Corporate Social Responsibility vs. ESG
Corporate Social Responsibility (CSR) and Environment Social Governance (ESG) are two concepts that have gained significant attention in the past few years. Though both concepts are related to assessing a company’s impact on the society and environment, there are some distinct differences between the two.
CSR in simplest terms can be defined as a company’s voluntary actions and initiatives that are designed to promote social, environmental, and economic sustainability. The different forms of CSR may include- philanthropy, volunteerism, and ethical sourcing of materials. These initiatives are mainly aimed at improving the company’s reputation in society, building trust with the stakeholders, and making a positive impact in society.
Evolution of CSR in India
The concept of CSR is not new to India, it has been there since time immemorial but it got widely recognized after India became a signatory to various conventions like – the UN Conference on Human Environment and Development (famously known as the Stockholm Declaration), Rio Declaration 1992, etc. whose focus was on creating public awareness on environmental problems and promote sustainable development respectively. India went ahead and amended the Constitution to make citizens duty-bound to protect the environment.1 Following the path of development, the Ministry of Corporate Affairs notified CSR Voluntary guidelines to be followed by the companies as a business policy. 2
The significance of CSR in modern businesses cannot be denied as it not only helps companies to increase their reputation but also helps in higher productivity and quality by improving the working conditions of its employees. This is mostly used as a brand tool nowadays to recognize before the customers that the company is socially responsible. 3
Components of CSR
- Environmental initiatives: these initiatives mean supporting environmental causes and forming partnerships with conservation organizations to contribute to environmental sustainability programs such as – reducing carbon emissions, etc.
- Social initiatives: with these initiatives, the company tries to assess and take responsibility for its impact on the environment at large. For instance – community development programs, employee volunteer efforts, or charities for local communities, etc.
- Economic Initiatives: the major focus of CSR is social and environmental initiatives but financial initiatives are equally important– community involvement, ethical business practices, and promoting environmental sustainability like buying local suppliers, etc. 4
CSR and Companies Act, 2013
The Companies Act of 2013 is a piece of legislation that makes CSR a mandatory provision for the companies’ u/s 135. It provides that every company having a net worth of Rs. 500 crores or more, or turnover of Rs. 1000 crores or more, or a net profit of Rs. 5 crores during the financial year shall constitute a CSR committee consisting of 3 or more directors inclusive of one independent director. The clause of net profit of Rs 5 crores extends to include small and medium enterprises in its radar. Thus, SMEs need to learn to be compliant with CSR activities and rules. Sub-section 5 to s.135 provides for the duty of the board that it should make sure that the CSR responsibilities are being performed and if the company fails to perform the activities under CSR, then it shall disclose the reasons for not doing so to the board. 5 The Act encourages companies to spend at least 2% of their average net profit in the previous 3 years on CSR activities. 6 This is not a penal provision but rather a declaratory one. 7
ESG can be defined as a set of standards used by investors to evaluate a company’s performance on environmental, governance, and societal issues to assess the company’s risks and potential for long-term sustainable growth. The factors of evaluation may include- carbon footprint, labor practices, employee and board diversity, etc.
Components of ESG
- Environment factors: the environmental factors in the ESG may include- the company’s carbon footprint, waste management practices, climate change inclusivity, etc.
- Social factors: within this component of ESG, companies may consider aspects like – labor practices, data protection, employees' diversity, and their volunteerism and engagement with local communities, etc.
