CSR: Help Others, Not Yourself

Hindustan Unilever (HUL) spends a lot of resources in rural India educating villagers about the need for good hygiene practices. Taken at face value, this is one of the projects that qualify as Corporate Social Responsibility (CSR) activity.

But the CSR rules of the Companies Act 2013 will not allow HUL to treat such community outreach activities as CSR. It will be treated as an activity undertaken in the normal course of business. That’s because, HUL will derive direct benefit from this activity – demand for its toiletries and detergents will grow among the targeted communities. The Indian subsidiary of the Anglo-Dutch FMCG major will have to book all such expenses as business promotion expenditure.

Its Project Shakti, a programme that combines social responsibility, sustainability and business strategy, too will not qualify as a CSR activity, even in part, because CSR rules do not allow shared value propositions.

Like HUL, many India companies across industries have activities that combine sustainability with business strategy – and none of them can treat a part of the spending on such activities as CSR expense. Companies have another little bother to deal with – CSR activities carried out by a department within the company will not qualify as CSR activity under the Companies Act.

This is because the Rules accompanying the Companies Act, 2013 say that CSR activities must be undertaken by a separate entity – it could be trust, a society or another company set up specifically for the purpose. It is not necessary that these trusts, societies and companies should be set up by the company on its own – companies can work with an existing independent one that has a three-year track record for carrying out such activities. Companies can also collaborate with other companies for a joint CSR programme – provided each can identify and report separately their part of the joint activity and what was achieved.

Effectively, the new Act and its Rules make it necessary for companies to spin off CSR activities that are currently carried out internally into a separate entity registered as a trust or a society or a not for profit company.
What qualifies as CSR activity
The Companies Act lists out all 10 sets of activities that qualify as CSR activities. Most of the listed activities are not foreign to companies – much of their work in CSR is among the 10 specified. For instance, contribution to environmental sustainability is an activity many big Indian companies showcase. Others are known to work in the areas of education, particularly female literacy.

Besides these, projects identified in the Rules include eradicating hunger and poverty, promoting education and employment enhancing vocational skills, protection of national heritage, art and culture and contributing to the Prime Minister’s National Relief Funds. Promoting gender equality, empowering women, rural development, funding or contributing to technology incubators within approved academic institutions and promoting all kinds of sports also qualify as CSR activity.

While this is a longer list than the one originally written into the Act that went through Parliament, companies need not limit themselves to the ones listed – though there is a little confusion on that due to the wording of the Act.

What is clearly not CSR
Any contribution directly or indirectly to political parties will not be counted as CSR expenditure – it will be treated as political funding. Any activity or project that benefits only the employees of a company and their families too will not count as CSR. The first condition is a welcome step as it lowers, although it may not eliminate, opportunities for politicians to arm twist companies to support specific projects where they have a vested interest. The second condition may prove restrictive in new areas of development where at least one member of a family is employed by the company – if the employment was part of a compensation settlement with a village for land acquired or leased from farmers.

Who needs to have a CSR policy
It is mandatory for any company operating in India, including branches and project offices of foreign companies as well as unlisted Indian companies, with net worth of Rs 500 crore or more, or turnover of Rs 1,000 crore or more or a net profit of Rs 5 crore or more in any financial year to have a CSR policy. Its CSR policy is to be decided by a committee of the board, which will also identify projects and monitor their implementation. In doing so, companies have to give preference to local areas and areas where its business operates. While there is nothing wrong with that stipulation, there could be a concentration of CSR projects in certain pockets such as industrial belts and clusters, special economic zones and some towns and cities, while many areas that require a lot of intervention may get ignored.

All these companies are required to set aside two per cent of their average net profit of the preceding three years for CSR activities and ensure that they spend that money. Any failure to spend the funds has to be adequately explained by the board in its report. There is as yet no penalty for failure to spend or for falling short of target. The government is relying on peer pressure and companies’ own need to be seen as caring to ensure the spending happens.

Areas of concern
Many see the mandatory spending as an additional tax of two per cent on corporate profits, as the Income Tax Act does not yet allow the spending as a deduction from profit. If the CSR expenditure is a deduction, net profit will be lower and so would be the income tax that companies pay on their net earnings. It remains to be seen if the new government formed after May 16 will amend the Income Tax Act to allow that deduction.

Another area of concern is for branches and project offices of foreign companies. CSR spending could run into Foreign Contribution Regulation Act (FCRA) and Foreign Exchange Management Act (FEMA) red-tape. Under FCRA rules, NGOs receiving contributions from foreign entities – branches and project offices are not Indian companies – need to get approvals from the home ministry. Under FEMA, branch offices and project offices can take up eight kinds of activities and CSR is not among them. FDI is not allowed in companies set up as not for profit. But income generated from FDI is also treated as FDI and therefore any contribution from profits to CSR activities could be viewed as routing FDI into CSR.

Foreign banks face another set of problem. A Reserve Bank of India circular of 2005 allows foreign banks to contribute up to one per cent of their profit of the previous year to non-profits and charity. The question remains whether these banks should comply with the RBI circular or the Companies Act.

Sharing responsibility
India is the first country to legislate mandatory CSR spending for companies. But India is not the first to go down that path. Denmark and the United Kingdom issued directives in 2002 and 2006, respectively, asking companies to spend on sustainable development. India may have merely followed them.

Indian companies may grudgingly follow the government directive, but the world is watching India’s attempt to share what is widely seen as perceived as state responsibility with the private sector and possibly replicate India’s experience. For India companies, it is also an opportunity to deploy their organizational and managerial capacity to play a significant role in activities where government has failed to deliver. Dividends would follow in terms of a healthier nation, a better educated and trained work force, larger markets for its goods and services and more importantly, in building of a caring corporate brand.

[By Tina Edwin]

(This article first appeared in Business Today)

(Source: http://businesstoday.intoday.in/story/csr-help-others-not-yourself/1/205918.html)

Exclude Tobacco companies from CSR

Cigarette, beedi and kattha manufacturers should be kept out of the corporate social responsibility (CSR) initiatives, as it would help them promote their brands and earn good will, they should instead be asked to pay their CSR contributions directly to state and central governments for welfare schemes, a PIL filed in Madras high court has said.

