Building Bridges: Sustainability and Corporate Social Responsibility

10th Oct 2014 Sustainability

The changing landscape of India’s Corporate Social Responsibility Policy is beginning to shed light on a part-solution for encouraging and boosting sustainability. Earlier this year, India became the first country in the world to bring a mandatory CSR spending to the table. While being the initiator, and a necessary one perhaps, the Indian policy framework is perhaps not fully developed to accommodate the implications of imposing a mandatory spend. The conversion of the de rigueur social responsibility dialogue to action seemed to spark sufficient negative reaction to the policy. Apprehensions that the CSR spending requirement would trigger a forced, evasive behavior and, consequently, carpet the real issue of targeted impactful spending were expressed by industry leaders, policy experts and related entities. These apprehensions are not without reasonable cause – the Indian shadow economy is designed, structured and maintained by a robust persistence of tax-evasive behavior. The introduction of mandatory CSR spending floor reinforce similar tax-evasive strategies on a large scale, and under the garb of socially responsible spending, making it all the more difficult to reverse the initiative.

The Bill has also been criticized for encouraging a direct linkage between spending and social initiative. It is argued that without imposing channels for spending and directing the funding towards complementary industry-specific entities, it will be scattered and distributed. Additionally, a simple 2% spending by large corporates, it is argued increases direct funding and support to non-profits and charitable organizations. While this is not necessarily a bad thing, the long-term growth of such organizations is dependent on a self-sufficient revenue model, and independence from external funding.

Preliminary estimates arrive at 8000+ companies that are within the applicability of the new CSR Bill with forecasted spending at about 15,000 cr. With the challenges as listed out above, and the lack of defined channels within the sector, the flow of large amounts of capital could have a damaging effect overall. Lastly, many see the CSR bill as a potential floodgate for ‘greenwashing’ initiatives – where spending is essentially targeted at corporate activities that are, in addition to being profitable, also sustainable.

However, proponents of the CSR mandate see it as a strong tool designed by the Government to indicate the manner and limits within which the Indian growth story will unfold. They believe that the biggest gainers from the changed framework are the social enterprises and Small and Medium Enterprises, who can feed off from long-term institutional financial support from larger corporations. The promise of corporate spending and corporate initiative in developing large umbrella projects to finance multiple smaller ventures is indeed exciting despite the need for capacity building in the sector. Most of the support coming in for the CSR bill is in the form a prospective gain, like a Phoenix from the ashes. The anticipation that a slew of measures will be unfurled from the private sector to create high-impact vehicles for the delivery of socially responsible initiatives is undoubtedly high.

On an academic note of relevance, it is to be noted that the strength of the policy derives from certain fundamental factors, one of which is the legal origin, i.e. the legal system that births the said policy and gives it the force of law. Within this context, the predominant view has held that the law is, historically and structurally, tied closely with shareholder protection as opposed to the management of stakeholders’ interests. Studies have demonstrated that common law tends to share a greater linkage with shareholder-protection whereas civil law shares a greater linkage with stakeholder-preservation. The distinction is highly significant for understanding sustainability through a CSR lens – shareholder preservation rests on supremacy of the fiduciary duty to shareholders whereas the stakeholder paradigm holds that the company’s existence and growth should be complementary to the ecosystem of stakeholders that surround it. Additionally, the broader civil-common law distinction perhaps reflects the conventional presumptions of Scandinavian and European nations adopting more sustainable practices than the common law nations. With this context for discussion, these developments through instruments that mimic the civil law system – statutory policy brought into force through parliament, are encouraging.

One segment of the CSR ecosystem that shows promise of reaping the benefits of a strong 2% spending mandate is the sustainability sector. The booming economic growth of the emerging economies will entail heavy industries, urbanization, energy-consumption, water-shortages and other necessary costs associated with fast economic growth. According to a forecast by the Economist Intelligence Unit (EIU), the annual growth rate in the economies of Brazil and Russia will be marginally over 4% till 2017 while those of India and China will be around 8% and 9% respectively.

Sustainability has emerged as the buzzword over the last decade or so, as it is most deeply and relevantly reflected in the United Nations’ nomenclatural changes. We have now moved from Millennium Development Goals to Sustainable Development Goals. The last decade has also triggered a shift in priorities from development to sustainability leading to some sharing of resources between the two valuable outcomes. Given the limited share of the global resource pie that accrues to charitable and philanthropic causes, the prioritization of sustainability over the past decade has significantly strengthened our ability to address the challenges.

The Bruntland Report definition of sustainability assumes a special significance when one takes sustainable development as a sovereign obligation limited by territorial boundaries. The implications and the width of the challenge for countries such as India are immense – with a fast accelerating economy as well as a burgeoning population, balancing the growth necessitates a reconciliation between growth and control, thus, creating a sustainable solution. As the global race for bringing down the cost of clean technology heats up, market dynamics are likely to enable a prioritized allocation of financial resources towards greener entities. As these BRICS countries are central hubs of economic growth, it will be an exceedingly difficult task for the member nations to keep pace with the pressing challenges that emerge from economic growth without harsh limitations.
The burgeoning rise in investments and resources towards a ‘greener’ approach to business and technology creates an environment where the corporation can embrace CSR while maintaining the firms’ interests in maximizing shareholder value, and perhaps, especially relevant for the emerging economies.

Original image available here.

The Author is a member of Oval Observer Foundation. The views expressed here are solely those of the author and do not necessarily reflect the opinion of the Foundation, its partners and affiliates.