- Governance: this component includes – board diversity, shareholders’ rights, and ethical business practices that make the leaders and executives accountable and transparent. 8
ESG has evolved in recent years to meet the demands of investors and public authorities. But now facing difficulties due to investors’ misperceptions that sustainable investment limits choice and compromise with financial goals. 9 In India, the Ministry of Corporate Affairs (MCA) has taken the responsibility to guide the companies towards a sustainable future. In the year 2011, the ministry notified “National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Businesses”. Moreover, in 2012 and 2017 SEBI mandated the top 100 companies by market capitalization to file Business Responsibility Reports (BRBs) from an ESG perspective. Recently in the year 2021, SEBI introduced new reporting requirements as ‘Business Responsibility and Sustainability Report (BRSR)’ on ESG parameters. 10
Difference between CSR and ESG
| BASIS | CSR | ESG |
|---|---|---|
| Scope | The scope is narrow as it focuses on the voluntary initiatives of the companies towards the society and environment. | The scope is wider as it overall assesses the impact of the company and its governance factors on the environment, and society. It includes CSR. |
| Voluntary Initiatives | Activities under CSR are voluntary initiatives of the companies. | Here, majorly the activities involved are integrated into investment analysis as well as decision-making processes. |
| Stakeholder Involvement | CSR focuses on ethical behavior and its impact on the society and environment at large. | This is used by the investors to assess the company’s performance and evaluate potential financial risks associated with social issues within a company. |
| Value | These activities are aimed at giving back to the community through its volunteer programs and sustainable business practices. | This is more focused on its financial performance by considering environmental and social impacts. 11 |
Top Companies with CSR and ESG Initiatives
- Reliance Industries Ltd. has been at the top of the list for CSR spending in 2022. It has spent Rs. 1185 crores approximately in various areas like – education, disaster response, arts, culture, and heritage. 12 As part of ESG parameters, it has also done well in policy disclosure. 13
- Tata Consultancy Services Ltd. has spent around Rs. 727 crores under CSR for purposes like – skill, employment, entrepreneurship, etc. 14
- HDFC Bank Ltd. is the 10th largest bank in the globe and has spent Rs. 736 crores approx. on CSR activities like health care, sports, rural development, etc. 15 On the ESG front as well, HDFC has been one of the top 5 companies to perform well on all parameters. 16
- ICICI Bank Ltd. is one of the largest private sector banks and has spent around Rs 266 crores on CSR initiatives. It established the ICICI Foundation in the year 2008 for inclusive growth. 17
- Mahindra & Mahindra Ltd. has launched ‘Rise for Good’ CSR programs for the benefit of kids, farmers, and girls. It has spent around Rs. 97 crores on CSR projects and similarly has performed well on ESG parameters as well. 18
Conclusion
To conclude, both CSR and ESG are important concepts for companies to consider to promote sustainability and responsible business practices. India has been placed in a good position globally after adopting ESG principles. Largely both CSR and ESG have remained voluntary initiatives of the companies and businesses are struggling to meet the ESG norms. Thus, the creation of a robust and comprehensive framework for the regulation of companies on ESG principles is essential considering the transformative shift of business towards sustainability and social activities. 19 Companies like HUL have implemented zero waste initiatives, Wipro has robust e-waste management programs, Tata Steel has water-efficient technologies, etc. Therefore, for the mutual benefit of society as well as companies, ESG principles must be integrated into the business objectives.
Overall, social initiatives are on the rise in both forms - external impact as well as internal governance. By incorporating both CSR and ESG into their operations and decision-making processes, companies can demonstrate their commitment to social and environmental responsibility and help build a better future for all.
Authored by Uniqua Singh, a Ph.D. Student from IIULER, Goa
2 The Institute of Company Secretaries of India, “Corporate Social Responsibility: An Engine for Inclusive Growth” (January 2015).
3 Ibid.
4 Anna Olivero, “ESG vs CSR: Meaning and key differences to know” AWorld, August 21, 2023.
5 The Companies Act, 2013 (Act No. 8 of 2013), S.135 proviso II.
6 Confederation of Indian Industry, ‘‘Handbook on Corporate Social Responsibility in India”, PWC (2013).
7 Supra note 2.
8 Ibid.
9 R. Boffo and R. Patalano, “ESG Investing: Practices, Progress, and Challenges”, OECD Paris (2020).
10 Student Company Secretary, “Evolving ESG Reporting Landscape in India” (December 2021).
11 Supra note 2.
12 The CSR Journal, “Top 100 companies in India for CSR and Sustainability in 2022” (January 30, 2023).
13 Stakeholders Empowerment Services, “ESG Scores Top 100 Listed Companies in India” (2021).
14 Supra note 12.
15 Supra note 12.
16 Ibid.
17 Supra note 12.
18 Supra note 12.
19 Vidhi Agrawal, “From Tradition to Transformation: ESG Initiatives in Indian Corporate Landscape” Institute of Company Secretaries of India, October 2023.