The PIL, filed by S Cyril Alexander, state convenor of Tamil Nadu People’s Forum for Tobacco Control (TNPFTC), pointed out that as the CSR scheme which took effect from April 1, companies are mandated to spend 5% of their profit after tax (PAT) on various welfare, development and relief activities. In the bargain, they are allowed to use their brand names and company logo, which is an opportunity to promote their brand name and create a good will.

While welcoming the legal obligation companies had been put under the CSR regime, the PIL said: “Allowing the tobacco industry to take part in CSR scheme would result only in promotion of their brand names, and would totally run counter to the very purpose and object behind the introduction of CSR scheme. In turn, it would only push up the expenditure incurred by the public exchequer towards health, environment and social welfare.”

Cyril said regular CSR norms should not cover tobacco industry, as promoting tobacco goods under CCR schemes would harm public health and well-being. Narrating the deaths and disabilities caused by tobacco products, which result in heart attacks, strokes, cancer and other diseases, the PIL said that in India about 1 million people die of tobacco use every year. Noting that there are 275 tobacco users in the country, he said, “if this present trend continues, tobacco alone will account for 13% of all deaths in India by 2020.”

Calling for excluding the tobacco industry from the CSR regime, the PIL said they should instead pay the amount to state and central governments which would spend the funds on meeting the medical expenses of people affected by tobacco products, and for furthering the National Tobacco Control Programme (NTCP) initiatives.

On Monday, the first bench comprising Acting Chief Justice Satish K Agnihotri and Justice M M Sundresh issued notice to the authorities, returnable in two weeks.

[THE TIMES OF INDIA]

CSR As An Anti-Poverty Instrument

In 2000, the United Nations made the historic announcement of eight Millennium Development Goals (MDGs). They were very specific and had a timeline of 15 years for delivery. Progress on most of these objectives has been encouraging, but as we look towards the next round of development goals, we must recognise how the world has changed since 2000.
The global financial crisis had a devastating impact on both individuals and the public sector. Conversely, the rise of the BRIC economies and Africa’s emergence mean that aid is simply not needed on the same scale as it was before.

Therefore, we in the emerging economies need to reconsider not only the substance of the new development framework, but also the implementation process. In the original MDGs, the private sector was noticeable mostly by its absence. This time, we must step up as part of the solution and pioneer new approaches that could hold the key to a more innovative and inclusive way to deliver development.

Take, for example, India. While its economy has expanded impressively over the past decade and half, so has income inequality. Improvements on social indicators such as malnutrition and hunger have not kept pace with its growing prosperity, primarily because public spending to tackle these challenges was simply inadequate.
CSR – a game changer
But now the Indian government has introduced the first step of a potential gamechanger, and we in Africa have taken note. A new law enacted this month makes it mandatory for private corporations to invest at least 2 per cent of their profits in corporate social responsibility (CSR). The private sector in India now has a unique opportunity to respond to the collective aspirations of an entire country and accelerate action towards achieving the MDGs on hunger, health and sustainability. We applaud India for this.

My own group of companies also contributes 2 per cent of pre-tax profits to social development. Yet we go beyond this, and seek to create social impact through all the businesses we operate. While the Indian government now requires Indian companies to contribute towards social development, I challenge the Indian private sector to go further. Take up the challenge and strive to balance economic prosperity and social wealth which helps ultimately to create more gainful jobs and all inclusive nation.

In framing the new development agenda, the private sector must focus on tackling unemployment and job creation on a massive scale, and on dramatically improving access to electricity. These goals are critical to both lives and quality of life, and cannot be accomplished without collaboration with the private sector.

Development framework
For example, much of the mandated and voluntary private sector investments could go into creating many of the 100 million new jobs India will need over the next decade.

Lack of access to electricity is also a major challenge that will prevent us from eradicating poverty. Millions of mothers are giving birth in the dark, life-saving vaccine deliveries are challenged by lack of power to support their cold chains, and 90 million children go to school without electricity.

If we agree that access to electricity and improved livelihoods are vital components for the success of the post-2015 development agenda, then the private sector must have a key role to play in its design and implementation.

For governments, achieving the goals of the post-2015 development framework will mean enacting reforms and creating new policies to build more competitive business environments. We in the private sector must act with integrity, making sure that markets drive development, not oppose it.

We must focus on creating and multiplying value in the societies in which we source, supply and operate, and integrate this into our corporate governance, our operations, our project development and our profit calculation, across the value chain.

To truly combat poverty, we must combine the best qualities of all sectors: the political will, resources, and convening power of governments; the compassion, selflessness and dedication of non-profits; the innovation, expertise, and financial capital of the private sector; and the drive, creativity and entrepreneurial spirit of the people we seek to help. Only then can we hope to take on the challenges of the post-2015 development agenda.

[The writer is chairman of the Heirs Holdings group, Lagos][Courtesy: csrtimes.com]

Indian cos may go dutch to meet CSR norms, maximise impact of social joint ventures

Companies in India, particularly mid sized and small ones, may go dutch to meet corporate social responsibility (CSR) norms under the new corporate law, a move that can help them cut down on common costs and maximize impact of the money they spend on philanthropy.

India has become the first country in the world to make it mandatory from this month for firms with a net worth of over Rs 500 crore or yearly sales of Rs1,000 crore plus or those booking net profit in excess of Rs 5 crore to allocate at least 2% of their profits to social responsibilities. State-run Rural Electrification Corporation has decided to contribute about Rs2 crore to a literacy project which was already receiving funds from the largest public sector natural gas company GAIL (India).

More such arrangements of resource pooling between firms with shared philanthropic ambitions are being thrashed out in what could well become a trend. "REC's decision to back non-governmental organisation Aroh Foundation's Padho Aur Badho, a government-led right to education initiative which had received about Rs5 crore from GAIL, came after it approached Indian Institute of Corporate Affairs (IICA), an arm of the Ministry of Corporate Affairs, which in turn identified that the PSU's social vision matches that of GAIL and advised it to join the ongoing project," said a consultant with direct knowledge of the matter.

