CSR and COVID-19: Changing Regulatory Landscape, Insights, and Implications
Executive Summary & Overview
Corporate Social Responsibility (CSR) has grown manifold. CSR has become a national priority. It has evolved from “philanthropy” to the “comply or explain” approach to “comply only”. Emerging dimensions of CSR comprise its changing regulatory landscape, CSR Accounting and Social Audit perspectives, and COVID-19 implications. COVID-19 had been a catalyst and impacted CSR practices further.
Traditionally, the maximum amount of CSR had been spent on education. However, post the outbreak of COVID-19, the amount spent on healthcare had improved substantially. Evidence has indicated the emergence of need-based, focused, strategic, and sustainable CSR practices. In addition, the COVID-19 disruptions led to lower CSR spending. This conceptual article is based on secondary data for the period 2014-15 to 2020-21 retrieved from the national CSR portal of the Government of India. It provides pertinent CSR implications for stakeholders, regulators and professionals.
1. Introduction: Historical Evolution and Conceptual Foundations
CSR is a historical concept. It has become popular since the American economist questioned the operational framework of companies (Bowen, 1953). Business must be conducted in the desired manner to protect the interests of stakeholders. Later on, CSR developments led to an active discourse on companies’ attitudes toward the protection of the interests of stakeholders’ (Davis, 1960; Frederick, 1960; Walton, 1967; Carroll, 1979). In the Indian context, the Report of the Social Audit Committee by Tata Steel in the 1980s reflected the objective clause in the Articles of Association as an indication of the company’s social and moral commitments toward stakeholders. The stakeholder theory (Freeman, 1984) supports the notion of the protection of the interests of stakeholders unlike the classical school of thought. Further, management experts have been accentuating needs and concerns to engage in an active dialogue that fosters the well-being of the stakeholders.
Developments in CSR are contextualised. Compliance with CSR has increased in India since the enactment of the Companies Act, 2013. CSR aids to execute context-specific organisational actions and policies. It considers the protection of the interests of stakeholders aligned with the environmental, social, and governance (ESG) parameters. CSR activities also improve environmental, political, and transnational relationships. CSR enhances business competitiveness, and ensures the resilience and going concern ability of firms. Firms have increasingly realised that they can better compete in the markets by making a significant contribution to society and the surrounding environment. The enforcement of CSR activities becomes crucial to achieving the social and economic goals of firms. A move from conventional CSR to a more focused, resilient and sustainable CSR approach in VUCA (volatility, uncertainty, complexity, and ambiguity) world delivers better valuation.
2. Need for Corporate Social Responsibility
CSR is the commitment by businesses for improvements and developments in the life of the social community. Protecting stakeholders’ interests while doing business is a challenge (Freeman, 1984). Simultaneously, the business is expected to earn profits without violating legal, societal, and ethical norms (Friedman, 1970). In this context, CSR is bolstered by the notion that companies can work in coherence with societies henceforth they need to make sufficient contributions toward social development. Therefore, CSR as a concept has emerged as an important tool of corporate reporting leading to enhanced disclosures facilitating the attainment of the sustainable development goal (SDG) of inclusiveness and cohesiveness in the national, societal, and developmental interests of emerging nations.
To boost the growth and development process in these countries, governments expect businesses as partners to support sustainable development goals. This can become possible by inculcating CSR culture. CSR reporting facilitates the investor community by empowering informed and proper decision making. Compliance with CSR yields myriad social and economic benefits. The managers need to decide how much to spend on CSR in consonance with the CSR policy. To support stakeholders’ perspectives and to integrate CSR as a part of corporate culture, a commendable policy framework is legislated by the regulators to achieve the sustainable development goals and sustain profits for the planet and the people.
“CSR aids to execute context-specific organisational actions and policies. It considers the protection of the interests of stakeholders aligned with the environmental, social, and governance (ESG) parameters.”
3. Changing Regulatory Landscape: From “Comply or Explain” to “Comply Only”
Though CSR has been practised since the ancient era albeit informally, the concept earned formal recognition on the implementation of CSR provisions of the Companies Act, 2013. In India, CSR has evolved as a growing area of interest for companies, professionals, academics, and researchers. Before the finalisation of the Companies Act 2013, many CSR initiatives were taken which laid the foundation to legislate CSR.
§ Statutory Mandate under Section 135 of the Companies Act, 2013:
Every company satisfying any of the following criteria in any financial year must constitute a CSR Committee and formulate a CSR policy:
- Net Worth: Rs. 500 crores or more; OR
- Turnover: Rs. 1,000 crores or more; OR
- Net Profit: Rs. 5 crores or more.
