India’s CSR Story

The Indian Companies Bill is a remarkable piece of legislation. With one stroke, it has mandated CSR spending across a multitude of companies. It is the result of months of discussions with NGOs, companies, politicians, and bureaucrats, and it is estimated that $3 billion in capital will be generated annually through the money spent by 16,000 companies on CSR (2% of net profits).

This has happened amidst energetic debate in the Western world arguing against the need for legislating CSR. But India operates in a unique context. Our health, water, sanitation, illiteracy, and poverty problems are immense. Scalable, high-impact, innovative solutions – driven in part by legislation, enterprise, and personal action – are the only way out.

The task now is to convert the opportunity that this legislation provides into tangible outcomes that not only comply with the law but also highlight the larger vision of the organizations they impact. The unique culture, skills, and intrinsic abilities of Indian companies to innovate can establish new ways to support society and build their brands. CSR solutions can take the form of collective funds for greater impact, financial innovation, and new social impact models.

Targeted CSR spends

A study of the Global Reporting Initiative on Indian companies reveals CSR investments in a multitude of areas. However, the new bill gives legitimacy only to select areas where these funds need to be invested. Some of the areas covered include poverty, education, gender equality, health, and environmental sustainability. Under the new rules, companies would need to clearly distinguish those activities that are undertaken specifically in pursuit of the normal course of business and those that are done incrementally as part of their CSR initiatives. Expenses incurred during the normal course of business cannot be classified as CSR expenses – even though the expenditure is for CSR-related purposes.

Pooling together resources to reach scale

Before the new rules were mandated, an important question arose: Rather than simple charity, can corporate India collectively fund efforts to solve common problems? For example, large food and drink companies can together target the waste that their product packaging generates. Automotive companies can pool resources to address road deaths and unsafe driving. Steel companies, which are large consumers of water, can work with local communities to recharge underground wells and help provide safe water solutions. Together, these corporations can leverage the kind of scale and longevity needed to solve these deep-rooted problems.

The rules have given legitimacy to the idea of pooling of resources, thereby enabling companies to enhance their spending capacity on bigger CSR projects. Companies belonging to the same group can set up a nonprofit trust and can join hands with other companies to undertake CSR projects jointly.

Financial innovation

To ensure that the mandated money is spent well, innovative financial products such as social impact bonds are critical. Experimenting with such instruments will allow for formal relationships to be formed that are based on outcomes and follow stringent audit rules. Achievement of outcomes will ensure that the money is spent wisely and that social benefits are achieved. The broader impact will be to help in channeling financial resources toward areas that have social or environmental benefits. The creative use of funds will definitely help improve the lives of all people, not just those in proximity of a company’s plants, but also broader society. Using financial tools innovatively can potentially raise social levels dramatically.

Scarcity of talent

For many corporations, this strategic shift is difficult, and it is compounded by the scarcity of CSR talent to create scalable long-term strategies and implement them. Although several thousand jobs will be created because of this Bill, several CSR jobs at all levels lie vacant. The big questions in these nascent CSR departments include: What causes should be supported? How can efforts be scaled? How can these efforts be implemented without losing focus?

Rise of the CSR agency

With CSR expenditures expected to be large and with scarce trained resources, growing the CSR department will be a slow process at most companies initially. Many are predicting the rise of the CSR agency – an intermediary firm – which will serve as the go-between. They will take the funds and distribute them to NGOs, ensuring that efforts are consistent, accounted for, and scalable. The agency could also help companies with other aspects such as training, verification, impact assessment, and ongoing audits.

Reporting and disclosure

The realization that CSR projects can no longer be charitable contributions and that they need to be accountable for impact is slowly hitting home. It is worrying for many that they can have a significant impact on brand and corporate reputations.

Our study of sustainability reports indicates that the quality of reporting leaves much to be desired. With information flowing from both internal as well as external sources (e.g., CSR agencies), ensuring high-quality reportage will be complex. This may lead to the growth of specialized agencies (e.g., CSR auditors) to ensure high-quality reporting and minimize the information asymmetry that currently exists – much like the American ecosystem, which has mushroomed a marketplace of organizations and agencies to support corporations’ efforts in CSR reporting, verification, etc.

This is an exciting time for India and CSR. The future is uncertain, but there is also hope – that corporations will finally do more of the right things and tell more about it!