NGOs, development sector consultants and the government are all betting big on the future of such social joint ventures. For instance, Samabhavana Society, a home-grown not-for profit group which works with 'difficult communities' such as male sex workers is rolling out this month its prototype portal where it will showcase work of different grass-roots level NGOs with marginalised population and exhort various corporate groups to invest their CSR funds in their area of interest.

"We are already sifting through the track record of the work NGOs have done with different communities in last three years. This would be classified into different categories and hosted on the cloud for the companies to review where we can help channelise their funds into groundlevel work," said Jasmir Thakur, founder of Samabhavana Society. It will generate periodic reports of progress and build plan to use social media platforms to display the kind of results such collaborative pieces of work are generating.

"That the government is bullish about the prospect of such groupings going is apparent from the fact that we have specially set up a dedicated cell under National Foundation for CSR (NFCSR), an arm of IICA to facilitate more such alignments between companies," said Nikhil Pant, chief programme executive of NFCSR. The government is focusing on helping 1,400 top listed firms to comply with the norms and this trend may gather more steam as the focus shifts to smaller firms, he added. While spelling out nuanced rules for the CSR obligations earlier this year, the corporate affairs ministry made an explicit mention of such possibilities.

"A company may also collaborate with other companies for undertaking projects or programmes or CSR activities in such a manner that the CSR committees of respective companies are in a position to report separately on such projects," says the new corporate law. The logic behind such team-ups is compelling. "Of the 16,400 odd companies in the CSR net this year, almost 14,000 companies would need to make small contributions of less than Rs1 crore.

Individually, they may not achieve much but splitting the bills can help them rationalise administrative, back office and other common spends and attain economies of scale and make a meaningful difference," said Linn Dorin, chief principal of Global Finance Strategies (GFS), an international development consultancy which advises donors, governments and NGOs in areas of finance, administration and operations. GFS, which entered India this year, is in hectic talks with multiple companies and is working out such cause led groupings.

[courtesy: Shubham Batra, YASHODHARA DASGUPTA & Soma Das, ET Bureau ]

Partnerships Key To Success In CSR

PPP, an acronym that gained favour in government services and business ventures in Bengal in the mid-1990s, re-emerged on Thursday but in a new avatar. At a symposium to explore opportunities to collaborate on corporate social responsibility, US consul general in Kolkata Helen LaFave called for private-private partnerships (PPP) to maximize the gain from CSR funds. The traditional definition of PPP is public-private partnership in which the government and one or more private sector firms join hand to create a business or service.

“The new corporate legislation in India creates exciting opportunities to tap the power of partnership, not only between USAID and Indian companies and NGOs but among Indian entities themselves,” LaFave said, kicking off an exciting panel discussion before a packed house at the Bengal Chamber for Commerce & Industry. This is the third such seminar following the ones at Mumbai and Hyderabad.

Elaborating on the power of partnerships, USAID India deputy mission director Kathryn Stevens pointed out that though USAID’s resources had shrunk, it was really not about money but about leveraging one another’s strengths to do more for society.

Social responsibility, SREI Equipment Finance joint managing director Sunil Kanoria felt, needed to come from within. “It is ingrained in Indian culture. The vedas and puranas talk of giving a tenth of earnings back to society. When I got into business, there was account called ‘dharmada’ or donation. So I inculcated the spirit of giving. CSR may be a law today but it has to come from within and be sustainable to make a difference,” he said, calling for self-involvement in the social activity and not just cheque book CSR. WWF-India climate change adaptation head Anurag Danda cited several examples of working with both the government and corporates to create sustainable interventions or development strategies for people in the Sunderbans.

“CSR works only if all stakeholders have a shared vision. There’s a thin line between the passion that an NGO partner brings in and irrationality. It is difficult for some corporate partners to handle this kind of passion unless they share the vision,” said Danda.

It was the realization that 85 rich men in the world had assets equalling that of 3.5 billion people that led to ITC embarking on its CSR path with a vision to create a more equitable society in the country.

“India has 17% of the world population but 4% of water and 1% forest cover. ITC being an agricultural company had encountered the fact that climate change is here and now. The activities that range from e-choupal to watershed projects and social forestry touches 40,000 villages and provide livelihood to 7 million people,” said ITC vice-president Nazeeb Arif, adding that a shared vision with 70-odd NGOs had made it possible.

Century Plyboards president (marketing) Anoop Hoon felt the old adage ‘charity begins at home’ still holds true and that one could embark to do good to others only after sensitizing employees within the organization. “Once you build a culture of CSR within, there is a multiplier effect. Practice internal CSR and create champions who can then take up CSR projects for the company,” he said.

Amway vice-president (east) Diptarag Bhattacharjee stressed on the need to engage with society. The American company that actually got into CSR in 1996 before it actually began doing business in India two years later has been working extensively with the visually impaired.

“We believe CSR is just not philanthropy; it does not mean that we donate some books, give some scholarship or organize a day’s meal and we are through with our responsibilities. CSR is not just giving the fish but providing them the fishing rod. Our aim had always been to engage with focused groups and develop some sustainable projects for them,” Bhattacharjee said.

[THE TIMES OF INDIA]

Unilever Lifebuoy Campaign Reduces Diarrhoea from 36% to 5%

Unilever’s health soap Lifebuoy has announced the results of its ‘Help A Child Reach 5’ handwashing programmes launched in Thesgora, India, noting an overwhelming drop in the incidence of diarrhoea: from 36% to 5%[1].

The decrease in diarrhoea in this village – known for having one of the highest rates in India of this deadly yet preventable disease – was observed over the period of Lifebuoy’s intervention in an independent evaluation of 1485 households with children aged below 12 years, conducted by Nielsen in September 2013.

