On April 1, 2014, the Indian government introduced the world’s most comprehensive CSR law. In a nutshell, it requires companies that meet certain criteria to spend two percent of a rolling three-year average of their profits on various CSR activities. This may include measures relating to hunger, nutrition, sanitation, education and training, environment, women’s empowerment, national heritage, arts and culture, sports activities and the Prime Minister’s relief fund.
The law is expected to generate more than $2 billion USD annually. Those funds can be spent by companies to implement CSR activities independently, through their own non-profit foundation or through independently registered non-profit organisations. (For a good summary of the legislation and its application, click here.)
First India, Then Europe
Two weeks after India’s law took effect, the European Union the European Union announced the adoption by the European Parliament of the wonderfully bureaucratic sounding Directive on disclosure of non-financial and diversity information by large companies and groups. According to the EU, “Companies concerned will need to disclose information on policies, risks and results as regards environmental matters, social and employee-related aspects, respect for human rights, anti-corruption and bribery issues, and diversity on boards of directors.”
“Transparency is essential to helping various actors tackle the woolly, interrelated aspects of the world’s stark sustainability realities.”Not surprisingly, these developments have set media outlets, conferences and social media abuzz with conflicting points of view. Some say the requirements are too stringent and prescriptive. Others suggest they don’t go far enough. The Global Reporting Initiative (GRI), the world’s leading CSR reporting standard, pronounced: “[India’s] 2% ruling could lead to forced philanthropy, ‘tick box’ behaviour, tokenism or even corruption, and masking of data to avoid having to comply.”
It’s too early to tell if they’re right but what we do know is that it’s generating an enormous amount of discussion. That can only help bring it further into the mainstream.
The Debate Rages On
Whether you’re for them, against them, ambivalent or undecided, what’s interesting is that the focus of these laws is actually less on the activities undertaken and more on the reporting of them.
In India, companies that fall under the ambit of the CSR law are required to prepare a detailed report in a prescribed format about their CSR policy, the composition of their mandatory CSR committee, the amount of CSR expenditures and how they were spent. Penalties for non-compliance with the law are directed at failure to prepare and publish the report, not failure to implement activities.
This mandatory reporting approach is one that Canada has taken with its financial institutions, many of which have been criticised for years for making obscenely large profits. Canadian banks with $1 billion or more in equity are required to prepare annual public accountability statements that describe the contributions made by the institution to Canada’s economy and society. This includes community development, access to financial services, initiatives to support SMEs, taxes paid to all levels of government, and so on.
Reporting as a Lever
So why are lawmakers focussing on reporting? Is it the right leverage point? The short answer is yes.
Traditional arguments in favour of reporting generally take a company-centric, self-interest viewpoint. The business case for CSR reporting is built around benefits like improving corporate reputation, creating efficiencies, attracting and retaining talented employees, and managing risk.
However, there are broader societal considerations at play and they fall under the purview of government to encourage. Addressing issues like environmental sustainability or social equity require long-term, coordinated and sustained responses. But that also means that stakeholders need access to good, readily available information.
Indeed, one of the most significant criticisms that stakeholders have had of large corporations is lack of transparency. As business consultant and author Christopher Meyer opines, companies that do not step up to the plate will find themselves in “the worst of all worlds,” where they will “be made responsible and still not be considered responsible.”
The Societal Benefits of Pulling Back the Corporate Veil
Making reporting by large companies mandatory increases transparency. It presents a public record—useful for investors and activists who want the real story behind a company’s social and environmental footprint. And it allows for easier comparison of performance between companies, especially when their reports adhere to international standards like the GRI.
What’s more, this transparency is essential to helping various actors tackle the woolly, interrelated aspects of the world’s stark sustainability realities. No one organisation created these challenges but it will certainly take good information and collective effort to successfully address them.
Reporting is also a great way to share best practices and raise the bar generally on performance—within sectors and more broadly. It taps into the competitive spirit of business and it appears to be working. No company wants to arrive last to the party and they certainly don’t want to be the worst dressed ones there.
In fact, more than half of corporates prepare CSR reports today. Amongst the largest ones, the rate is much higher. According to the Global Reporting Initiative, “Ninety-five percent of Global 250 companies issue sustainability reports—80 percent of which use the GRI Guidelines to report.” Laws that mandate sustainability reporting will clearly fuel this trend further.
Finally, in the “what’s in it for me” category, business often proclaims its desire for self-regulation, not onerous laws. However, making that work to the benefit of stakeholders beyond the boardroom or stockmarket relies on timely, credible information. Which brings us back to the value of sustainability reporting.
It’s Time to Follow the Path of Financial Annual Reports
For decades, companies have been legally bound to prepare annual financial reports so that investors had access to audited information with which to make good financial decisions. Today, no one questions the need for those reports and everyone benefits from them.
However, we also know that companies have to be more accountable to society and nature. After all, good schools, healthy citizens, social cohesion, and clean air, land and water are vital to any company’s success. So, given their size and influence, it’s only appropriate that companies report on how they’re performing in those domains too.
We’ll continue to hear a lot more about mandatory reporting in the years to come. Rest assured that Junxion’s voice will be one of them.
For more on CSR reporting, check out four other recent posts: Putting Trust at the Core of Communicating CSR, Corporate Social Impact: Integrated CSR & Full Spectrum Responsibility the Top 10 Things to Include in Your CSR Report, and The Report’s Out, but Communicating Isn’t Over.
Junxion Principal Peter ter Weeme works on projects forwarding environmental and social sustainability around the globe.