Corporate Social Responsibility (CSR): Types, Importance, Issues

With nearly two-thirds of India still living in poverty by today’s standards of living and the climate situation deteriorating by the day, the importance of CSR cannot be overstated. Companies must take CSR compliance more seriously and responsibly.

A properly implemented CSR concept can also provide a number of competitive advantages, including improved access to capital and markets, increased sales and profits, cost savings in operations, and improved productivity and quality. It also improves human resource efficiency, brand image and reputation, customer loyalty, and decision-making and risk-management processes.

This topic of “Corporate Social Responsibility (CSR): Types, Importance, Issues” is important from the perspective of the UPSC IAS Examination, which falls under General Studies Portion.

What is Corporate Social Responsibility (CSR)?

• In general, the term “Corporate Social Responsibility” refers to a corporate initiative to assess and accept responsibility for the company’s environmental and social impact.
• Clause 135 of the Companies Act, 2013 governs the concept of CSR in India.
• India is the world’s first country to mandate CSR spending as well as a framework for identifying potential CSR activities.
• The Act’s CSR provisions apply to companies with an annual turnover of Rs. 1,000 crore or more, a net worth of Rs. 500 crore or more, or a net profit of Rs. 5 crore or more.
• The Act requires businesses to form a CSR committee that will recommend a Corporate Social Responsibility Policy to the Board of Directors and will also monitor it on a regular basis.
• Companies are encouraged to spend 2% of their average net profit over the previous three years on CSR activities under the Act.

What are activities under CSR?

Schedule VII of the Act specifies the indicative activities that can be undertaken by a company under CSR. Among the activities are:

• Eradicating extreme hunger and poverty
• Promotion of education, gender equality and empowering women
• Combating HIV-AIDS and other diseases
• Ensuring environmental sustainability
• Contribution to the PM’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief.

Types of Corporate Social Responsibility (CSR)

There are four major types of corporate social responsibility. A company may choose to participate in any of these separately, and a company’s lack of involvement in one area does not prevent it from being socially responsible.

1. Environmental Responsibility:

Environmental responsibility is the cornerstone of corporate social responsibility, which is anchored in protecting mother nature. A company can ensure that it leaves the environment in better shape than when it arrived by conducting its operations as efficiently as possible and supporting relevant causes. Environmental stewardship is something that many businesses strive for.

2. Ethical Responsibility:

The cornerstone of corporate social responsibility, ethical responsibility is based on acting in a just and moral manner. Although external factors such as client demands can have an impact on ethical goals, businesses frequently set their own standards.

3. Philanthropic Responsibility:

Philanthropic responsibility is the underpinning of corporate social responsibility, and it questions how a business behaves and how it contributes to society. In its most basic form, philanthropic duty refers to how an organisation allocates its resources to better the world.

4. Financial Responsibility:

Financial responsibility is the component of corporate social responsibility that connects the three previously mentioned areas. A company can set goals to become more environmentally conscious, morally upright, and charitable, but these goals must be supported by financial investments in programmes, grants, or product research.

What are the Advantages of Corporate Social Responsibility?

As important as CSR is for the community, it is also beneficial to businesses. CSR activities can help employees and corporations form stronger bonds, boost morale, and help both employees and employers feel more connected to the world around them. Aside from the environmental benefits, here are some other reasons why businesses pursue corporate social responsibility.

1. Company reputation:

Customers are becoming more aware of the impact that businesses can have on their communities, and many base their purchasing decisions on a company’s CSR efforts. As a corporation increases its CSR efforts, it is more likely to have a positive brand reputation.

2. Investor Relations:

Implementing CSR strategies has a positive impact on how investors feel about a company and how they evaluate its value, which can give businesses a competitive advantage and help them outperform the market.

3. Employee Satisfaction:

Non-financial work benefits tied to SR that align businesses and employees strengthen employee retention. Believe in sticking with a company if you work for one. As a result, there will be less churn, less dissatisfied employees, and lower overall hiring costs. Companies can reduce risk by adhering to CSR guidelines, avoiding potentially hazardous situations, and participating in beneficial initiatives.

