Can you regulate CSR?

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Years ago, I wrote an article in the Stanford Social Innovation Review, called “The Myth of CSR”.  My basic thesis was that the problem with companies trying to ‘do good’ while trying to make money is that markets simply don’t work that way:  instead, they drive a race to the bottom in terms of ethics.

I viewed at the time – and am still more or less of the view – that you need to have fairly strong regulations on social and environmental standards in order to have a level playing field.  It wasn’t that there wasn’t room for innovation, but more that we need to bring the bottom feeders up through mandated standards, not through competition.

So when I heard that India was going to be “regulating” CSR, I was intrigued.  What did this really mean? Was it mandatory social and environmental reporting?  A blanket based regulation that ensured companies implemented sustainability strategies?  A duty on Directors (as I had campaigned on before) to enforce higher ethical standards?

Unfortunately, it’s none of these things.  Instead, it’s enforced philanthropy. So as of April 1 this year, the Indian 2013 Companies Act requires larger companies to spend 2% of their net profits on charitable causes.  It applies to both domestic companies and foreign companies registered within India.

Some observers are fairly optimistic, however.  India is a hugely unequal society, where a small number of companies wield significant economic might.  India’s challenges are immense:  a country of 1.2 billion people; extreme levels of income inequality; violence against women; pollution; climate change; farmer suicide, urban migration, to name just a few.  To expect the government to solve all of these problems is unreasonable.  A regulation of this sort, they argue, is a way to remind companies that they have a duty to uphold the public good.  “It will put CSR on the agenda” they say, even if it’s driven from a philanthropic perspective.  From there, we can move to more ambitious strategies for CSR overall. India needs both philanthropy and sustainability.

In spite of this optimism, as far as I can see, there is a reticence thus far, on the part of Indian companies to embrace a more ambitious agenda. A large sporting goods company recently revealed that they have had to de-prioritise sustainability and focus on their profits.  Similarly, a senior CSR figure at an automobile manufacturer regretfully noted to me that all the CSR act will do is help them to simply reinforce their active charity work – very little of which has to do with the core sustainability operations of the business.

CSR, whether regulated or not, shouldn’t be about philanthropy, but rather about how a business earns its money in the first place: its impact on the environment, the way it pays its workers, or sharing value with a community – and most of these things shouldn’t be up for negotiation.

Nonetheless, it’s an interesting development in the CSR arena and one to watch.  Will the leaders in India use this as a bigger opportunity than it appears at face value?  Watch this space.

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