This article is written by Samridhi Srivastava student of Lloyd Law College, Greater Noida. It will give an insight into the policy of Corporate Social Responsibility.
Table of Contents
With the increase in human activity in our surroundings and setting up of more and more companies, industries, or factories, it is important to protect our environment. When a company or industry is set up, it helps in boosting our economy by helping with the increase in employment rate and balancing the inflation rate, but on the other side, it also exploits the environment because of the product and mode they are choosing to deal with.
So, to keep the balance between the growth of the economy and nature, the Government of India came up with the Corporate Social Responsibility policy which makes it compulsory for companies to comply with sustainable development towards society. This article will look into the need to implement CSR in relation to trade which will lead towards sustainable development.
Concept of CSR
Corporate Social Responsibility (CSR) is the policy where it is the social responsibility of the corporate to set up a fund where they will annually donate some amount for the development and growth of the society. However, as per Section 135 of the Companies Act, 2013 only those companies whose net worth value is more than Rs. 500 crore or turnover is more than Rs. 1000 crore or net profit is more than Rs. 500 crore have to establish a committee, whose main objective is to ensure that 2% of the companies annual earning is being spent for growth and development within the areas they are operating.
This policy is not for any profit motive but it is for achieving environmental and social change. The United Nations Industrial Development Organisation believes in sustainable development where economic growth comes with social equity and environmental protection. However, with this, the Ministry of Corporate Affairs made it compulsory for companies that are operating in India to comply with CSR policies and those companies that are eligible to establish a CSR Committee.
However, companies who fail to spend money towards social development and environmental protection at the end of the year have to state a reason in their financial report in the committee as per Section 134 of the Companies Act, 2013.
The main aim of the CSR policy is not only to establish a fund towards societal growth and environment property, but it also includes a commitment to serve the underprivileged and vulnerable section of society. The following are the activities that a company can take-up:
- They have to eradicate poverty, malnutrition and establish a facility for health care by providing safe potable water and sanitation facilities.
- They have to promote education and provide vocational training, especially amongst women, children, disabled, and senior citizens.
- For reducing inequality both socially and economically, they should empower women by building a woman’s hostel, a daycare facility for working women, and also old-age homes.
- They should provide good maternal facilities and subsidized medicines at the hospital and also work towards improving the child’s mortality rate.
- More hospitals should be established with dispensary and sanitation facilities so that diseases like malaria, AIDS, etc. can be treated more adequately.
- It is the duty of the companies to ensure the protection of the environment by the way of sustainable development, maintaining ecological balance, conserving forests, flora, and fauna. They should also work towards maintaining the quality of the air, water, and soil.
- They should contribute to the PM relief’s fund as these funds are used towards socio-economic development of women, SC’s, ST’s and OBC’s.
- For war widows, armed forces veterans, and those who are dependent on them, companies should take initiatives for their benefits.
- They should also involve themselves in protecting national heritage sites, culture, and art; set-up public libraries and promote hand-craft.
- They should develop slum and rural areas.
- They should promote sports which are of national importance and which are related to the Olympics by providing proper training.
The CSR Committee will consist of 3 or more Directors from which 1 director will work independently. They have to constitute a meeting twice within a year for reviewing and discussing CSR Policy. This committee works as an advisory body where they recommend the activity which the company can take, fix the required budget, give a blueprint for implementation of the project, and also ensure transparency for project progress.
Potential and challenges of private regulation
The implementation of Corporate Social Responsibility (CSR) leads to balancing economic growth where it becomes the responsibility of the company to also take responsibility for the environment and respect the needs of the vulnerable society. And companies who implement this policy gain significantly as their stake in the market also increases by showing their sensitivity towards the society and environment.
The purpose of any business does not only involve gaining profit and expansion, but it also includes taking care of the surroundings and imbalance in the environment. But the amount which is used for the development and improvement of the society and environment is covered from a different budget plan which does not also cause any impact on the Company. There are so many companies in India who have implemented CSR and how much profit they earn in a year, they utilize it towards sustainable development of society. For instance, TATA Steel Ltd., Mahindra & Mahindra, Ultratech Cement, Tata Motors, Tate Chemicals, etc. The following are the potential of Corporate Social Responsibility in private regulation:
Recognition of the brand
The publicity of the company increases with the activity they take up according to the CSR Policy, where companies invest for public good and benefit, their brand also starts earning recognition from grass root level to the international market.
