This Article has been written by Ms. Pragati Singh, A Third Year Law Student of Calcutta University,West Bengal
Abstract:
Corporate social responsibility (CSR) is a concept that suggests that the corporate entities have a responsibility to contribute positively to society beyond their financial obligations.
Corporate social responsibility (CSR) reporting has become increasingly important in the business world as companies are expected to be more transparent about their social and environmental works. Many countries have introduced laws and regulations which not only require companies to report on their CSR activities but also plays an impactful role on the society and the environment.
Introduction:
Corporate Social Responsibility (CSR) is a concept where companies choose to make a positive impact on society and the environment voluntarily. It involves integrating social and other important concerns into their business operations to benefit their stakeholders and society as a whole in a proactive manner.
Corporate social responsibility (CSR) is typically seen as a strategic effort that enhances a company’s reputation. This means that social responsibility initiatives need to be well-integrated into the business model to be effective. In some cases, companies go beyond merely meeting legal obligations and instead take actions that benefit society, not just their own interests.
In recent years, governments and judiciaries have recognized the significance of CSR and established legal provisions to ensure corporations fulfill their responsibilities. This article explores the legal framework of CSR, citing relevant judicial precedents that highlight the growing importance of this concept.
In recent years, governments and judiciaries have recognized the significance of CSR and established legal provisions to ensure corporations fulfill their responsibilities. This article explores the legal framework of CSR, citing relevant judicial precedents that highlight the growing importance of this concept.
What is a CSR reporting:
A corporate social responsibility (CSR) report, also known as a corporate sustainability report, is a document that companies use to showcase their efforts in promoting sustainable practices and contributing to societal well-being. These reports are designed to provide stakeholders such as employees, investors, suppliers, and communities with data-driven insights into the company’s progress towards sustainable development goals. By offering transparency on environmental, social, and governance (ESG) factors, CSR reports cater to the growing demand from consumers who seek to align their values with their financial decisions. These annual reports contain a wealth of information, so readers should be aware of what key aspects to focus on when reviewing them.
Background:
Corporate Social Responsibility reporting, or CSR reporting, is a way for organizations to share information about their social and environmental performance with stakeholders. It goes beyond financial metrics to provide transparency on how the organization impacts society and the environment. Typically released annually, CSR reports are not mandatory but can be required in some jurisdictions for large organizations. These reports have evolved from focusing solely on social metrics to include a broader range of non-financial measures of success. In recent times, CSR reporting is often referred to interchangeably with ESG (Environmental Social and Governance) reporting.
The concept of organizations showing a great concern for society and their employees dates back to the 1800s during the Industrial Revolution. Philanthropy was common, with industrialists and entrepreneurs making donations to support various causes. Modern CSR reporting can thus be traced back to 1953 when the term was first coined by American economist Howard Bowen. By the 1970s, CSR reporting gained popularity, and by the 1980s, many companies were using CSR reports to demonstrate their social responsibility, enhance their brand reputation, and engage with stakeholders.
Once considered a rare practice, CSR has now become a widely adopted form of self-regulation across organizations of all sizes, often overseen by a dedicated CSR Manager.
CSR applicability in India:
As per Section 135 of the Companies Act, 2013, certain companies are required to allocate a specific amount towards CSR activities. According to the Act, ‘Corporate Social Responsibility’ encompasses projects or programs related to activities outlined in Schedule VII of the Act. It also includes initiatives undertaken by a company’s Board of Directors in line with the recommendations of the CSR Committee and the company’s declared CSR Policy. This policy must address subjects specified in Schedule VII of the Act.
If a company in India has a net worth exceeding Rs. 500 crore, turnover exceeding Rs. 1000 crore, or net profit exceeding Rs. 5 crore in the preceding financial year, it must comply with CSR regulations. The Board of Directors of such companies must ensure that at least 2% of their average net profits from the past three financial years are allocated towards CSR activities as per their CSR policy. If a company has not completed three financial years since its incorporation, it should spend 2% of its average net profits from the immediately preceding financial years based on its CSR policy.
Section 135 of the Companies Act mandates that any company that meets the basic criteria to fall within the ambit of CSR must constitute an internal CSR Committee, which would be responsible for ensuring that the business has done everything in its power to honourably discharge its duties under CSR in accordance with the provisions of the Companies Act.
The CSR Committee constituted by the company must also choose any of the activities prescribed by the government in the Companies Act (Schedule VII). The average net profits earned in the three preceding financial years would be used to calculate the minimum amount of money to be spent on CSR activities by the business.
This provision was often a cause for dispute, in cases when a company which had not yet completed three whole years in the market, could nonetheless be qualified as a CSR company due to metrics such as turnover or net worth.
The amendment brought about by the new Bill has tried to resolve this problem by creating a separate provision for companies which qualify via some metrics to undertake CSR activities but are yet to complete three financial years of existence. In such cases, the amount to be spent on CSR activities by the company will be calculated on the basis of profits earned in the last financial year/years.
Hence, if a company that has only existed for two years crosses the minimum threshold limit for CSR spending, then the amount which it needs to spend will be calculated on the basis of profits earned during the last two financial years. If the company had existed just for a single year at the time of triggering the CSR thresholds, then the amount would be calculated on the basis of profits earned during that first year itself.
Judicial Precedence Emphasizing CSR:
Indian Petrochemicals Corporation Ltd. v. MC Mehta (1987) was a groundbreaking case that introduced the concept of “absolute liability” for industries causing harm to the environment and people. The Supreme Court of India ruled that industries involved in hazardous activities must compensate affected parties, highlighting the importance of environmental protection and community well-being.
