Context

• This article highlights the need for geographic diversification of corporate social responsibility (CSR) spending and the way forward for its implementation.

What is Corporate Social Responsibility?

• CSR is a management concept through which a company achieves a balance of economic, environmental and social imperatives.
• It is a business philosophy that dictates that companies around the globe should deviate from the narrow path of chasing only financial gains and wealth buildup and embark on a journey of sustainable development. 
• It includes community welfare, ethical corporate conduct, climate action, defending the socio-economic rights of marginalized sections of society, among other aspects.
• India is the first country in the world to make CSR mandatory, following an amendment to The Company Act, 2013 in 2014.
• Any company that has a net worth of at least Rs 500 crore, a turnover of Rs 1,000 crore or a net profit of Rs 5 crore is obliged to spend 2% of its average profits over the last three years on CSR.
• Businesses can invest their profits in areas such as education, poverty, gender equality, and hunger as part of their CSR compliance, as regulated by the law.

RBI’s Suggestion

• The RBI’s latest report on currency and finance recommends policy options to mitigate climate risks and achieve India’s goal of net zero by 2070. 
  • One suggestion is mandatory geographic diversification of corporate social responsibility (CSR) spending. 
• While this is a sound recommendation, its implementation will require a shift in the ecosystem for a more equitable distribution of CSR funding.

Current scenario of CSR spending

• Concentrated spending in industrialized states: 
  • Section 135 of the Companies Act states that companies give preference to areas near where they operate in deploying CSR funds. This has resulted in more funding for social issues but also concentrated spending in the most industrialized states. 
  • As of 2020-21, 10 states received 80 per cent of all CSR funding. 

Does the government mandate CSR spending in local areas?

• In 2021, the Ministry of Corporate Affairs had clarified that preference for local areas is not mandatory, and the spirit of the legislation is to align CSR with national priorities. 
• However, the concentration of funding in a few states suggests that companies still prefer to direct their CSR funding locally.

Why do companies prefer to direct CSR funding locally?

• This preference arises from a desire to help communities that live and work near their business operations, and within regions where they are familiar with the challenges. 
• Local projects allow funders to leverage their knowledge of the region, utilize existing relationships and networks, and exert greater influence over outcomes through staff visits and monitoring. 
• This in return allows corporates to obtain a “social license to operate” through the greater goodwill and influence they derive from doing good with and for local communities. 

Challenges in diversifying CSR spending

• Accessing remote locations, identifying the needs of local communities, and trusted implementation partners are challenges.
• Grassroots non-profit organizations often lack the means to showcase their impact on national platforms, resulting in an information gap with funders.

How to diversify CSR spending or to overcome local preference?

• Ecosystem change and regulatory shift: 
  • Achieving an equitable distribution of CSR funds will require both a regulatory shift and changes at an ecosystem level, where the level of trust between companies and between the private, public and social sectors is high. 
  • This will enable companies to find trusted for-profit, social enterprises and non-profit partners. 
• Partnership based approach: 
  • Successful pan-India projects will benefit from collaborations between larger companies and smaller social enterprises that are beginning their social impact journeys. 
  • Collaborations can involve pooling funding, talent, resources, and innovations to address complex, intersectional challenges.
  • For instance, pan-India non-profits with big budgets heavily rely on grassroots organizations for project implementation. 
• Align with local government 
  • CSR programmes can align with local government through initiatives like the Aspirational District Programme and the Aspirational Block Programme. 
  • The ADP emphasizes convergence with national and state schemes, fostering collaboration among local, state and national governance entities, and with external agencies for implementation. 
  • By participating in such programmes companies develop meaningful relationships with government departments, influence local governance practices, and streamline district administration work while undertaking impactful projects in vulnerable districts.
  • Independent partnerships with local government and non-profits can also be a modus operandi for CSR programmes.
• Take technology’s help
  • Companies contemplating remote projects where staff cannot often make field visits can rely on technology-enabled monitoring and evaluation models like tools to transfer and share real-time data, the creation of dashboards, sophisticated accounting software, virtual field visits, and video conferencing.

Conclusion

• Corporations that wish to be true national partners in realizing environmental and social goals will have to establish trusted partnerships with a more diverse set of nonprofits and local governments.