In this blog post, Sanjay Khan Chowdhury, who is currently practicing under a Senior Advocate in Calcutta High Court and is also pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, explains and analyzes the concept of CSR and Corporate Sustainability Rating. 

Corporate Social Responsibility (CSR), also called Corporate Conscience, Corporate Citizenship or Responsible Business is a way of corporate self-regulation imbibed into a business Structure or model.

The term corporate social responsibility has its usage and popularize in the 1960’s, and since then it has remained in its cloak to cover legal, moral, social responsibility construed more narrowly. The business Dictionary defines CSR as ” Company’s sense of responsibility toward the community and the environment (both ecological and social) in which to operate. According to the UNIDO “Corporate social responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interaction with their stakeholder. CSR is understood as being the way to which a company achieves a balance of economic, environmental and social imperatives (Triple bottom approach), while at the same time addressing the expectation of shareholder and stakeholder. In this sense, it is important to draw a distinction between CSR, which can be strategic business management concept, and charity, sponsorship or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, will would directly enhance the reputation of a company and stretch its brand, the concept of CSR clearly goes beyond that”. Companies express this citizenship:

• through their waste and pollution reduction process,
• by contributing educational and social programs and
• by earning adequate returns on the employed resources.

Thus, on broader and larger perspective the term includes volunteering and philanthropy.

The Company Act of 2013 has introduced the very idea of CSR at as an institutional level through its forefront explains mandate, its promoting of greater transparency, and disclosure. Schedule VII of the said Act list out the CSR Activities, suggest communities to be the focal point. On the other hand, by discussing a company relationship to its stakeholder and integrating CSR into its core operation, the draft rules suggest that the CSR needs to go beyond communities and the concept of philanthropy.

CSR in India

In India, the concept of CSR is dictated by Clause 135 of the New Companies Act of 2013.The CSR provision of the Act stipulates that the above provision will apply to companies with an annual turnover of Rs. 1,000 crore INR and more, or a net worth of 500 crore INR and more or a net profit of five crores INR and more. The Act also stipulates that the companies set up a CSR committee consisting of their board member, including at least one independent member. The Act encourages companies to spend at least 2% of their average net profit in the previous three years on CSR activities.

CSR Draft Rules

The draft Rules as of September 2013 are:

1. The surplus arising CSR activities will have to be reinvested into CSR initiatives, and this will be over and above the 2% figure.
2. The Company can implement its CSR activities through following methods-

• Directly on its own.
• Through its nonprofit foundation set up so as to facilitate this Initiative.
• Through independently registered nonprofit organization that has a record of at least three years in similar such related activities.
• Collaborating or pooling their resources with other companies.

3. Only CSR activities undertaken in India will be taken into consideration.
4. Activities meant exclusively for employees, and their families will not qualify.
5. A format for the board report on CSR has been provided which includes amongst other, activity-wise, the reason for spending under 2% of the Average net profit of the previous three years and a responsibility statement that the CSR policy, implementation and monitoring process is in compliance with the CSR objectives, in letter and spirit. This has to be signed by either CEO or the MD or a director of the company.

Benefits of Good CSR

As the business gets more complex, a good CSR can bring greater benefits. For example,

1. Communities provide the license to operate.
2. Attracting and retaining employees.
3. Communities as suppliers.
4. Enhancing corporate reputation.

The Clause 135 of the Act lays down the guidelines that are to be followed by companies while developing their CSR program. The CSR committee will be responsible for preparing a detailed plan for CSR activities, including the expenditure, the type of activities, roles, and responsibilities of various stakeholders and a monitoring mechanism for such activities.

The new Act requires that the board of the companies shall, after taking into account the recommendation made by the CSR Committee, approve the CSR policy for the company and disclose its content in their report and also publish the detail on the official company website, if any. The other reporting requirement mandated by the government of India, including CSR, is by the SEBI which issued a circular on 13^th August 2012 mandating the top 100 listed companies to report their ESG initiatives. They are to be reported in the form of a BRR as part of the annual report. SEBI has provided a template for filling the BRR. Business responsibility reporting is in line with the NVG published by the ministry of corporate affairs in July 2011. The relevant companies have also made provisions in the listing agreement to incorporate the submission of BRR. The listing Agreement also provides the format of the BRR. The BRR requires companies to report their performance on the nine NVG principles. Other listed companies have been encouraged by SEBI to voluntary disclose information on their ESG performance in the BRR format.

The reporting and communication close the loopholes between intent and level of achievement and thus is a huge element of the CSR process. In the context of the companies Act 2013 this prima facie most mandatory requirement as it provides crucial inputs to preparing the director report. The project level reporting forms the base and hence getting it right is critical. Project reports have to be consolidated in programmers related reports, aligned with the CSR policy stated by the companies Act 2013.the report has to conform to the requirement of CSR rules under the Companies Act 2013 in term of form and content as noncompliance attracts penalties. This report will also form a key input into the company’s SEBI Business Responsibility Report and Sustainability Report. The CSR committee may choose to go beyond the requirement of the Companies Act, 2013 and issue stand-alone CSR Report.

A sustainability report is an organization report that gives information about economic, environment, social and governance performance. The corporate sustainability reporting has a long history going back to environment reporting. About more than 80 Indian companies are now doing sustainability reporting framework developed by the global reporting initiative. The GRI IS nonprofit organization that works towards a sustainable global economy by providing sustainability reporting guidance. The sustainability reporting should cover all the aspect of the companies like their Product, how will it impact society, the recycling policies, recall policies and like companies should report what they are doing about local supplier development.

Sustainability reporting requires expertise and involves a complex process. Involvement and ownership by the top management are the critical part of this process, given the ability of the member of the top management to effect changes within the organization and to develop a long-term vision and goal for the organization. A dedicated sustainability report is a reflection of the company’s commitment to the issue of sustainability, which helps companies and their stakeholder identify a comprehensive reference point for reporting, thereby aligning many of their CSR initiatives with goals that can be measured and monitored. Both reporting, as well as non-reporting companies, have accepted the possibility of sustainability reporting becoming mandatory in the near future across all public traded enterprises as also of the need to put together a process that is relevant for the business, its sector and its stakeholder. Therefore, companies should work toward establishing a robust process and also ensure verification and assurance of data for increased credibility.

References:

1.Handbook on Corporate Social Responsibility

2. Sustainable reporting India-2012