When a business brand is recognized amongst the general public, they also start earning a positive reputation regarding their social work in which they are involved. When a firm’s positive reputation is built it ultimately strengths its business as more and more people will want to then invest in their venture.
Total sales increase and trust of the customer
When a corporation has set-up a CSR fund and implements the fund either for the development of the vulnerable society or for improving the environment, their contribution is known in the society, which will ultimately precede their reputation. Also, when a company’s reputation is established everyone will like to invest in such ventures, and with this, their total sale will increase and with this, they will also earn the trust of their customer.
Improved financial performance
When a company is recognized and earns a reputation more and more investors will look forward to investing and also the customer base of the company increases which results in improved financial performance.
High chances to retain staff and attract talent
Only companies whose annual turnover or profit is more than Rs. 5000 crore is required to work for social development likewise after having knowledge about such companies the staff who are associated with them will always like to stay longer, and those who are employed in these companies, their reputation also builds and these companies never fail in attracting more and more talent as more youth will also like to work under them.
Expansion of business
When a company’s customer-base increases, they can also expand their business because of the easy availability of the appropriate capital as with the earned reputation in the market, no investor will back-off from investing in the company and when an organization grows the need for employees and labours also increases.
However, there are still some challenges that are being faced by companies while implementing CSR funds for the improvement and development of the society. They are as following:
Government role shrinks
With the implementation of CSR, the responsibility of government towards societal needs shrunk as more and more companies came forward to look forward to societal development and environment protection. However, this leads to an increase in non-regulated initiatives because now for deploying environment and societal needs, the government does not have to rely on the legislature and any regulatory body to regulate. Companies are free to invest wherever they want and this also results in unequal development.
Now with CSR all those whose interest is attached with a firm they look forward to being informed about the firm’s performance rate and all the investments they are planning to take up.
The interest of customer
When a company is investing in the societal and environmental development and improvement of the society, the interest of the customer also increases, as now they look forward to them to invest in an effective manner and when a firm’s funds decrease or do not invest in any given year, the total sale of the company also falls.
The pressure of the investors
There is constant pressure built upon the firm from their investors as investors are changing the way they are now investing in any venture because now they prefer those firms who have a more sensitive response towards societal needs.
Increased competition in the labour market
The way employees are approaching employers has also evolved as now employees are not concerned more in the pay-scale they are being offered but more in the ethical conduct of the employer, so to stay in the run companies now have to improve their principles and working environment.
Unclear CSR guidelines
There are no specific guidelines mentioned regarding the way a firm should work effectively for deploying its resources for societal benefits.
Companies often deploy their resources more effectively by investing in an NGO because they work from the grass route level and have knowledge regarding the needs of the society but when a company wants to develop any rural areas they cannot find any operating NGO who can help them.
CSR in trade and investment agreements
Since the expansion of any firm is related to its reach in the global market and choice of investments, the United Nation Environment Programme (UNEP) came with a sustainable development plan where nations who are growing economically they should also work towards reducing poverty, protection of labour market and environment. Because both labour and environment are important for any trade and investment agreements. However, other organizations provide guidelines for the implications of CSR in trade and investment agreements, for instance, ILO (International Labor Office), Organisation for Economic Co-operation and Development (OECD), etc.
The CSR gained importance when inter-state trade barriers were removed by introducing liberalization in investment because there are firms that have greater influence in the global market because of their great reach in various countries and trust that they have earned between their consumers. Also, CSR is mostly concerned with societal issues like rights of labour, protection of the environment, controlling the exploitation of resources, etc.