Mandatory Minimum Expenditure: Spending at least 2% of the average net profit of the preceding three financial years. Profits are calculated pursuant to Section 198 and Section 381 of the Act. The CSR Committee must comprise a minimum of three directors, of whom at least one must be an Independent Director. Qualifying expenditures must strictly fall within the activities enumerated in Schedule VII (such as eliminating hunger and poverty, promoting education, combating disease, and encouraging gender equality). CSR is entirely a Board-driven process. The Board approves the recommendations of the CSR Committee and ensures full execution.
Evolutionary Timeline of CSR Regulation in India (2007–2014):
CSR Rules 2014 to 2016 guide the proper implementation of CSR provisions. To enhance monitoring mechanisms of CSR, the government has recently mandated CSR compliance. The regulatory landscape of CSR is having a paradigm shift from a “Comply or Explain” to a “Comply” approach. Earlier, CSR was based on the “Comply or Explain” approach which implied that either company should comply with CSR norms or else they need to explain non-compliance of CSR in the Board’s report with reasons. Default concerning CSR norms now will attract a penalty.
4. CSR Accounting Perspectives & Social Audit Mandate
To enrich CSR practices, the Institute of Chartered Accountants of India (ICAI, 2020) has issued a comprehensive Technical Guide / Guidance Note on Accounting for Expenditure on Corporate Social Responsibility Activities. It elaborates on accounting aspects of CSR expenditure which may be in cash or kind or both as per Generally Accepted Accounting Principles (GAAP) and Accounting Standards.
Unspent CSR Account Treatment
If the CSR amount remains unspent on an ongoing project, it must be transferred to “the Unspent Corporate Social Responsibility Account” within 30 days from the closure of the financial year. This amount must be spent within three financial years. In case of failure, the balance shall be transferred to a Fund specified in Schedule VII within 30 days from the end of the three financial years.
Asset Recognition & Set-Off Rights
Measurement and recognition criteria require creating provisions and liabilities for CSR expenditure. If a company spends excess over the statutory obligation, an asset is recognized in the books of accounts. This excess CSR spend can be set off against the CSR obligation of succeeding financial years.
Indirect Taxes & Surplus Income
Indirect taxes on CSR contributions are recognized as part of CSR expenditure. Any surplus or gain arising out of CSR activities shall be recognized in the Statement of Profit and Loss as non-business profit, treated as a liability in the balance sheet, and simultaneously recognized as a charge against profits.
Statutory Reporting & MCA21 Registry
The Board is empowered to plan and execute CSR activities. CSR disclosure is an integral component of the Board’s report and must be mandatorily filed in the MCA21 registry. Independent financial audit, Board accountability, and committee oversight ensure strict compliance.
Emergence of Mandatory Social Audit:
To account for CSR practices, the ICAI has issued a guidance note prescribing accounting treatment. Accounting for CSR provides an opportunity to comprehend it like any other business transaction. It enhances the responsibility of supervisors managing the entities. Guidance note on accounting for CSR has laid another cornerstone in its successful implementation. In addition, regulators are contemplating bringing in a mandatory “Social Audit” (Shukla, 2022). It can be used for a comprehensive impact assessment of CSR spending. It will ensure efficient and effective CSR spending and justified use of CSR funds.
This initiative is expected to further stiffen the CSR regulations. Initially, the Social Audit is to be made applicable to public sector undertakings (PSUs), later on it might cover all companies. In this context, the Securities and Exchange Board of India (SEBI) has already given a direction to the ICAI to devise a suitable standard. The introduction of “Social Audit” will enlarge the scope for accounting professionals. It is expected to benefit various sections of society in true spirit. It will ensure that needy people get an advantage of CSR spending at the national level in addition to the extant practice of spending CSR wherein preference is given to the local community.
5. CSR Disclosures: Strategy, Risk Mitigation, and Value Creation
Quality CSR disclosures by firms increase their investment efficiency and valuation. CSR compliant and resilient companies are better suited to recover from business shocks and environmental threats. Companies with a good level of CSR compliance make more sales, earn better profits, and gain brand image. In addition, stakeholders support these companies in times of crisis, and such companies remain sustainable.
The idea of strategic CSR was first introduced by Baron (2001). Over the past years, a paradigm shift had been observed from philanthropy to strategic CSR. The spirit of strategic CSR points out the competitive advantages of compliance with CSR. Strategic CSR activities make social good by enhancing prestige, increased stakeholder participation, lowering risks and making business innovations. The reputation enhancing property of strategic CSR triggers positive attributes for extant and future stakeholders’ perspectives. Firms should form a strategy to align their CSR activities to attain business objectives. Suitable integration of CSR strategy in business operations leads to better social and financial performance which promotes business resilience.
The moderating impact of CSR reporting on the relationship between related party transactions and firm value imply reduced managerial opportunism (Hendratama & Barokah, 2020). Henceforth, resilient companies should regard CSR as an essential component of their innovations and transformations in tough times (COVID-19). Eloquent disclosure of sustainability information in CSR reports proves advantageous for firms. The dynamic business environment requires a sustainable approach to achieve ESG goals. Business objectives need to be aligned with the United Nations’ goal of sustainable development to make the world a better place to live in the ensuing years.
