The nationwide lockdowns of 2022 led to a pressing need for localized social support. Both private and public funds were poured into the NGO system working to combat the challenges brought in by the pandemic- such as livelihood options for vulnerable communities, food banks, health and medical support.
This topic of “Role of CSR in NGO Funding” is important from the perspective of the UPSC IAS Examination, which falls under General Studies Portion.
What issues are faced by NGOs in terms of funding?
- In any social effort, meeting expenses calls for big cheques. For instance, an NGO working on education outcomes may receive funding for books, online educational resources, training teachers, designing curriculum, etc.
- However, NGOs have other expenses too. If an NGO is to achieve sustained impact in the long-term, it has to pay for expenses that aren’t specifically tied to social programs i.e. administrative and support expenses such as electricity, rent, technology and human resource costs.
- Meaning, an NGO’s true cost includes not only the program costs but also organizational development costs and other indirect costs.
- Leaving the true cost unaddressed tends to reduce the organization’s efficacy and even the impact of the very programs that their funders support.
What are the types of funders?
- A survey of 80 social sector funders revealed the existence of 3 distinct funder archetypes, based on the differing belief of how philanthropy creates impact:
- Program proponents who value program outcomes above everything else
- Adaptive funders who aren’t rigid and tend to support indirect costs
- Organization builders who see the value in investing in stronger organization as well as the social programs undertaken by the NGOs
What is the situation with respect to CSR funders?
- CSR funders account for 1/5th of all private funds in India, mainly falling under program proponents.
- They rarely contribute funds for organizational development. Whatever they pay for indirect costs is limited to a fixed rate of less than 5%. Meanwhile, research shows that NGOs’ indirect costs range between 5% and 55%, depending on the organizations’ mission and operating model.
- This situation is partly because of the funders’ focus on regulatory compliances. The 2021 amendments to the CSR law introduced substantial penalties for non-compliance.
- Some 90% of CSR funders are small, unlisted companies and those companies with spending of less than ₹50 lakh/ year aren’t required to have CSR committees. In such cases, the companies generally leave the decision making and formulation of action plans to the company boards. These company boards may have little to no experience with regards to social programs and NGOs. As a result, the boards’ priorities lean towards compliance, risk avoidance and cost minimization.
- Larger companies delegate the CSR work to their HR department or to their administrative or communication heads, instead of hiring professional leads with experience in the social sector.
- Not every company is aware of all the facets of the CSR rules. For example, the 5% limit on administrative overhead costs is applicable only to the internal CSR operational costs and not to the administrative costs.
- Many errors are made with regards to safety, resulting in the unintended consequence of leaving an NGO to face unpaid bills or having to draw from its scarce core funds to pay for such essentials.
What can be done to change the situation?
- Companies can try pooling their resources with other like-minded CSR/ social sector stakeholders- leading to an increase in their collective impact potential.
- They can also try hiring professionals who have previous experience in working with NGOs.
- CSR funders could learn from their peers who have a different way of viewing organizational development and indirect costs. For instance, the CSR arm of ASK Group- ASK Foundation- is working on improving rural communities’ livelihood. However, until 4 years ago, the entity gave annual grants to NGOs, but with only limited indirect cost coverage (5-10%) and didn’t provide for any organizational development costs. Later on, it adopted a multi-year grant making approach and started offering indirect cost support of up to 20%. This shift occurred after an analysis and understanding of its peer organizations’ practice of paying higher rates and the advantages of a stronger NGO partner on program outcomes.
- The pandemic exposed the NGOs’ vulnerabilities to financial stress. In September 2020, 54% of NGOs had less than 3 months’ worth of reserve funds. Before the pandemic, this number stood at 38%.
- While the law currently doesn’t back CSR programs’ contribution to NGO reserves, funders can help relieve the pressure on the NGOs and make them more resilient by covering the indirect costs and the organizational development.
- In addition to funding support, corporates can aid the NGOs by offering their substantial accounting and finance capabilities. This is especially significant given how NGOs lack clear financial reporting standards and the internal capabilities to perform true-cost analyses.
- A corporate with a relationship of mutual trust with an NGO could offer volunteer financial analysis services to help organizations in calculating true costs and building their financial resilience. Eg: Edelweiss has a structured employee engagement program to help NGOs with cashflow and financial management and other supports.
- Though not many CSR funders think this way now, CSR practices are maturing and decision-makers are shifting focus away from compliance to the actual social impact. Funders are following several themes during this transition- such as creating collaboratives, hiring professionals and publishing their impact metrics to ensure accountability.
The idea is to shift away from merely signing cheques towards recognizing that what is good for the society is also good for the business. The CSR scene is already transforming as seen from the increasing number of philanthropic collaboratives.
Practice Questions for Mains:
Discuss the role played by CSR funding in the success of NGOs’ social programs. What needs to change in CSR funding to improve the situation? (250 words)