Corporate Social Responsibility in India: Linking CSR and R&D

Corporate Social Responsibility (CSR) is the self-regulating mechanism by which businesses ensure to comply with globally agreed upon ethical norms and standards, and engage in actions for wider social benefit, such as acts to mitigate their impact on the environment, improving the labour conditions of the workforce or giving back to the community within which they operate.

The CSR process ultimately involves corporations taking responsibility for the impact of their activities, working positively towards, for example, mitigating environmental damage through cleaning up after industrial production; empowering local communities through the building of schools and hospitals; increasing consumer satisfaction by enabling them to buy sustainable and responsible products; enhancing the labour environment; rewarding employees monetarily and by providing them with other services such as childcare, educational opportunities, and/or professional training opportunities.

Corporate Social Responsibility in India

The importance of CSR was recognised by the Indian government in the Companies Act 2013, which was passed by Parliament in August 2014. The Act remains salient and was the first Indian law to include provisions for expected CSR expenditures. According to the Act, companies with market capitalisation of over five billion Indian Rupees (INR) (approximately 60 million EUR) are expected to spend at least two percent of their annual net profits on CSR activities. Although they are free to invest this as they see fit, the funds must be utilised based on areas specified in Schedule VII of the Act, or deposited into a fund prescribed under the Schedule. 

Additionally, details of this spending must be legally included in annual reports. The rules also require listed firms to establish a CSR committee among their board members, which must include at least one independent director. Budgetary allocations are based on profit after tax and remain subject to approval by the Board of Directors. Companies and individuals who fail to comply with these targets risk being fined between twice the amount required to be transferred to their CSR fund or 10 million INR, whichever is lower, for defaulting companies. In addition, a fine of 1/10th of the amount is required to be transferred into a Schedule VII fund, or a maximum of 200,000 INR for defaulting officers. This is a shift from the original form of the act, which has been amended over the years for greater clarity and applicability. For example, the addition of financial penalties for non-compliance shows that the Act has shifted from a ‘Comply or Explain’ regime, to a ‘Comply or be Penalised’ regime since its enactment. 

There have also been substantial changes to the definition clause of CSR Policy Rules by defining new terms like Administrative Overheads, International Organisation, and Public Authority. In addition, a negative list of activities, which are not considered CSR activities, has also been introduced. These include activities undertaken in the normal course of business, activities undertaken outside India, contributions to political parties, activities that significantly benefit employees (measured as benefitting more than 25% of employees) and their families, and activities supported on a sponsorship basis for deriving marketing benefits for products or services. Additionally, the R&D activity of new vaccines, drugs and medical devices related to COVID-19 is a permissible CSR activity for the fiscal years 2020-21 through to 2022-23.

The act was a game-changer, as it revolutionised the administration and management of businesses. It brought the Indian business environment closer to international norms and standards, thus providing scope for greater economic growth and expansion of the Indian economy by facilitating foreign investment and international mergers and acquisitions. However, while the legislation provides the opportunity, it is still up to businesses and companies to take initiative and capitalise on this.

Despite the fall in spending due to the Covid-19 pandemic, for example in 2021, when CSR spending dropped by 64%, Indian companies still contributed massively, both monetarily and in kind, to anti-Covid 19 efforts with their Schedule VII CSR spending. India’s largest conglomerate, the Tata Group, spent nearly 10 billion INR on CSR activities in the 2021 fiscal year, while Reliance industries spent 9.2 billion INR on social causes. Reliance also contributed 5.6 billion INR to the Centre and various state governments’ Covid Relief Programmes, such as the national PMCARES initiative. These contributions have proved vital in the fight against the pandemic and brought a lot of goodwill to these companies.

The continued ability of the Indian industry to take advantage of spending on CSR can be affected to a great extent by further professionalisation and clever management of such spending. One of the most efficient ways to do this is for companies to channel their CSR expenditures into internal environmental and social research and development (R&D) projects. In doing so, they not only fulfil their obligations as responsible corporate citizens, but also spearhead investment in innovation and technological development, which will ultimately help them to move forward, and stay ahead of the competition. This also helps in avoiding wasteful CSR spending (such as funding initiatives that are not required in an area), which may not have a sufficient social or environmental impact when brought forth. Therefore, firms should see mandatory CSR spending not as an enforced burden, but rather as an opportunity to invest back into their company and the wider society.

Thus, it remains important to explore the possibilities for combining CSR investment with environmentally and socially friendly R&D. Environmental R&D aims to promote the concept of clean technology and eco-innovation and to stimulate the development of new technological and systemic solutions to global environmental challenges for the medium to long term. The ageing infrastructure prevalent in Indian industry provides scope for improvement, particularly in reducing the industrial environmental footprint, which has increasingly become a concern over the past few years. 

Rather than handing over and outsourcing two percent of their profit to NGOs to spend on charitable programmes, companies should consider and address the social and environmental impact of their own business and industry. The mining industry, for example, has been responsible for great ecological damage over the years. Instead of donating to unrelated causes or outside agencies such as NGOs, corporations could utilise internal experts and invest in R&D divisions within their company. This would help devote CSR finances to improve and directly strengthen their environmental R&D and provide further income opportunities. Mining companies possess the critical mass to produce cutting-edge clean-tech, and thus be at the forefront of green mining and the green economy, not just nationally but also globally.

