Corporate Social Responsibility: A Deep Dive

The Companies Act, 2013 formalized the concept of Corporate Social Responsibility (CSR) U/s 135 of the Act. Certain companies, through its CSR committee, are required to spend a specified percentage of their ‘profits’ on CSR activities. CSR Committee is responsible for formulating and recommending a CSR policy, which outlines the activities and projects the company plans to undertake and the budget for such initiatives.

Schedule VII of the Companies Act outlines the areas in which CSR funds can be spent. These areas are meant to address pressing social issues and contribute to the overall development of society. Some of the key activities include Eradicating hunger, poverty, and malnutrition, Promoting education, including special education and employment-enhancing vocational skills, etc.

The definition of "profit" is crucial i.e. normal business profit U/s 198 of the Companies Act. The average net profit of the company over the last three years is considered to determine the amount to be spent on CSR activities. A company is required to allocate at least 2% of its average net profit towards CSR initiatives. If a company fails to spend this amount, it must deposit the sum in a separate bank account to be expensed within next 3 years, and disclose the reasons thereof in its annual report.

CSR activities are not a charity or donation, but a serious & strategic corporate responsibility towards societal welfare and sustainable development. Charity & donations are choices but not the obligation. Generally companies donate from time to time in the areas of disaster relief, education, and healthcare. However, CSR is much broader and includes long-term investments in social and environmental welfare. It is about businesses integrating social good into their core operations and ensuring that their operations do not harm the communities in which they operate.

ISO 26000 provides guidelines for businesses and organizations to operate in a socially responsible manner. It offers a comprehensive framework for integrating social responsibility into business operations. It focuses on key areas like human rights, labor practices, the environment, fair operating practices, consumer issues, and community involvement. While ISO 26000 is voluntary, it acts as a guiding tool for companies seeking to deepen their CSR commitment beyond the legal requirements.

While CSR and ESG (Environmental, Social, and Governance) both deal with a company’s impact on society and the environment, they serve different purposes and are governed by different regulations.

1. CSR is governed by the Companies Act, 2013. It primarily addresses social and environmental issues (the “E” for Environment and the “S” for Social).

2. CSR, particularly for companies with CSR obligations below ?1 crore, operates on board approval. They must disclose their CSR activities in their annual reports. For CSR projects exceeding ?1 crore, an impact analysis report is required to assess the effectiveness of the initiatives.

3. ESG, on the other hand, is more comprehensive and involves a company's performance across three key areas: Environment, Social, and Governance. ESG considerations are mandatory for listed companies under SEBI’s (Securities and Exchange Board of India) disclosure norms, requiring them to report on their environmental impact, social responsibility, and governance practices.

4. ESG requires quantification, verification, and external audit. This ensures that companies are held accountable for their environmental and social impacts as well as their governance practices.

It is not only a legal obligation for the companies, but also a moral responsibility of its employees, towards society and creating lasting positive changes in communities. It is therefore crucial to understand the nuances of CSR and ESG, ensuring compliance while making meaningful contributions to society and the environment.?