In Union Carbide Corporation v. Union of India (1992), the Bhopal gas tragedy underscored the moral and legal duties of corporations towards victims of industrial disasters. The Indian Supreme Court emphasized the necessity of providing compensation, rehabilitation, and environmental restoration as essential components of corporate accountability.
Kiobel v. Royal Dutch Petroleum Co. (2013) saw the United States Supreme Court acknowledging the Alien Tort Statute’s role in holding corporations accountable for human rights abuses abroad. The ruling emphasized corporate liability for involvement in human rights violations.
In Rio Tinto plc v. Comisión Nacional de Energía (CNE) (2015), the Spanish Constitutional Court ruled that mining companies, like Rio Tinto, must consult local communities before commencing mining activities, emphasizing the importance of respecting indigenous communities’ rights.
Vedanta Resources plc v. Lungowe (2019) saw the UK Supreme Court ruling that a parent company could be held responsible for its subsidiary’s actions abroad if it failed to prevent human rights and environmental violations, reinforcing the concept of “duty of care” and extending CSR obligations extraterritorially.
Impact of CSR reporting:
I believe that corporate social responsibility (CSR) reporting and its impact on companies’ operations are crucial aspects of modern business practices. Just like how we as individuals are expected to be accountable for our actions and it’s impact on society and the environment, companies should also be transparent and responsible for their social and environmental impacts.
In many ways, CSR reporting is a way for companies to show that they are not just focused on profits, but also on making a positive impact on society and the environment. Just as individuals strive to make a difference in the world and leave a positive legacy, companies can use CSR reporting to showcase their efforts to contribute to the greater good.
I believe that CSR reporting can help companies build up the trust and credibility with their stakeholders, including customers, investors, employees, and the community at large. Just as individuals build relationships based on trust and integrity, companies can strengthen their relationships with stakeholders by being transparent about their CSR activities and their impact on society and the environment.
Moreover, CSR reporting can also help companies manage risks and seize opportunities. Just as individuals assess risks and opportunities in their personal lives, companies can use CSR reporting to identify potential risks related to social and environmental issues and develop strategies to mitigate them. By being proactive in addressing these risks, companies can protect their reputation and create value for their stakeholders.
Furthermore, CSR reporting can also drive innovation and competitiveness in companies. Just as individuals seek to improve themselves and adapt to changing circumstances, companies can use CSR reporting to identify areas for improvement and innovation. By focusing on social and environmental sustainability, companies can differentiate themselves from competitors and attract customers who are increasingly conscious of ethical and sustainable practices.
In terms of companies law, I believe that CSR reporting requirements are essential for holding companies accountable for their social and environmental impacts. Just as individuals are held accountable for their actions under the law, companies should also be held accountable for their CSR activities. By mandating CSR reporting, governments can ensure that companies are transparent about their social and environmental performance and encourage them to take responsibility for their impacts.
Penalty For Non-Compliance of CSR in India:
In case a company fails to comply with the provisions relating to CSR spending, transferring and utilising the unspent amount, the company will be punishable with a penalty of Rs.1 crore or twice the amount required to be transferred by the company to the CSR fund specified in Schedule VII of the Act or the Unspent Corporate Social Responsibility Account, whichever is less.
Further, every officer of such company who defaults in compliance will be liable to pay Rs.2 lakh or one-tenth of the amount required to be transferred by the company to CSR fund specified in Schedule VII or the Unspent Corporate Social Responsibility Account, whichever is less.
Applicability Of CSR outside India:
In some countries, such as the UK and France, there are specific laws that require companies to report on their CSR activities. For instance, in the UK, the Companies Act 2006 requires large companies to include a statement on their CSR activities in their annual reports. In France, the Grenelle II law requires companies to report on their social and environmental impacts.
In countries where there are specific laws that require companies to report on their CSR activities, such as the UK and France, I see this as a positive step towards promoting corporate accountability and transparency. Just as individuals are expected to abide by laws and regulations, companies should also comply with CSR reporting requirements to demonstrate their commitment to social responsibility.
Moreover, international frameworks such as the Global Reporting Initiative (GRI) and the United Nations Sustainable Development Goals (SDGs) provide guidance for companies on how to report on their CSR activities in a standardized and consistent manner. Just as individuals seek guidance from ethical principles and values, companies can use these frameworks to align their CSR reporting with global standards and best practices.
In addition to specific laws, there are also international frameworks that companies can use to guide their CSR reporting for example we have the Global Reporting Initiative (GRI) and the United Nations Sustainable Development Goals (SDGs).
Conclusion:
As the CSR reporting and impact in companies law is becoming more prevalent as stakeholders, including investors, customers, and employees, are demanding more transparency and accountability from businesses. Companies that effectively report on their CSR activities and demonstrate a positive impact are more likely to attract and retain customers, investors, and employees
Overall, It can be concluded that CSR reporting and its impact in companies law are essential for promoting ethical business practices, transparency, and accountability.
References:
https://www.investopedia.com/terms/c/corp-social-responsibility.asp
https://www.ibm.com/blog/what-is-csr-reporting/
https://www.businessnewsdaily.com/4679-corporate-social-responsibility.html
https://corporatefinanceinstitute.com/resources/esg/corporate-social-responsibility-csr/
Indian Petrochemicals Corporation Ltd. v. MC Mehta, AIR 1987 SC 1086 (India)
Union Carbide Corporation v. Union of India, AIR 1992 SC 248 (India)
Kiobel v. Royal Dutch Petroleum Co., 569 U.S. 108 (2013)
Rio Tinto plc v. Comisión Nacional de Energía (CNE), Judgment of the Spanish Constitutional Court No. 95/2015
Vedanta Resources plc v. Lungowe, [2019] UKSC 20