The potential for companies to invest in environmentally and socially responsible R&D still remains underexplored but could greatly benefit corporations, either technologically, financially or socially. R&D can help a firm obtain competitive advantage as it not only leads to the development of new products, but also improves product design and makes it more environmentally compliant, thus fitting well with CSR requirements. It can also lead to instances like reduced energy wastage.

By enhancing energy and production efficiency, a company ultimately improves its productivity and profitability. Productivity is also boosted by positive and favourable working labour force conditions. One of the biggest problems in sectors like construction, mining and ship recycling is the reported poor status of workers compared to other industries. In this regard, environmental R&D can also help improve working conditions, thus increasing their productivity, as better paid and compensated workers cared for with improved working conditions tend to be more productive.

Professionalising CSR management in a company is also a valuable marketing tool, as many consumers value companies perceived as socially responsible, which in turn helps increase the company’s revenues. Studies have demonstrated that many consumers prefer the goods they purchase to have certain socially responsible attributes or to be produced in a socially responsible manner. The importance of CSR for a corporate image can be particularly relevant for the banking sector. Ethical banking has been relatively slow to catch on in India, despite the country’s enormous potential.  Serving human needs including a healthy environment and financial sustainability, banks can do much to help impact living and working conditions in India, especially given the COVID-19 pandemic and its consequences.

In the public sector, the State Bank of India has previously launched a green banking policy, having set up windmills in Tamil Nadu, Maharashtra, and Gujarat to generate clean energy. It was the first Indian bank to promote green power projects and launch Green Housing plans. In the private sector, Axis Bank and ICICI Bank have set up their own charitable foundations. Other banks engage in CSR activities, generally not related to banking, while there is a lot more that banks could do in terms of green banking. This includes making their financial products and loans more stringent and compliant with the objectives and norms of green and ethical banking, such as green loans and investments in eco-friendly construction, urbanisation, infrastructure, and manufacturing projects. Deeper engagement in green banking could take the form of jointly set up/coordinated ethical banking centres, administered by a group of banks. Policy coordination also significantly enhances participating banks’ images and brand reputations among consumers.

In short, the professionalisation of CSR brings tangible economic benefits for companies across sectors of the economy. Ultimately, social and economic performance are not mutually exclusive. On the contrary, they often enjoy a symbiotic relationship where success in one leads to success in the other. Recognition of this dynamic is important for the global growth of the Indian economy, especially in view of post-pandemic recovery. India’s explosive economic growth in a time of great environmental change requires further professionalisation of CSR in the country’s business sector. CSR investment in R&D will become essential, as truly innovative eco-technology is the key to allaying environmental concerns about India’s industry growth. Ultimately it can help India to move forward on its path to sustainable development, in line with global climate change conventions.

To this end, governments and administrations have separated their avenues from corporations to help further professionalise CSR spending and increase its impact.

In terms of Public Policy, collaborating with NGOs and wider civil society remains key, bringing together local expertise to interact with people in the region and lead them to more directed action. India should also legally standardise practices such as waste recycling and emissions reduction across its industry, in line with India’s Sustainable Development Goals (SDG) and COP26 obligations. Finally, while public funding to R&D must increase to at least two percent of GDP, India must also push for collaboration with public institutions and universities, as many companies already do with institutes like the Indian Institute of Technology (IITs). It should also increase public funding for green technology research.

In terms of Corporate Policy, companies must staff CSR divisions with well-trained and experienced professionals, which would allow for a formal framework for sustainability reporting and implementation. It must also ensure continued, regular and well-conducted training programmes. Moreover, while collaborating with civil society, companies must base their CSR programmes on the needs of the local population, promote their participation and create jobs and economic activity in the community. Companies can also enter into voluntary certifications based on common collaboration, which would mark companies seen as adequately giving back to the community. This would work as a powerful marketing tool and could be used to increase interest in their products as they would be seen as environmentally and socially responsible, and thus good partners for collaboration and investment.

To conclude, there is sufficient evidence that corporate social responsibility is beneficial not only to society, but also to the companies engaging in CSR activities. Although many businesses already have established CSR strategies, this has generally taken the form of financial support for NGOs or other charitable causes, and often does more to attract the goodwill of customers and stakeholders, rather than have any substantive, long-term impact.

As companies are now expected to spend a certain percentage of profits on CSR, and are legally required to produce annual CSR reports, it has become increasingly imperative for businesses to professionalise and integrate their CSR strategies into their business functions. CSR requirements should not be seen as a social obligation or burden, rather, they should be embraced as an entrepreneurial opportunity, open to many.

Indian industry has already taken big steps towards the professionalisation of CSR, and the implementation of CSR-minded processes and procedures. However, there remains scope for much greater action, particularly in the use of R&D to find responsible and profitable innovations and methods, and for companies to further mitigate any environmental impact and damage they may cause.

Author: Aadil Sud, EIAS Junior Researcher

Photo Credits: Unsplash