Lifebuoy’s ‘Help A Child Reach 5’ campaign aims to eradicate preventable deaths from diseases like diarrhoea through teaching lifesaving handwashing habits. The campaign was launched with an award winning film ”Gondappa” (www.youtube.com/helpachildreach5) and handwashing initiatives in Thesgora, a village in Madhya Pradesh.

The results achieved show that handwashing programmes have significant positive impact on both the handwashing behaviours and the health of a community. Lifebuoy’s handwashing programmes are now being rolled out to villages across 14 countries (Bangladesh, Brazil, Egypt, Ghana, India, Indonesia, Kenya, Malaysia, Nigeria, Pakistan, South Africa, Sudan, Uganda and Vietnam) and scaled up in India to reach 45 million people.

This adds to the ambitious goal of Unilever to help more than a billion people improve their hygiene habits by 2015. On 28 April this year, the Unilever Sustainable Living Report 2013 will be published, and it will confirm that Unilever has reached around 303 million people through its programmes of handwashing, safe drinking water, oral health and self-esteem.

Unilever’s health soap brand, Lifebuoy, puts its social purpose at the heart of its innovation and engagement with consumers. The Lifebuoy’s handwashing programmes are not only helping to change habits to combat disease – expert studies have shown that washing hands with soap at critical moments during the day can dramatically cut the incidence of life-threatening diseases like diarrhoea. They are also driving volume growth in key markets. Lifebuoy has achieved three years of double-digit growth to become the world’s number one anti-bacterial brand.

Samir Singh, Lifebuoy’s Global Brand Vice President, explains, “Lifebuoy’s ‘Help A Child Reach 5’ campaign has demonstrated excellent results in Thesgora and we will now be scaling up this campaign globally. To date, Lifebuoy has impacted the handwashing behaviours of 183 million people in 14 countries and the results of our efforts so far prove that when a social mission is embedded into a successful brand’s core values, significant and indeed lifesaving change can happen fast.”

Worldwide, one child dies from diarrhoea or pneumonia every 15 seconds, amounting to 2.1 million deaths each year. Handwashing with soap is the most cost-effective way to prevent child deaths and contribute to Millennium Development Goal 4 (MDG4) towards reducing child mortality. Put simply, the simple but lifesaving act of handwashing with soap could help many more children reach the age of five.

More than 2.5 billion people still lack effective sanitation, good hygiene and safe drinking water. Tackling these issues can achieve a big impact on the diseases that cause ill health and cost lives. To achieve better health outcomes and lower costs Unilever will try to address all three together. Unilever has leading brands – Lifebuoy, Pureit and Domestos – that can make a difference in these three areas.

Next to the 183 million people reached by Lifebuoy’s handwashing programmes, Pureit is providing safe drinking water to 55 million people. Both brands have worked closely with others such as PSI, a Unilever Foundation partner. Domestos and the Unilever Foundation are partnering with UNICEF to scale up its Community Approaches to Total Sanitation programme.

For more information, visit Facebook.com/Lifebuoy.

India now only country with legislated CSR with spending threshold of Rs 15,000 Cr

With the implementation of the new company law from April 1, India has become the only country in the world with legislated corporate social responsibility (CSR) and a spending threshold of up to $2.5 billion (Rs 15,000 crore). 

The new law mandates that all companies, including foreign firms, with a minimum net worth of Rs.500 crore, turnover of Rs.1,000 crore and net profit of at least Rs.5 crore, spend at least two percent of their profit on CSR. 

According to industry estimates, around 8,000 companies will fall into the ambit of the CSR provisions and this would translate into an estimated CSR spend of $1.95 billion to $2.44 billion. With higher economic growth and increase in companies profits, this mandatory spending will go up. 

"India is the only country that has made legislation for CSR spending," Sai Venkateshwaran, partner and head of accounting advisory services at KPMG India, told IANS (Indo Asian News Service). 

He said the new law would lead to a significant increase in spending by companies on CSR activities. 

"Many big companies have been actively engaged in the CSR activities, but the number is low. The new law will lead to a significant increase in the numbers," said Venkateshwaran, adding the mandated spending would be in the range of Rs.10,000 crore to Rs.15,000 crore annually. 

Sidharth Birla, president of industry body FICCI, said the businesses by and large welcome the new legislation. However, some issues continue to trouble that need to be addressed by the regulator. 

"This is an evolutionary concept and will gradually evolve over a period of time. Industry is therefore anxious on the implementation of this new provision," Birla told IANS. 

The new Companies Act 2013 that came into effect from April 1, 2014, replaced six-decade old legislation Companies Act 1956. CSR has been made mandatory under the new regulation and there are provisions of penalties, in case of failure.

Venkateshwaran said the industries' concerns about the new legislation were largely related to taxation and limit on activities that fall under the ambit of CSR. 

Birla also shared a similar view and said: "The biggest concern of Industry is with respect to the impact of CSR contribution from a tax deductibility point of view." 

"Industry hopes that the ministry of finance will find it fit to ensure CSR spend remains tax-deductible, more so since this spend is an integral cost of responsible business," he said. 

Under the current income tax law, the CSR spending cannot be treated as expenditure. It will be part of profit and attract taxes. 

As per the current law, unless expenditure is in the course of the business of the company, the same is disallowed and the question may arise as to whether CSR expenditure is incurred in the course of the business of the company or not. Therefore, the CSR Rules could lead to substantial expenses being disallowed in course of tax assessments. 

"Unless the Income Tax law is also changed simultaneously, this could lead to years of protracted litigation and disputes," said Birla. 

[ - Gyanendra Kumar Keshri] [Economic Times]

Utilise CSR for Social Change

Starting tomorrow (1st April 2014), an estimated 16,000 companies will finally have to start discharging their corporate social responsibility (CSR) as per the new Companies Act, 2013. If most companies actually comply with the requirement of spending 2% of their profits on CSR, an estimated Rs20,000 crore and substantial expertise will flow to the social sector.

This tidal wave is both an opportunity and a challenge. Clearly, the funding will be of immense help given the ocean of needs in India. However, there is also a high risk of money being misspent and stolen. India has nearly three million NGOs. However, many are fraudulent and even many genuine NGOs do not have the capacity to absorb substantial funds.

