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Policy Papers

Corporate Social Responsibility and Creative Government in India

From Greenwashto Green shoots?

India’s 2011 Companies Bill has just been passed. It heralds a new era in Corporate Social Responsibility (CSR), not just in India but internationally. Under the new law companies above INR 500 Crore in revenues (around USD90 m)are required to earmark 2% of their net profits to CSR activities and to report those activities in their annual report.In introducing the legislation the Minister for Corporate Affairs stated this was ‘the first time, and historically it may be the first time in the world, that a country considered mandating expenditures for the public good, rather than simply taxing companies or leaving them to their own devices.’

This is remarkable, especially in the context of India’s business community, which has to datebeen slow to adopt CSR and taking a more traditional philanthropic approach. Thoughelements of this community have been opposed to the new legislation, arguing that it goes against the core principle of voluntarism inherent in the philosophy of CSR, many are now embracing it. For instance in the wake of the new legislation CSR Chapters are being set up in different cities, engaging business and community stakeholders.

It is interesting to consider the origins andimplications of the new law.

Origins

So how has this law come about?

The idea of earmarkingCSR funds from profits lies in the consensus that now exists in India both in business (especially larger companies such as Tata, Wipro, and Infosys) and wider societythat business should ‘give back’ to society, andhas an important role to play in helping to alleviate India’s persistent poverty. Indiaremains home to the largest concentration of poverty in the world, despite the massive economic growth that the country has been witnessing. Voluntary philanthropic targets have been jointly set by Government and industry but to the government’s frustration these have not been met. Faced with the choice of higher business taxes or mandated CSR spend, the Government has vision and decided that mandatory CSR is the better solution.

In fact the 2011 Companies Bill is far widerreaching than just CSR, and is far from being anti business, seeking to liberalise and align the outdated Indian business legal framework with those of more developed countries , partly with a view to enhancing the flow of foreign investment into the country.So it is not just the actions of Indian companies that will be impacted by the CSR measures, but also those of inward investors seeking to gain the goodwill of the communities they will be working with.

Implications

One should inject a healthy dose of scepticism at this point. The legislation will not engender a new love of philanthropy. The legislation is inherently difficult to enforce and some businesses will undoubtedly seek to implement it cynically. Yet the measure has its business supporters too, and CSR is part of an inevitable march towards more responsible governance in all areas. There are many businesses already, in India and elsewhere, who see CSR as a win-win opportunity to both do good for the community and for their business. Ultimately it will be the interested stakeholders (customers, communities and shareholders) who are driving this march. As they become more knowledgeablethrough the communication revolution and social media about which businesses are really trying and which are only pretending, they will punish the latter through customer disloyalty or in other ways. Once that starts to happen genuine CSR will rapidly become the norm, and businesses will ignore it at their peril. The pace of change may be tempered by the need to focus on growth and overcoming recessionary pressures, but nonetheless it will accelerate in the months ahead.

It is perhaps exporters and inward investors that will lead the way. It is they that have the most tolose and win in the short-run.

On the one hand Indian companies seeking to export will be facing increasing pressures not just at home, but also in their export markets. EU economic policy and that of its members , not to mention the expectations of customers, are increasingly requiring effective socially and environmentally responsible corporate governance. For these companies effective CSR is already becoming a licence to trade, and they had better become good at it quickly or they will find penetrating, or retaining share in, the EU market more and more difficult.

On the other hand European companies have fared poorly in exporting to India. Their effective CSR activities oriented towards Indian society as a part of these companies’ investment strategy could help change that. Of course the CSR measures of India’s2011 Companies Bill may be seen as protectionist in this context – adding through these CSR measures yet another barrier to trade. Yet European businesses have in general been more advancedin adopting CSR than Indian businesses, and may surprise at their ability to surmount this obstacle, given the opportunities they have in India known for its ‘social diversity’.

Opportunities

All of thissignals interesting days ahead for thosein business, government and civil societyengaged in defining and implement helping company CSR activities. The challenges and opportunities will exist, not just for those companies who embrace the legislation (many companies do support it in fact), but also for the communities and agencies who they must work with to make their CSR initiatives a reality.

Compared to the normal model, where taxes are paid to the state, and the state invests in social improvement, the Indian model, in mandating CSR spend from profits made holds interesting advantages. Part of the thinking behind the Bill is that companies might best focus their CSR contributions in the area of their expertise. So, for instance,telecoms companies might focus on telemedicine and chemical companies on alleviating pollution. This should in principle facilitate innovative initiatives based on strong know-how.

Experience shows however that to make this happen will require a combination of enlightened business leadership on the one hand, and strong community representation on the other.A recent survey in India showed that it was not just business that was backward in its adoption of CSR, but also local agencies representing communities who could benefit from CSR who are poor at knowing how to negotiate CSR initiatives effectively. There is then a job of work to be done both in briefing CEO and community leaders on the changing paradigm and the implications for them, as well raising awareness of roles and responsibilities in business and agencies. Work also needs to be done in skilling CSR managers in business and the community in the tools for developing and implementing appropriate CSR initiatives. Finally there is a need to create an effective market to match up the supply side – the resources of companies implementing CSR - with the needs of communities for social or environmental improvements.

Green shoots

The TERRE Policy Centre, with its focus on brokering practical solutions to sustainability between business and community stakeholders, and it’s location in Maharashtra the second largest industrial region of India, is strategically positioned to contribute to these challenges. It is for this reason that we are launching a much needed initiative, the Green Shoots Network to support business and communities in their CSR endeavours.

The challenges are great. But the omens are also good. Though it will take time, there appears to be only one direction in which this is all going. For years a voluntary corporate social responsibility was considered, rightly, by many to be more public relations than substance. The tide has turned. Stakeholders are expecting substance now, and legislation in India and Europe is shaping the future.

The word ‘free’ in the term ‘free trade’ may in the future turn the connotations it currently has among many for ruthless business practice, into a connotation of a new business led enlightenment, of new green shoots of economic growth. TERRE considers that the moment has come that Green Shoots will transform into Green Industry and Green Societies. It is a dream well worth pursuing.

There will be more about this in coming days through our activities, our web site and our news letter.

 

Simon Hodgkinson, Advisor, New Technology, Strategic Management & Capacity Building Projects

Simon Hodgkinson

Advisor,
New Technology, Strategic Management & Capacity Building Projects