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)

An Introduction : What is Corporate Social Responsibility?

“Corporate Social Responsibility is a management concept whereby companies integrate social and environmental concerns in their business operations and interactions with their stakeholders. CSR is generally understood as being the way through which a company achieves a balance of economic, environmental and social imperatives, while at the same time addressing the expectations of shareholders and stakeholders. In this sense it is important to draw a distinction between CSR, which can be a strategic business management concept, and charity, sponsorships or philanthropy. Even though the latter can also make a valuable contribution to poverty reduction, will directly enhance the reputation of a company and strengthen its brand, the concept of CSR clearly goes beyond that.”

– United Nations Industrial Development Organization (UNIDO)

 It should also be kept in mind that :

• The CSR approach is holistic and integrated with the core business strategy for addressing social and environmental impacts of businesses.

• CSR needs to address the well-being of all stakeholders and not just the company’s shareholders.

• Philanthropic activities are only a part of CSR, which otherwise constitutes a much larger set of activities entailing strategic business benefits.

PHILANTHROPY vs. CSR

When a business decides to donate a portion of profit to a charity, this action qualifies as philanthropy. In this case either a one-time or ongoing commitment is made to give money to a non-profit organization, and that organization uses the money to further its mission. Social responsibility involves adopting responsible behaviours for the business. Corporate social responsibility of a company encompasses any practice that improves the lives of its work force, community and the environment.

Corporate Philanthropy and Employees:

When a business donates money to charity, the employees may not be directly affected, and they may not be aware of the company’s charitable actions. Philanthropy decisions come from owners and chief executive officers. While employees may be made aware of the charitable contribution, they are seldom consulted about which charity the company chooses to contribute to.

Social Responsibility and Employees:

When a campaign is launched to make a company more socially responsible, employees can participate actively to make it a success. In fact, employees can head efforts to clean up the community, paint and repair schools, start recycling programs, collect donations for the underprivileged, conduct blood drives or reduce company waste.

Corporate Philanthropy and Company Gain:

In philanthropy, the peers and the public do not expect the company to gain from it, according to the Gulf News website – “Publicizing your philanthropic efforts as a way to improve your company reputation can backfire. If you leave publicity up to the charity, you may benefit without appearing to be self-serving”.

Corporate Social Responsibility and Company Gain:

The business can publicize its efforts to be socially responsible. The public tends to accept this and may respect the company for boldly stating that social responsibility is a corporate duty. If the community and the customers can be involved in helping the efforts to engage in socially responsible business, goodwill for the company can be created. This goodwill can translate into loyal customers and positive brand recognition.

Corporate philanthropy and social responsibility are different but not mutually exclusive. One can engage in both. Since philanthropy and social responsibility come with costs, one should evaluate the extent of one’s financial commitments before making them. Engaging in philanthropy and social responsibility simultaneously can help others while establishing a company as a good neighbour and generous giver.

CSR IN INDIA
With the passage of the Companies Act, 2013 the mandate for corporate social responsibility (CSR) has been formally introduced to the dashboard of the Boards of Indian companies. The Industry has responded positively to the reform measure undertaken by the government with a wide interest across the public and private sector, Indian and multinational companies. Under the new Companies Act, mid and large companies have to spend 2% of their three-year annual average net profit on CSR activities. 

The activities which can be included by companies in their CSR policies include: eradicating hunger, poverty, malnutrition and promoting preventive healthcare, promoting sanitation and availability of safe drinking water, promoting education, promoting gender equality, ensuring environmental sustainability, protection of national heritage, etc. Those spending for the benefit of armed forces veterans, war widows and their dependents would be eligible to cover the expenses under CSR spending rules.

Under gender equality activities related to empowering women, setting up homes and hostels for women and orphans, setting up old age homes, day-care centers and similar facilities for senior citizens and projects on reducing inequalities faced by socially and economically backward groups have been included.

Spending on training to promote rural and nationally recognized para-olympic and Olympic sports would also qualify for credit under the CSR rules. Rural development projects and contributions or funds to technology incubators located within academic institutions and approved by the government would also be approved under this category.

The importance of CSR has emerged significantly nowadays. CSR in India expanded to include economic and social interests. Along with this it also broadened to cover environmental interests. Companies have become more transparent in accounting and display ‘public reporting’ due to pressures from various stakeholders. It is possible for companies to behave in the ‘desired’ ethical and responsible manner towards consumers, employees, communities, stakeholders and environment. They have started incorporating their CSR initiative in their annual reports.