On the flip side, the vast majority of companies, even otherwise-sophisticated and well-intentioned ones with a long tradition of philanthropy, do not have much of a clue about how to put their money and talent to good use. They often confuse CSR with charity and end up practicing “chequebook philanthropy” — which is simply writing cheques for random requests without any real strategy and, therefore, with very little sustainable impact. Unfortunately, many other companies are busy finding all the loopholes that will enable them to evade their responsibility.

Given this backdrop, how do you approach CSR sensibly?

First, it’s important to realise that CSR isn’t just about compliance with a new Act. It is strategic. Done well, CSR contributes to building corporate reputation and trust. This is critical because trust in businesses is very low, and people are disgusted with corrupt business practices and crony capitalism.

CSR is also a fantastic way of engaging employees. There is a growing desire among educated people to “give back” to society, and a company’s social initiatives are an excellent outlet for this desire.

Working on tough social challenges is also a good way of rounding out rising leaders, and companies that develop a reputation for doing well and doing good are able to better attract talent. Finally, CSR projects can be an important source of innovation.

Microsoft’s work in digital literacy has not only helped nearly 40 million children, it has also inspired product innovations such as Multipoint Server that enables many children to concurrently share a single PC.

Similarly, Hindustan Unilever’s work in rural markets has resulted in the Shaktiamma rural distribution model that today drives 10% or more of the company’s revenues.

Second, it is critical to have the right leadership for your CSR work. The new Act specifies that a company must set up a board committee to oversee CSR with at least one independent director on it.

This is mandatory, but insufficient. You also need to appoint a credible leader who will help shape your CSR strategy, evangelize this to employees, build external partnerships and communicate the impact being created. This cannot be accomplished by a junior manager tucked away deep in the HR department. It has to be a capable leader, well regarded in the organisation and with ready access to the CEO and senior leaders of the company.
It is equally important to pick the areas of focus for your CSR work. Investing in vocational training or literacy in communities around the company’s facilities is an obvious area.

Picking areas adjacent to your core business has great merit because these have the greatest potential to sustain. So, if you are Nestle or ITC, initiatives that help farmers is natural.

However, there are a number of desperately underfunded and important areas that are important to consider, for instance, support for performing arts or support for NGOs that are working on human rights or governance. This is a uniquely opportune time to imaginatively create a portfolio of areas where you want to have impact.

The most important thing, though, is to graduate from chequebook philanthropy to impact investing. Your company is going to be spending 2% of its pretax profits. This is a big deal and needs to be approached with the rigour of a venture capitalist. You need to have a disciplined approach with clear criteria for making grants to the most deserving non-profits.

Mutual expectations and impact metrics must be documented in a simple but stringent MoU. There must be a good process for involving employees to work with each grantee to help build capacity in specific areas like finance, IT or marketing.

Finally, there must be a disciplined annual review of each grantee as well as the whole portfolio that drives necessary course correction.

Instead of seeing CSR as an onerous imposition and a 2% tax, see it instead as a 2% investment in building corporate reputation, employee engagement and innovation. Real CSR not only renews the implicit licence to operate given by society to your company, it helps create a functioning society that we can all live in.

[ - Ravi Venkatesan, former chairman of Microsoft India, chairman of Social Venture Partners India] [Economic times]

Fuelling efficient energy management through CSR

Ensuring environmental sustainability is one of the activities that companies can take up as part of their corporate social responsibility (CSR) obligations under schedule VII of the new Companies Act.

Ensuring environmental sustainability is one of the activities that companies can take up as part of their corporate social responsibility (CSR) obligations under schedule VII of the new Companies Act. This provides an excellent opportunity for companies to contribute to India’s energy security and climate change concerns. Demand side management (DSM) initiatives are one crucial and relevant way for companies to work towards environmental sustainability.

DSM generally refers to initiatives undertaken by electric utilities/distribution companies (discoms) to motivate and facilitate their consumers to adopt select electricity saving, load management, fuel substitution (substituting electricity with, say, solar energy) or demand response measures (collectively referred to as DSM measures). DSM includes maintaining or enhancing the economics and quality of service provided to consumers.

Conserving electricity through DSM makes a lot of sense in the Indian context not only because power generation in India is the largest contributor to CO2 emissions (roughly 42-43% of total CO2 emissions of 1.745 billion tonnes in 2011) but also because the potential to save electricity through efficiency measures is huge. The Planning Commission’s ‘Integrated Energy Policy Report’ estimates that at least 15% of total generation can be saved. This translates into a potential saving of 136 billion units of electricity at today’s generation levels, or reduction of CO2 emissions by about 136 million tonnes per year at optimum levels.

The beauty of DSM is that, although the funds for facilitating it come from consumers themselves, appropriate selection of DSM measures accomplishes load and energy relief for the power utilities, respite from power cuts for consumers, and reduction of the country’s CO2 emissions—all of this economically, i.e. without burdening consumers with enhanced tariffs, and government and discoms with enhanced subsidy bills. In the Indian context, where consumers face shortages as well as spiralling tariffs, DSM by utility companies is really important.

American, European, Australian and even some Asian power utilities have mainstreamed DSM in their day-to-day operations. The usefulness of DSM can be gauged from the fact that utilities, especially in the US, are now routinely spending as much as 2-3.3% of their annual revenues on DSM. But distribution company-led DSM initiatives have hardly taken off in India, except in Maharashtra. Under the regulatory regime of the Maharashtra Electricity Regulatory Commission, mostly privately-owned utilities in Mumbai have been designing and running DSM programmes since 2005.

It is not as if no efforts have been made to introduce DSM in other states. The Forum of Regulators, a statutory conclave of central and state chairpersons, has been undertaking DSM developmental work on an ongoing basis and, as a result, a few state commissions have issued DSM regulations. But at the ground level, very little DSM work is being done. One major reason for this is the lack of conviction among the top management of state commissions and discoms about the efficacy of DSM. This has resulted in commissions and utilities not making serious efforts to gain knowledge and understanding about the what, why and how of DSM programme development and implementation. As institutions, regulatory commissions and discoms have neither the infrastructure nor the competence to undertake DSM activities.