With the implementation of CSR in trade and investment agreement, the principles of CSR can be manipulated towards the adoption of sustainable development which will not only have a positive impact on trade and investment of any private sector but it will also have an impact on society and environment within the locality. And when the inclusion of CSR is done in the trade and investment agreement it strengthens both. The following are the reasons under which CSR’s strength increases when it is used with trade and investment agreements:
CSR retains consistency
The policy of CSR tends to differ from one country to another country and this problem is mostly found in developing countries who fail in gaining consistency while trading and making or attracting investments globally. So when CSR is included with trade and investment policy, CSR gains consistency as the implication of CSR principles will get promoted with it as which in return makes it easier for suppliers to recognize which code of conduct or standard should be adopted.
CSR strengthens institutional capacity
It helps in strengthening the institution’s capacity by providing training to its staff or exporters who can identify the social and environmental needs and also the ways to address.
Transparency is maintained
While dealing with foreign nations it becomes easier to maintain transparency between both parties when CSR policy is adopted with trade and investment agreement. CSR promotes good relations between various stakeholders and companies sectors which results in peaceful dispute resolution.
The following are the reasons under which trade and investment agreement strengthen when CSR is linked:
Motivates assessment of impact and participation of stakeholders
When trade and investment agreements are linked with CSR, it motivates assessment of social, economic, and environmental impact while negotiating because where CSR is implemented they have to comply with its principles before entering into any agreement. And stakeholders equality participate in it because there is an assessment of impact which is done on society and environment and also the result of any recommended policy and new changes are made.
Aids partnership and spread of knowledge
Companies where CSR is implemented, they build a strong relationship with each other which in turn strengthen their partnership and because of which knowledge regarding the condition of the economy, society and environment spread, which also has a positive impact on bilateral trade and investment agreements with other foreign investors in the market.
The need for CSR in trade
When CSR policies are implemented concerning trade it means protection of labour rights, development of society, and protection of the environment. And the implication of CSR is done in three different sects of the society which is given by the International Labour Office (ILO). They are as follows:
For shaping business coherently and having a positive impact on the trade and investment agreements, the state plays an important role in mandating CSR within their territory or jurisdiction more effectively, as they take responsibility when any company enters into an agreement and they can also be held liable where stakeholders also have different roles.
A Business can choose whichever activity they want to take up even if states are responsible for the implication of the clause of CSR and can also select any CSR mechanism which the government promotes. By which businesses get to play a crucial role in the improvement of the working environment and labor situation. However, with the adoption of the CSR companies gained recognition among various stakeholders and customers.
Workers are involved in the growth of an institution and when CSR is linked with the trade and investment agreement there is a positive impact on the labour rights and the concept of human rights broadens
Informing customers about social and environmental conditions
In recent years, Customers who are willing to spend their money look forward to investing in those ventures where CSR policy is implemented because they tend to think if they will invest in any firm where CSR is implemented that will indirectly help in supporting societal and environmental needs. A survey has been conducted on behalf of OECD where it was found that consumers even do not mind spending more on the products or services which are being offered.
The purchase of any customer is not always motivated by companies who are involved in the improvement of society, it is also driven by the cost and quality of the product. For instance, if they are going to buy anything the chances of first going through a firm’s social investment is less but when that firm is producing or providing any good or service which is covered under affordable price and it also has good quality involved in it, then the chances of increase of total sales of any venture will gradually rise.
However, because of not being properly aware regarding the CSR most of the time customers tend to think that their interest in spending in any product will not bring any change into the society and some customers show no interest in the development or improvement of the society because they think the government or media have to take initiative for promoting social work. There are various other issues that businesses face because of not being properly informed about Corporate Social Responsibility (CSR). Some of the issues are as follows:
- Customers do not trust companies when they claim about CSR.
- They also at times do not want to pay more for the product.
- Customers do not want to visit specifically to any companies to show if they are not within their reach.
- They also tend to not trust the quality of the product.
However, the only way to provide proper information regarding CSR is to communicate effectively. Companies who are involved in social work should identify customers who are sensitive to CSR and inform them about the activities which they are taking up and how their small contribution to the company by only purchasing a product can make a difference in the life of any vulnerable section of society or improve the condition of the environment. Also, when a customer is well informed they will like to then invest in the company’s product.
The Corporate Society Responsibility works more effectively when it is inter-linked with trade because when a company takes responsibility for improving society by taking up various activities, they earn recognition and reputation in the global market because of which more and more stakeholders want to invest, and also customer base increases.
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