Knocking sense into CSR

Published On: May 20, 2017 12:35 AM NPT By: Simone Galimberti

There is lack of understanding on benefits of CSR in Nepal as companies fail to understand how it benefits them in the long run
The new Industrial Enterprise Act, which came into force in 2016, has been controversial as it provisions that industries with transactions over Rs 150 million must spend at least one percent of their annual profits in Corporate Social Responsibility (CSR) activities. A special financial vehicle, a Children Welfare Fund, will be created by the Ministry of Industry to manage these contributions. 

The Ministry of Industry, probably enthused by the recent initiatives of the Dhurmus Suntali Foundation, has decided that the first contributions to the Fund will support the much-neglected children from the Musar community in Siraha district.

The Act follows recent a directive of the Nepal Rastra Bank (NRB) that made it mandatory for commercial banks to allocate one percent of their profits on CSR activities.

While similar in scope, the two provisions are very different in nature as the new NRB regulation is more liberal, limiting itself to setting clear standards on the administration of the funds, including the way of selection of beneficiary projects, while leaving each private entity the freedom to choose which projects to support. 

From the perspective of a CEO or Board of Directors, between the two, the central bank regulation is preferable: unlike the NRB directive, the Act, they say, is “centralizing” and “patronizing” at the same, as companies are simply asked to put money into a basket over which they have no control whatsoever. 

After all, no one has forgotten how the corporate actors were under pressure to “voluntarily” donate to the Prime Minister Fund in the aftermath of the earthquakes. Three years on, with the donations aimed at the reconstruction of the country still unspent, it is unsurprising that the new Act has been met with some resistance from the business community.

With these two new legal provisions, Nepal has officially joined the list of countries like India and Indonesia that are making CSR contributions mandatory. 

In 2014 the European Parliament passed a new legislation that requires publicly traded companies with more than 500 employees to include sustainability factors as part of their annual financial reports. According to GreenBiz, a website, at the time the law was passed only 2,500 companies were voluntarily sharing their sustainability impact—”social, environmental and human rights impact, diversity and anti-corruption policies”. With the implementation of the new law, the number would rise to 7,000 by the end of 2017.

Yet in most countries around the world, CSR is seen mostly as a voluntary affair, with companies being incentivized and in some cases nudged towards it but very rarely forced to donate.

The Boston College Center for Corporate Citizenship, a leading research center on CSR, in its flagship State of Corporate Citizenship 2017 report has stated that executives worldwide anticipates an increase in community investment over the next three years.

At the same time the report reinforces previous insights that corporate citizenship helps companies and their employees enhance their performance, and plays an important role in helping them achieve corporate goals.

Certainly the debate between “voluntary” versus “mandatory” contributions will remain for foreseeable future, in Nepal as well as in other countries. 

One hope is that in the future there will be an increased focus on social businesses and ethical investments coupled with more ethical corporate behavior. In that case, more for-profit commercial activities that create wealth for the shareholders while also contributing positively to the local communities and the wider society will make CSR contributions redundant.

In this future scenario, companies will have enough social contributions already embedded it their corporate missions, such that ethical forms of business will be a standard, and cross sector partnerships will provide added value to work.

Yet, even globally, there is still a long way to go before we reach this ideal target. After all, we should not forget that many multinationals, while they are pro-active on corporate citizenship, exploit legal loopholes in order to pay less in taxes, a clear indicator on how “double standards” are still practiced.

In the case of Nepal, there is clearly a lack of understanding on the benefits of CSR-related activities, especially on its returns and the way it can benefit the company’s bottom-line in the long run. 

New and most innovative forms of CSR, including corporate volunteerism, have never been really discussed in Nepal. If local companies aspire to compete globally, they also need to be bold and innovative in terms of their community engagement, while the not-for-profit sector must rise up to the new challenge of working with the corporate actors. 

So far very few companies in Nepal have shown genuine interest in embracing global CSR practices. This attitude must change (even for their own good) and they must learn to come up with innovative ideas on how to do it well. 

For its part, the government, instead of acting unilaterally, should engage the private sector in a frank discussion on how to frame and develop corporate social responsibility in Nepal’s context.

The Industrial Enterprise Act should thus be amended giving more freedom to the private sector to decide how to spend the money they set aside for CSR. And to motivate the private sector, the government in its upcoming budget should include tax breaks or deductions for CSR contributions.

While in effect, the two provisions—the Act and the NRB regulation—can be seen as new tax, we should accept and welcome the central bank’s approach, even while we need to be more flexible on how much should be invested and where. After all not all companies are in a financial position to contribute one percent of their profit to CSR.

These provisions are a “necessary evil” that big companies and banks should welcome as an opportunity to do some real good at community level while at the same time also enhancing their performance. It is also a wonderful opportunity to show the potential of cross-sector partnerships in the country’s development.

The author is the Co-Founder of ENGAGE, a not for profit supporting youths with physical disabilities

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