If utilities in India are to realise DSM potential on a sustained basis, top priority will have to be given to institutionalising DSM within state commissions and discoms. It is here that Indian companies, as part of CSR, can make significant contributions by undertaking well-designed initiatives.

Such initiatives could include business firms providing assistance in conducting a series of one-to-one awareness creation and education events for top management of SERCs to secure ‘regulatory buy-in’ to the DSM concept, which would help induce utilities to take steps towards DSM. They could also assist in establishing dedicated DSM cells within state regulatory commissions to facilitate the regulatory process within the commissions. Such cells would provide necessary hand-holding support and guidance to discoms in institutionalising DSM as well as getting oriented about the what, why and how of DSM programme development and implementation.

Indian companies could also assist by providing upfront financial resources for implementing pilot DSM programmes as well as conducting consumer surveys and load research, conducting DSM and demand-response potential studies, and developing DSM-related information systems and databases to aid in planning, programme design, cost-effectiveness assessment, and evaluation. Assistance couldalso be provided in establishing dedicated DSM cells within discoms with a separate staff, budget and resources, as well as hands-on training to utilities personnel in various aspects of DSM. Later, when DSM has become an integral part of the day-to-day operations within state commissions and utilities, Indian firms can contribute by providing financial assistance to implement various DSM programmes and projects under the PPP mode. 

By choosing to further the cause of DSM in India, Indian companies would thus not only be able to fulfil their CSR obligations but also make significant contributions to the nation’s energy security and climate change mitigation efforts.

[Views by - Vijay Deshpande , Pramod Deo - The financial Express]

CSR: An equal responsibility of SMEs

SMEs play a critical role in generating millions of jobs, especially at the low-skill level. It is imperative that India works towards making the smaller enterprises CSR compliant.

Over 8,000 large companies complying to Corporate Social Responsibility (CSR) has been a remarkable policy adoption by the Indian Government. This move has put India in league with countries like Sweden, Mauritius and Norway who have robust policies on CSR for industries. But where India lags behind these countries is that the Companies Act does not successfully bring CSR into the mainstream.

India is a country of SMEs. It is imperative that India works towards making the smaller enterprises CSR compliant. Employing close to 40% of India's workforce and contributing 45% to India's manufacturing output, SMEs play a critical role in generating millions of jobs, especially at the low-skill level. The country's 1.3 million SMEs account for 40% of India's total exports. SMEs have a much wider spread, hence a wider reach across communities. We can extrapolate and comfortably say, that the geographical reach through SMEs is vastly higher than through the larger enterprises.

UNIDO on its website on CSR defines Corporate Social Responsibility as a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. The SMEs need to realise that CSR is not just about spending money. It is an ‘attitude’. The excuse of being small will only prevent the SME from becoming world class.

SMEs are equally responsible towards making living conditions better for their employees and their families. What SMEs do not realise is that CSR is the only way through which the company can achieve a balance of economic, environmental and social goals. As we move ahead in the 21^stcentury – India can achieve its dreams, and turn its burgeoning young population into an asset only if each company big or small takes on responsibility for social, educational and environmental upliftment at large. This will go a long way in creating harmony between workers and the management, while at the same time addressing the expectations of all stakeholders in business.

E-waste management, Courtesy: Pluss Polymers

The smaller enterprises need to not always spend in rupee terms for CSR. They have to first educate themselves on CSR. The UN through its UNIDO programmes in developing countries has successfully defined a Triple Bottom Line (TBL) Approach, which has proven to be a successful tool for SMEs in the developing countries to assist them in meeting social and environmental standards without compromising their competitiveness. The TBL approach is used as a framework for measuring and reporting corporate performance against economic, social and environmental performance. SMEs need to realise that profit alone will not drive them to become successful. They have to successfully integrate environment and society with economics.

UNIDO continues to articulate very appropriately that “A properly implemented CSR concept can bring along a variety of competitive advantages, such as enhanced access to capital and markets, increased sales and profits, operational cost savings, improved productivity and quality, efficient human resource base, improved brand image and reputation, enhanced customer loyalty, better decision making and risk management processes”.

At a whopping approximately 48 million, India has the second largest number of SMEs in the world, after China. While SMEs are the predominant form of enterprise in India, it is essential that they also comply to CSR standards and are reportable to the government. The government should consider modifying the Companies Act to ensure at least a reporting by SMEs on what they have done. This will force them to begin to think on those lines.

Forcing, however, undemocratic it may sound, is often a tool to initiate and change thought processes. CSR could for beginning be within their organisation – More often than not, SMEs tend to ignore the environment within the company itself. They could even look at motivating and training employees on health, sanitation, skill development, environment - these would change the immediate environment and benefit their families which in turn benefits the company.

Figure 1

CSR initiatives will begin to result in higher motivation and loyalty among employees. This in turn will lead to better production efficiencies, lower employee turnover, and eventually lower costs for companies. Very soon, organisations will see an increased sales turnover due to the competitive advantage derived from a good CSR policy.

Compliance to CSR will ensure that the bulk of SMEs undertake the following to help produce quality products and derive customer satisfaction, thereby improving the overall environmental and social surrounding of each one of them (refer Figure 1).

Large corporations have significant impact on society and environment. They are concerned about their brand reputation too. Therefore, they invest in CSR. However, it is important to appreciate that social and environmental impacts are interconnected. The two are related and have to be treated as one by everyone, whether an individual, small enterprise or large enterprise. CSR has to evolve into ISR – Individual Social Responsibility - eventually for India to become developed. Hence, it is imperative that SMEs take on this responsibility. It is the government’s responsibility to enable such a revolution, by bringing in the SMEs into the CSR act in a careful and responsible manner. The rules have to be enablers and not irritants for the SMEs. 