5. Better Decision-Making:

When making decisions, managers will be forced to consider a variety of economic, social, and ethical factors. Decisions are made with the public, employees, and the company’s long-term interests in mind, which improves decision-making.

6. Tax benefits:

The money spent on CSR is tax deductible, which helps the company’s profits grow.

What are the Problems with CSR Compliance?

Finding the Right Partners:

Despite growing awareness of the importance of CSR compliance, the challenges of identifying the right partners and projects, as well as selecting projects that have long-term impact, are scalable, and self-sustaining, remain.

Lack of Community Participation in CSR Activities:

• The local community is not interested in participating in and contributing to companies’ CSR activities. This is largely due to the fact that local communities have little or no knowledge of CSR, as no serious efforts have been made to raise awareness of CSR.
• The situation is exacerbated further by a lack of communication between the company and the grassroots community.

Transparency Issues:

• Companies have stated that there is a lack of transparency on the part of local implementing agencies because they do not make adequate efforts to disclose information on their programmes, audit issues, impact assessment, and fund utilisation.
• This reported lack of transparency has a negative impact on the process of building trust between companies and local communities, which is critical to the success of any local CSR initiative.

Non-availability of well-organized NGOs:

There is a lack of well-organized NGOs in remote and rural areas that can assess and identify real community needs and collaborate with businesses to ensure successful implementation of CSR activities.

How can CSR become more effective?

Companies’ Role:

• Beyond simply allocating funds, companies must conduct regular reviews of CSR compliance progress and implement some measures to take a more professional approach to the issue. They should also establish clear objectives and align all stakeholders with them.
• It is also critical that they inform their NGO partners of their business requirements. Companies that award money from their CSR budgets should be aware that the causes they choose are genuine.
• Companies must also update the roles of the Board, CSR Committee, and CFO, as well as establish new SOPs, including a defined process for fund utilization, determine the applicability of impact assessment, prepare a detailed checklist of processes with the owners and timelines, and develop an annual action plan.

Government’s Role:

• The government’s role is to ensure that the activities outlined in a company’s CSR Policy are carried out.
• It is also the government’s responsibility to address the issue of non-availability of NGOs and to raise public awareness about the importance of CSR and its activities.
• The government intends to change its CSR policy by mining data from mandated reports using technology tools such as Artificial Intelligence and Machine Learning. Technology should be used to improve the oversight of India Inc, but it should first be applied to the financial and governance aspects of companies before moving on to their social obligations.

What are the most appropriate areas for CSR investments?

Technological Progress:

• The key to non-linear project scale-up is leveraging technology, and solving societal problems is no exception.
• Sustainable and scalable solutions are now a reality thanks to a policy environment that encourages CSR investments in technology-led solutions.
• Collaborations with local governments, as well as the establishment of governance and community engagement structures, can help these projects become self-sustaining in the long run.

Higher Education:

• CSR can be used to help the tertiary education sector in a variety of ways.
• Funds can be directed toward the implementation of socially relevant projects conceived by faculty members, or toward scientific research that will uncover answers to key scientific questions underlying social problems.

Incubators Management:

• These grants can also be used to establish new incubators, assist existing incubators in hiring more people through internships and fellowships, and provide seed funding for start-ups.
• The government’s CSR policy allows a company to intervene at any point in the end-to-end tech value creation process, which is a huge enabler.

Environment-friendly projects

• Environment-friendly projects include developing affordable and recyclable sustainable construction materials, developing India-centric greening options such as novel heat and power management systems, and addressing socio-technical issues (such as flood management systems) through in-depth risk analytics on relevant parameters.
• Projects like these, funded by CSR and led by higher education institutions, would accelerate the transition from laboratory to reality and serve communities in novel ways.

Practice Question for Mains

Though corporate social responsibility (CSR) spending has increased, there are still many issues that prevent it from reaching its full potential. Propose measures to ensure that CSR funds have a national impact. (250 words)