduction from profit.

Estimates have been made regarding how the CSR requirement will translate into spending. Around INR 270 billion per year are estimated to be spent as CSR by India Inc. Just to compare – the annual budget of the Ministry of Environment is close to 17 billion and the budget for Ministry of Social Justice and Empowerment is INR 70 billion. So, the estimated CSR spend is a whopping three times more than the combined budgets of the two relevant Ministries. It is expected that India Inc. will deploy their organizational and  managerial capacity to play a significant role in activities where government has failed to deliver. That is the hope.

Of course, it is not easy to spend the money as projects that qualify for CSR are often  difficult to identify. Further, companies are required to engage not-for-profit agencies  (NGOs) that are competent – a combination that is often not easy to find! The NGO community in India is indeed not yet ready to help companies deliver CSR projects in the required time and quality. That is a constraint.

The Indian Institute of Corporate Affairs (IICA) has launched training and capacity  building activities with support from several reputed training institutions in the country.  According to Dr. Bhaskar Chatterjee, Director General of IICA, some 30,000 professionals  need to be trained. By July, IICA was able to train only 200. Clearly these efforts need to be substantially scaled up and a market needs to be created. The course fees of the training courses are high.

The CSR mandate under India’s Company’s act is rather project oriented, more an  accounting and reporting exercise than a strategic approach.

It is also averse to linking CSR with the creation of shareholder value. Many activities that  companies undertake are both profitable and good for society. Companies undertake these activities regardless of the law, since they are profitable activities. According to Dr Chatterjee however “CSR must have an altruistic motive and not end up in making profits for the company” (http://www.indiacsr.in/en/report-on-what-qualifies-as-csr-and-what-does-not/)

Would making a profitable investment in an energy-efficient operation qualify as ‘ensuring environmental sustainability,’ even if the firm made that investment on purely  financial grounds? What about working with social enterprises where innovations,  replications, up-scaling are good possibilities for creating entrepreneurship, employment and investment flows? The law however says a company can undertake its CSR activities only through a registered trust, a registered society or a non-profit (section 8) firm and not through social enterprises.

Given its narrow interpretation and ‘play’, I wonder to what extent the CSR mandate is going to improve environmental and social sustainability and help demonstrate sustainability-related interventions for the attention of the government.

Companies would mainly use CSR as a brand-building exercise, appeasing local communities around their factories or project operations. If CSR is under the brand  function, then the emphasis will be on how prominently the company’s logo is displayed  at the location of the activity. I won’t be surprised if the CSR budgets are used to satisfy the politicians, by launching initiatives in their constituencies. Every politician has an NGO and the easiest way to support them is to hand over a grant to their NGOs. There is a risk therefore that the new law would promote green washing and act as a vehicle for illegitimate transfer of funds.

I have had many occasions to speak at ‘sustainability conclaves and summits’ of some of the top Indian corporates. My experience has been thoroughly disappointing. The so-called sustainability cells of these companies are staffed with people who are not adequately trained or experienced in the domain and are generally ‘irrelevant’. If the top  companies do not have the vision and capacity, then is it too optimistic to expect results of change on the ground?

The Schedule 7 under the Company’s Act provides broad-brush guidance on CSR and most  companies go where they can shine in the media, establish a brand or go by the feelgood proposals of their employees. Amongst the 10 items, only item (IV) suggests ‘ensuring environmental sustainability’. The guidance is rather biased towards social (health, water, sanitation) infrastructure. Typical ‘investment chunks’ of projects therefore include construction of check dams, water treatment plants and toilets. I worry how these assets will be managed, especially with the use or handover phase requiring commitment and ownership from the communities. The need to ensure proper institutional arrangements for project sustainability has been a weak link in the CSR Act and guidance, and the main emphasis seems to be on spending or projectization.

Companies are following several sustainability-related initiatives. In fact, sometimes it’s like a maze for communicating sustainability to the internal and external stakeholders and even to the top management. There is too much of a ‘vocabulary’ used. CSR is just one of the vehicles.

A corporate needs to take a holistic view, develop strategies and practice a code of conduct. One needs to consider employees, neighborhoods (especially the youth), customers, suppliers, investors, regulators, media and academic and R&D institutions. There is a need to envelop the CSR engagements, investments and operations in the code of sustainability. Strategies such as greening of supply chains, extended producer responsibility and practices such as sustainability reporting must be woven. The focus should be on building skills and promotion of innovations that can foster sustainability.

Figure below shows a depiction for your comments and inputs.

 

CorporateCodeConduct_PrasadModak

 

Indeed, we have to think and practice sustainability beyond the 2%. Limiting to ‘2% thinking’ is not going to be enough!

 

 

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3 thoughts on “More than 2%

  1. It is indeed interesting to observe your views on ensuring sustainability through CSR funding. I have always supported training of artisans, nurturing innovations etc as important parts of CSR besides many others. A small suggestion is that companies can build small dwellings to support “prisoners of open jails” and employ these people as laborers in their industries. The country is far short of accommodation for such people, who are supposed to be “better citizens” compared to other prisoners and hence many are waiting to be shifted fro routine jail to open jail. These have to report daily to the police station (automatic safety valve), they try to prove themselves through their behavior and output as that can result in truncation of their term. We are anyway short of labor force and hence it can be a win win situation.
    Akhilendra

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  2. Your observations indeed needs serious attention by the policy makers. However, I would say, it is an early stage and all will learn as we progress. One noble initiative by Govt. of Rajasthan is development of a e-platform where the projects which the govt wants to undertake but is not able to do because of paucity of funds or procedural hurdles are listed. The corporates are encouraged to get themselves registered on the site and chose the kind of project it wishes to undertake. Govt provides support to the company in undertaking the activity. Efforts like this may dovetail government’s efforts in bringing social change.

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  3. Mandatory CSR is not new. As per Department of Public Enterprises Guidelines on Corporate Social Responsibility for Central Public Sector Enterprises (CPSEs) – April, 2010 – the expenditure range for CSR is stipulated as a percentage of net profit of the previous financial year. Expenditure range for CSR in a financial year is 3-5% of the net profit of previous year in case of CPSEs having profit less than Rs. 100 crores; 2-3% ( subject to minimum of Rs. 3 crores) in case the profit ranges from Rs. 100 crores to Rs. 500 crores and 0.5-2% in case of CPSEs having a net profit of more than Rs. 500 crores in the previous year. The CSR budget has to be fixed for each financial year and the funds would be non-lapsable.
    Section 135 requirement of Independent Directorr on CSR Committe, making CSR Policy Public, selecting projects conforming to Schedule VII, and formal CSR reporting requirements, will give the “missing direction” to CSR spend. As CSR Rules insist that activities undertaken in pursuance of normal course of business of the Company and activities such as sponsoring Marathon, Award, Charitable Contribution, Advertisement, TV sponsorship programme are not considered as CSR. This will separate out “media oriented CSR” from “CSR in measurable terms”.

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