Corporate Social Responsibility (CSR) in India

1. Corporate Social Responsibility (CSR) in India “Professionalisation of CSR with a focus on investment in R&D” Mr Axel Goethals CEO, European Institute for Asian Studies

2. Corporate Social Responsibility • Corporate social responsibility is the self-regulating mechanism by which businesses ensure they are complying with ethical norms and standards, and also engage in actions for wider social benefit. • The CSR process ultimately involves corporations taking responsibility for the impact of their activities, and working positively towards helping the environment, communities, consumers, employees, and other stakeholders. • The importance of CSR has been recognised by the Indian government in the Companies Act 2013, which was passed in August this year.

3. The Companies Act 2013 • The Act will be implemented in phases throughout 2014 and 2015. • Private companies with market capitalisation of over Rs. 5 billion (EUR 59 million), turnover of over Rs. 10 billion, or net profit of over Rs. 50 million (EUR 590,000) will be expected to spend at least 2% of their annual net profits on CSR activities. • These firms must establish a CSR committee among the board members, consisting three or more members, which must include at least one independent director. • The committee must formulate a CSR policy, detailing their activities and expenses. They are free to invest this money as they see fit, but details of CSR spending legally must be included in annual reports, as well as reasons for not meeting the 2% target.

4. Guidelines for Public Sector Enterprises • Public enterprises must formulate CSR policy. Those with less than Rs. 1 billion (EUR 12 million) net profit are required to pay 3-5 % towards CSR, for companies with net profit between Rs. 1 and 5 billion, the limit is 2 to 3 per cent. • For public enterprises with net profit of Rs. 5 billion and above, the spending level is fixed at 1 to 2 per cent. • Budgetary allocations will be subject to approval by the Board of Directors. Unutilised budget will be carried to next FY, but reasons for not using it must be provided in reports. • If allocated amount is not spent within two financial years it will be transferred to a newly created “Sustainability Fund”. • In both Guidelines and Companies Act, there is no penalty for non-compliance with target CSR expenditures.

5. CSR Investment in R&D • The new Companies Act provides scope for greater growth and expansion in the Indian economy, by facilitating foreign investment and international mergers and acquisitions. • Indian companies must seize the initiative by professionalising their CSR spending. One of the most efficient ways to do this is if companies channel CSR expenditures into environmental and social research and development (R&D) projects. In doing so, they will not only fulfil their obligations as responsible corporate citizens, they will also be spearheading investment in innovation and technology, which will ultimately help them get ahead of the competition. • Thus, firms should see the mandatory CSR spending not as an enforced burden, rather as an opportunity to invest back into their company, by focussing their CSR efforts in R&D investment.

6. CSR Investment in R&D: Profitability • Rather than outsourcing 2% of their profit to NGOs, companies should start considering to improve the social and environmental impact of their own business and industry. The mining industry, for example, has taken a great ecological toll over the years. • Corporations could utilise existing their internal experts and R&D divisions, by devoting CSR finances to improve and strengthen their own environmental R&D. The companies possess the critical mass to produce cutting-edge clean-tech, and thus be at the forefront of the green economy, not just nationally but also on the global stage. • R&D can help a firm obtain competitive advantage by making production and processing more eco-friendly. By enhancing energy, environmental and production efficiency, a company ultimately improves productivity and therefore its profitability. • Productivity is also boosted by positive working conditions for the labour force. One of the biggest problems in sectors like construction, mining and ship recycling is the poor status that workers have compared to other industries. • Professionalising CSR management in a company is also a valuable marketing tool, as many consumers value companies that they perceive as socially responsible, which helps increase the company’s revenues.

7. Ethical Banking • Ethical banking has been relatively slow to catch on in India, despite the enormous potential in the country. • In the public banking sector, the State Bank of India has launched a green banking policy, and has set up windmills in Tamil Nadu, Maharashtra and Gujarat to generate clean energy, while the Punjab and Sind Bank is developing initiatives to provide services in microfinance and financial inclusion to the rural population. • In the private sector, banks like Axis Bank and ICICI Bank have set up their own charitable foundations, and many other banks engage in CSR activities, but these are generally not related to banking, and there is much more the banks could be doing in terms of green banking. • This includes making their financial products and loans more compliant with the objectives and norms of green and ethical banking, such as green loans and investments in eco-friendly construction, urbanisation, infrastructure and manufacturing projects.

8. Indo-European Collaboration • The technical expertise and know-how of European companies, and more specifically SME’s, who tend to be more focussed on technical innovation, will be useful in three ways: • Firstly, information-sharing and consulting between European and Indian companies, in the form of multi-stakeholder platforms and forums would be beneficial to both parties, as the Indian companies could explore European ideas and experiences. The European companies meanwhile would benefit from working in a new Indian context, particularly in light of the CSR provisions in the Companies Act, which are revolutionary, and has not yet been seen anywhere else in the world. • Secondly, European companies have a wealth of experience in CSR in general, and particularly with clean technology, and green production and processing methods, which have been prominent in Europe longer than in India. • Thirdly, Indian companies would gain valuable insights from European management methods. European and Indian businesses could work together to improve working conditions in Indian industry, and thus help increase productivity.

9. CSR Investment in R&D: Future • India’s explosive economic growth in a time of great environmental change means that the professionalisation of CSR is an increasingly important issue. EIAS already has valuable experience in analysing and producing recommendations for companies and their CSR policies, conducting sector-wide case studies, and organising management-level, capacity-building workshops and training courses. • However, as always there is scope for more research into the link between CSR and environmental R&D, and its potential benefits for industry. CSR investment in R&D will become increasingly important, as truly innovative eco-technology is the key to allaying environmental concerns about the growth of Indian industry, and can ultimately help India on the path to sustainable development.

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