NEW DELHI: Corporate social responsibility (CSR) will get redefined under new guidelines set to be unveiled on Friday that aim to encourage ethical practices in all spheres of business operations, ultimately shifting the focus away from merely shelling out cash on social causes.
The new guidelines, now being referred to as business responsibility norms, will replace the ministry of corporate affairs’ voluntary directions on CSR introduced two years ago.
The new norms require a company to be responsible in its handling of issues related to environment and society where it functions. Apart from prescribing best practices on how a company should address concerns on human rights violations, the guidelines will suggest ways in which India Inc should interact and lobby with the government.
While the norms would still be kept voluntary, a strict process of reporting has been devised that would be periodically reviewed by regulators. An independent evaluation mechanism of how a business is performing is also being devised through rating agencies.
“The fear of losing credibility and goodwill is way bigger than money spent,” said a ministry official requesting anonymity.
Planning Commission member Arun Maira said, “It is the way profit is earned by the companies that is important, not the expenditure incurred on CSR.”
The commission, which is separately looking into the aspect on business responsibility and industry’s interface with the government, will come up with suggestions on how to make the new structure efficient. A Maira-led group is looking into the relationship of industry and government to suggest as part of promoting business responsibility.
The new norms will be kept separate from the purview of the Companies Act. “We should not immediately incorporate something which the industry does not understand right away,” Maira said.
The business responsibility framework has been jointly prepared by the Indian Institute of Corporate Affairs , a think tank under the ministry, and Germany-based international enterprise GIZ as part of a bilateral co-operation effort.
Companies will be asked to report their activities in their annual reports. While larger companies will be required to report as per the global reporting initiative (GRI) format, which is an internationally recognised format on sustainability reporting, smaller companies will have an option of just declaring their in-principle acceptance of these norms.
Rating firms have already started ranking companies based on their performance on environment social norms. Crisil had recently launched its Environment, Social and Governance (ESG) index, which measures company performance on voluntary disclosures on governance and environment issues rather than financial performance.
The index ranks India’s top 500 listed firms, using publicly available information to measure their performance. “Since June 2009 the ESG index has outperformed the Nifty 50,” said Sunil Sinha , senior economist and the person in charge of creating the index. “This shows that investing in environment friendly companies with good corporate governance will yield good return too.”
The social responsibility debate was revived this year when the corporate affairs minister wanted companies to spend at least 2% of their annual net profits on CSR activities by including the clause in the new Companies Act. The industry, however, managed to keep CSR spending voluntary although a provision on earmarking at least 2% of their net profits is likely to be maintained.