Since it became a
legal mandate for stipulated companies under the Companies Act 2013,
CSR has enabled businesses to benefit society and the environment, helping social stakeholders, enhancing brand image and reputation, and raising and boosting workforce morale.
While CSR has become a corporate buzzword in the last 10 years, the Companies Act 2013 also
introduced the ESG (Environment-Social-Governance) disclosures concept for companies to provide information on energy conservation measures in their business processes. With a growing global commitment to combat climate change, the ESG concept gained more clarity following subsequent
circulars on the topic by the Security and Exchange Board of India and the
National Voluntary Guidelines for Responsible Financing from the Indian Banks Association.
With climate change predicted to cause an estimated
loss of US$ 24 trillion to global financial assets, ESG has become critical to promoting a healthy environment, social responsibility and good governance. However, the transition from traditional to sustainable business practices comes with risks and high costs. In such a scenario, can aligning the sustainable business practices targets with the well-established CSR framework act as a force multiplier for green transitions?
With a growing global commitment to combat climate change, the ESG concept gained more clarity following subsequent circulars on the topic by the Security and Exchange Board of India and the National Voluntary Guidelines for Responsible Financing from the Indian Banks Association.
CSR and the green transition paradigm
A multi-stakeholder approach involving the shared vision and collaboration of all the internal and external business stakeholders is quintessential for competent and effective CSR.
This approach is
critical for the growth of businesses by raising their brand recognition, boosting investor relations, increasing employee engagement and mitigating risks. It also helps expand the scope of green transitions and accelerate the switch from traditional to sustainable business practices by reengineering supply chains and manufacturing processes from procurement to production.
For example,
Google’s investment of more than US$ 100 million in making its supply chain more energy efficient played a vital role in strengthening its global brand and catalysing its green transition. Its
high-quality carbon offsets programme is believed to have made everyday operations carbon-neutral, directly contributing to
SDG 13. Google’s focused CSR initiatives have also enabled it to implement energy-efficient data centres. It has also implemented a DEI (Diversity, Equity, and Inclusion)-like model into its organisational culture by introducing racial consciousness programmes for all its employees, emerging as a
great place to work. Indian multinationals, such as TCS, too, have made DEI an intrinsic component of their “
inclusion with exception” practice.
The luxury brand, Chanel, recently acquired a partial stake in a family-run natural fibre manufacturer to ensure closer supervision of the supplier company’s business practices.
Low carbon-footprint growth is the
hallmark of pursuing the SDGs. Business giants can handhold smaller enterprises to take collective action and contribute to the climate transition cause. The fashion industry, which contributes up to
10 percent of total global emissions, has witnessed such attempts. The luxury brand, Chanel, recently
acquired a partial stake in a family-run natural fibre manufacturer to ensure closer supervision of the supplier company’s business practices.
The 2021-22
CSR Expenditure Summary by India’s Ministry of Corporate Affairs revealed that 18,632 companies invested nearly INR 259.32 billion, a record high, in 42,440 CSR projects, with rural development and allied activities attracting substantial investments. This is significant given that
40 percent of Indians will be urban residents by 2030, and the rural areas will have converging aspirations with the urban world. However, to bridge the intent-action gap, factors like digital connectivity and financial inclusion need to be addressed to ensure socio-economic inclusion for all citizens of India.
CSR initiatives of
several companies have promoted education and gender equality, healthcare, public sanitation, organic farming, environment sustainability, vocational skills, and social businesses. They have applied CSR to create superior value for their consumers, augmented the natural capital and improved the sustainability of
livelihoods, in line with the SDGs. The scope of CSR also covers issues such as
fair trade,
reducing carbon footprint, reducing the
wage gap and
sustainable packaging.
Building CSR+ESG Frameworks
India’s
Ministry of Corporate Affairs regulates the CSR activities undertaken by companies. However, CSR is self-regulated and voluntary social engagement in the
European Union (EU), the
United Kingdom (UK) and the
United States (US). However,
research has indicated the disadvantages of private self-regulation considering their “absence of legitimacy”, being set by private organisations instead of legislative bodies.
The scope of CSR also covers issues such as fair trade, reducing carbon footprint, reducing the wage gap and sustainable packaging.
Combined with
ESG (Environment, Social and Corporate Governance), CSR can help with the difficult transition to sustainable business practices, essentially contributing to the achievement of the SDGs.
Research shows that:
- Companies undertaking inclusion practices are 120 percent more likely to fulfil their financial goals,
- Diversity has a similar impact and implies outperforming key financial performance indicators, and
- The extent of diversity within an organisation is directly proportional to the speed of innovation of products offered by a business.
Going beyond CSR, ESG helps build the resilience of companies in the face of contingencies and crises. For instance, undertaking ESG activities
enhanced the goodwill of companies during the COVID-19 pandemic. Pharmaceutical businesses used the goodwill generated during the pandemic for long-term reputation building, which resonated with the aims of protecting the environment and the health and well-being of society, especially for COVID-19 treatment and vaccine research.
The way forward
These convergences make a strong case for establishing regulatory mandates for
ESG, similar to those in force for CSR. The government must initiate sustained multi-stakeholder consultations to consider the extent to which ESG could be put under a legal or legislative ambit. While it may be difficult for smaller businesses to prioritise ESG, they must consider the enormous opportunity costs and trade-offs of not doing so.
Suitable reforms to India’s economic policy and taxation can stimulate the flow of capital and financing by considering incentives, including tax concessions, to facilitate ESG investments and catalyse green transitions. A broad policy framework within organisations with an organisation-wide commitment to achieving CSR and ESG targets can widen the scope of their sustainability
reports, holding the general public and stakeholders as accountability partners. This will lead to the fulfilment of regulatory mandates and broaden its horizon.
Suitable reforms to India’s economic policy and taxation can stimulate the flow of capital and financing by considering incentives, including tax concessions, to facilitate ESG investments and catalyse green transitions.
Businesses must employ CSR activities from the first link of their supply chain to avoid the impacts of
greenwashing. Such disclosures by bigger corporates can have a cascading effect and create pathways for relatively smaller businesses to follow. The growing consumer awareness and rising preference for ethically-sourced and environmentally viable products will also influence such decisions.
ESG expands on CSR and goes beyond philanthropic measures, creating a clear understanding of its environmental, social and internal governance practices for consumers and investors. Blending CSR with ESG is, thus, a win-win proposition for businesses, their shareholders, suppliers, the end-to-end product and/or service supply chain, employees, other stakeholders, and the society and environment at large.
Ninupta Srinath is an intern at the Observer Research Foundation
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