It is a no brainer that in India SMEs have frequently abdicated their environmental and societal responsibilities. This statement in no way implies that large organisations have become sustainable and are responsible. However, it will be fair to say that more and more large organisations have taken or are taking steps to reduce their environmental impact and in the process giving back to society, which is the very reason for their existence.

To create the sweeping change in education, environment and society that India needs, the returns from focussing on large organisations are diminishing with time. The focus has to shift to enabling SMEs to make an impact on the society and environment. The changes they can bring about, as they have done in manufacturing and contribution to the GDP, in turning India into a developed country through making an impact within their organisation and their immediate neighbourhood is enormous.

This, in no way is to imply that large organisations have become ‘sustainable’, or cannot do much to reduce their environmental or societal impacts. However, it is fair to say that a number of large companies have progressively undertaken steps and measures to improve their social and environmental performance.

It is also well known that the large organisations, being forced to disclose their wider sustainability impacts, have increasingly passed on the burden to the SMEs which form their supply chain. The significant environmental and social impacts of large organisations are hidden in their supply chains! This is because of increasing cost competitiveness. So, the government and auditors really need to get to the root of the problem.

India along with other developing countries is known for unsustainable practices of suppliers of raw materials (eg in electronics manufacturing, electroplating, dyeing or polymer recycling) or the unethical labour practices of production which is outsourced (eg in retail and clothing). These companies do not garner the same scrutiny as their large customers.

With a changing global economic landscape and the rising aspirations of the middle class in India, it is high time, SMEs begin to change themselves and factor in an attitudinal change towards the society and environment and do their bit in the progressive change required to turn India to a better place in the near future. SMEs should remember, if the society and environment around them fails, businesses will fail too. They should also consider CSR as minimising negative impact and creating positive impact in what they do every day of the week. If they begin documenting this, CSR will happen not just automatically, but within their existing resources!

[A view by - Samit Jain, MD, Pluss Polymers , courtesy- Business Standard]

How Commexes Can Bring Social, Economic Changes

Michael Porter and Mark Kramers’ magnum opus “Creating Shared Value” (CSV) is different from corporate social responsibility (CSR).

CSR programmes essentially emerge as necessary expense for a firm in a market economy to improve its reputation. CSV, on the other hand, reflects on the interconnectivity between societal and economic progress, and according to Porter and Kramer, “… has the power to unleash the next wave of global growth”. CSV postulates that competitiveness of a firm and the social development indicators are interdependent.

According to Porter and Kramer, the market economy can unleash the next upsurge of global growth only when societal concerns enter into core strategic decision-making of firms. There are three key ways in which firms can create shared value opportunities: by reconceiving products and markets; by redefining productivity in the value chain; and by enabling local cluster development.

With this premise, one needs to look at the core business of commodity exchanges. The principal objectives for which commodity exchanges have been set up in India are hedging and price discovery. While hedging is a micro-level function of the exchange, price discovery is a macro-level function, both of which, if performed properly points to inextricable entrenchment of the commodity exchange in the business of creating shared value.

Reconceiving Products

Firms can meet social needs while better serving existing markets, accessing new ones, or lowering costs through innovation. Commodity exchanges in India are doing that, though not truly to the full potential. Exchanges have been proactive in re-conceiving products such as mini- and micro-contracts thereby enabling small traders and SMEs’ access to cost-effective risk management. Services such as Exchange of Futures for Physicals (EFPs) have also been conceptualised. The potential in this domain is huge, but existing regulations act as limiting factors for further innovation, as only plain vanilla futures can be traded in the Indian commexes, and products such as options, indices, and other exotic products are not allowed.

Redefining productivity

While performing their desired macro-level and micro-level functions, in certain commodities, the commodity exchange has opened new vistas in the form of separate marketing channels. The emergence of efficient marketing channel has unlocked significant value in mentha oil, benefitting mentha farmers, processors, exporters, and consumers. The profoundness of this impact can be made out from the emergence of India as the major exporter of processed mentha crystals, displacing China. Mentha oil futures allowed processors to manage raw material risk – price, quantity and quality risks – all of which enabled Indian exporters to provide better price and delivery commitments to international buyers. Such a facility helped them consolidate at a time when Chinese exporters were defaulting on export commitments. Moreover, the high export prices of processed mentha crystals have been transmitted as high farm-gate prices of mentha oil due to the competitive structure of the trade channel, which has ultimately benefitted farmers.

Cluster Development

While documented evidence on this ground is less, there is no doubt that the potential for the comexes for cluster development is immense. It needs to be appreciated that the electronic platform makes the business operate at national levels, rather than local levels. Local cluster development, therefore, need not be thought of as merely having local suppliers or developing local infrastructure. Rather, cluster development needs to be viewed through the prism of community development. The gold ecosystem, by itself, has benefited substantially from gold futures by the process of price discovery/ dissemination and hedging, but the most critical driver of this ecosystem development is technology. Through the business model itself, there has been ecosystem development in the form of warehousing, testing, assaying, etc. According to an estimate of 2011, the commodity exchange business has given rise to employment of around 1.5 million through ecosystem development.

The movement from here

That a development of an institution like the commodity exchange brings with itself social, economic, physical, and philosophical changes was best exemplified by the history of evolution of the Chicago Board of Trade in US. While development of CBOT led to the various demands for infrastructure development, the development of enabling infrastructure also helped CBOT emerging as the prime trading forum. The importance of CBOT thus emerges from the changes in the institutional practices not only in the domain of agricultural marketing, but from the impacts that it created at the socio-politico-economic stratum of human existence. Can we see Indian exchanges moving towards that direction?

Views by - Nilanjan Ghosh, Chief Economist at MCX (I) Limited. (Views are personal.) [Business Line]

CSR - Out of the Box: Mandated corporate social responsibility hurts shareholders, not firms

Dr. Shubhashis Gangopadhyay

The new Companies Act of 2013 stipulates that all companies with a net worth of Rs 500 crore or more, or a turnover of Rs 1,000 crore or more, or a net profit of Rs 5 crore or more in any financial year will have to constitute a corporate social responsibility (CSR) committee of the board. With the help of this committee, the board shall ensure that such a company spends at least two per cent of its net average profit of the last three years on activities that have been designated as CSR activities by the government. Newspaper reports suggest that the government has identified 10 areas in which such expenditures will be eligible to be considered as CSR spending. These include eradicating hunger, poverty, malnutrition and promoting preventive health care, promoting sanitation and availability of safe drinking water, promoting education, promoting gender equality, ensuring environmental sustainability and protection of national heritage.

A technical problem has arisen. At one level, the law stipulates that the (central) government will decide what legitimate CSR activities are; however, another part of the Act states that the company’s board can identify the CSR activity that the company wants to undertake. The law ministry wants to ensure that the company chooses one from the activities mentioned and that there is no scope for the company to interpret what CSR is. In the meantime, however, the minister of corporate affairs is reported to have said that since the amount spent on CSR is the company’s money, it should be the one deciding on how that money should be spent.

The theoretical literature and empirical studies on CSR have systematically shown that CSR plays a significant role as an important part of a company’s competitive strategy. Companies can compete by lowering prices without reducing the quality of the product, or by improving the quality without any significant increases in its price. Extending this logic, one hypothesises that when people are conscious about a company’s participation in the improvement of society, the company can compete by doing more for society. Indeed, the economics literature on voluntary environmental practices by firms strongly supports this hypothesis. The same has been found for firms following fair labour practices in production. Firms use their social activities as a signal to win over consumers who stay loyal to them and employees who prefer to work for them. However, such signalling works as a competitive strategy only if participation in such activities is voluntary. If such participation is made compulsory, it is no longer a strategy – for it cannot be used by stakeholders outside the company to distinguish among firms.

The two per cent CSR rule has become like a tax on medium and large firms. Just as outside stakeholders do not distinguish among firms by the taxes they pay (unless the companies are hauled up for non-payment of taxes), CSR expenditures will no longer be a distinguishing feature of a firm unless it is hauled up for not meeting its CSR responsibilities.

If CSR was a strategic choice, then firms would participate in those social activities in which they had expertise. For instance, a company in the hospitality business could focus on running old-age homes (incidentally, I do not know if this would qualify), while a mining company could focus on paying institutions that improve forest cover or help in generating alternative livelihoods for displaced persons. Or a profit-making company involved in education could run village schools. Since these would have been voluntary, companies would have had to convince stakeholders about the efficacy of their non-profit activities. This would have forced companies to carry out independent impact evaluation studies and that would have helped policymakers understand what works and what doesn’t. Now, since such activities will become compulsory, companies will no longer feel the pressure to justify such expenditures.

This is a very important aspect of what we are getting into. While the company is a legal entity, the company’s profit is actually not the company’s money, as the minister refers to it as, but the money of the shareholders. And the reason why companies voluntarily do CSR is that shareholders do not fire the managers who use the shareholders’ money to do these activities but want their company to do them. So, essentially, what this law does is tell the shareholders of eligible companies that whether you want them to do so or not, your companies will have to spend this money in a way that the government wants them to do. So, instead of being a load on the company, it is actually a load on the shareholder.

As a shareholder, if I have a choice between investing in a company that will just about be eligible and another that is otherwise identical but just not eligible, I will invest in the latter company, since it will save two per cent of its profits for me! This will, of course, translate into a higher capital cost for the first company.

This law reflects our mindset in two ways. First, we love “out-of-the-box” ideas because, by definition, they do not follow from anything and, hence, require no justification. Second, we love to target our policies – food security and health insurance only for below-poverty-line households, employment guarantee schemes only for the rural labour, relaxation of labour laws and other sops only for small enterprises, and so on. So, the two per cent CSR rule is only for particular types of firms, and not for all businesses. One of the reasons why there are so few “out-of-the-box” ideas is that while good ideas may be out of the box, most out-of-the-box ideas are very bad.

- Views by Dr. Shubhashis Gangopadhyay, Research Director, India Development Foundation, published in Business Standard 

CSR & SUSTAINABILITY

Sustainability (corporate sustainability) is derived from the concept of sustainable development which is defined by the Brundtland Commission as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”. Corporate sustainability essentially refers to the role that companies can play in meeting the agenda of sustainable development and entails a balanced approach to economic progress, social progress and environmental stewardship.

CSR in India tends to focus on what is done with profits after they are made. On the other hand, sustainability is about factoring the social and environmental impacts of conducting business, that is, how profits are made. Hence, much of the Indian practice of CSR is an important component of sustainability or responsible business, which is a larger idea, a fact that is evident from various sustainability frameworks. An interesting case in point is the NVGs (National Voluntary Guidelines) for social, environmental and economic responsibilities of business

issued by the Ministry of Corporate Affairs in June 2011. Principle eight relating to inclusive development encompasses most of the aspects covered by the CSR clause of the Companies Act, 2013. However, the remaining eight principles relate to other aspects of the business. The UN Global Compact, a widely used sustainability framework has 10 principles covering social, environmental, human rights and governance issues, and what is described as CSR is implicit rather than explicit in these principles.

Globally, the notion of CSR and sustainability seems to be converging, as is evident from the various definitions of CSR put forth by global organisations. The genesis of this convergence can be observed from the preamble to the recently released draft rules relating to the CSR clause within the Companies Act, 2013 which talks about stakeholders and integrating it with the social, environmental and economic objectives, all of which constitute the idea of a triple bottom line approach. It is also acknowledged in the Guidelines on Corporate Social Responsibility and Sustainability for Central Public Sector Enterprises issued by the DPE (Department of Public Enterprise, Govt. of India) in April 2013. The new guidelines, which have replaced two existing separate guidelines on CSR and sustainable development, issued in 2010 and 2011 respectively, mentions the following:

 “Since corporate social responsibility and sustainability are so closely entwined, it can be said that corporate social responsibility and sustainability is a company’s commitment to its stakeholders to conduct business in an economically, socially and environmentally sustainable manner that is transparent and ethical.”

(courtesy: PWC handbook on CSR)