Empirical Evidence on CSR as a Risk Mitigation and Performance Driver:
- Stock Crash Resilience: CSR practices reduce compliance risk, provide a positive reflection in terms of stock prices, and reduce the probability of a stock price crash (Ding et al., 2021).
- Financial Performance: CSR spending exhibits a statistically significant positive effect on stock market reflections across Indian enterprises (Basak, Mondal & Rakshit, 2020).
- Crisis Outperformance: During the 2008–2009 global financial crisis, firms with high CSR intensity generated higher profitability, greater sales, and 4% to 7% higher stock returns relative to firms with low social capital (Lins et al., 2017).
- Enterprise Expansion: International reporting standards (sustainability, integrated reporting, and ESG frameworks) systematically mitigate expansion risks and safeguard long-term enterprise value.
6. CSR and COVID-19: Empirical Trends & Sectoral Reallocation
The COVID-19 pandemic caused many business disruptions. It has brought myriad transformations in areas such as technology, logistics and supply chains, digital banking, and digital healthcare to name a few. It had posed various challenges in deciding on marketing strategies, patterns of consumption, ways of advertising and making communication, supply patterns, spending on CSR and its relevant implications. The organisational understanding in transforming crisis (COVID-19) to core capabilities by optimum use of resources can add value to enhance the rational, heuristic, and dynamical capability of firms as a core competency (Biswas, et al. 2021).
Firms with better CSR and environmental performance are less prone to the adverse impact of COVID-19. As every crisis has opportunities as well as challenges, the companies planned to spend more on healthcare as a CSR expenditure. COVID-19 has provided unparalleled stress, testing time and simultaneous opportunities in the domain of CSR. Spending CSR on healthcare was a great gesture and a golden opportunity to unite with the social and business communities. The government clarified that all expenditures incurred toward COVID-19 relief are qualifying CSR expenditures. CSR spending on healthcare catalyzed telemedicine, mobile health (m-Health), and digital health (d-Health) infrastructures across emerging markets.
Table 1: CSR Spent in India, INR Crores (% of Total CSR) [2014-15 to 2020-21]
| CSR Area | 2014-15 | 2015-16 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 (COVID) |
|---|---|---|---|---|---|---|---|
| Education | 3,188.09 (31.67%) |
4,921.06 (33.90%) |
5,559.17 (38.76%) |
7,281.54 (42.59%) |
7,977.65 (39.59%) |
9,531.63 (38.61%) |
2,954.17 (33.46%) |
| Healthcare | 2,525.92 (25.09%) |
4,633.46 (31.92%) |
3,669.46 (25.58%) |
4,269.68 (24.97%) |
5,527.37 (27.43%) |
6,734.30 (27.28%) |
2,961.97 (33.55%) |
| Total CSR Spent | 10,065.93 | 14,517.20 | 14,344.40 | 17,097.66 | 20,150.27 | 24,688.66 | 8,828.11 |
Key Empirical Takeaways from 7-Year National CSR Data:
A glimpse of CSR data has revealed that a popular category of spending on CSR had been “education”. CSR spending on education has been 31.67% in 2014-15 to 33.46% in 2020-21, a trend since the enforcement of CSR. Spending on education is great for the growth, and development of human resources for an emerging economy.
However, post-outbreak of COVID-19, in the year 2020-21, the focus of CSR spending shifted from “education” to “healthcare”. Therefore, a drastic positive change in healthcare expenditure from 25.09% in 2014-15 to 33.55% in 2020-21 had been observed. This evidence indicates the emergence of need-based, focused, strategic, and sustainable CSR practices.
In addition, though the CSR spending in India from 2014-15 to 2019-20 had indicated an overall increasing trend (INR 10,065.93 Crores to INR 24,688.66 Crores), in 2020-21, CSR spending reduced dramatically to INR 8,828.11 Crores. So, the intervention of COVID-19 in CSR spending is apparent. Lower CSR spending in disrupted operating conditions will increase CSR reserves, entailing an extended commitment of companies toward more socially responsible behaviour in the days to come.
7. The Stepwise Implementation Model for Corporate Managers
CSR practices can be fruitful for the attainment of Sustainable Development Goals (SDGs). Managers need to understand a few steps to realise the true spirit of contributing to society by way of spending on CSR. A stepwise CSR process can be followed for adherence to CSR norms:
8. Conclusion & Future Outlook
The journey of CSR as a historical concept from philanthropy to comply or explain to the comply approach has been successful. CSR is the need of the hour and a national priority for India. The regulatory landscape has guided us about CSR provisions and its rules. The monitoring mechanism of CSR is expected to ensure better compliance. CSR practices lead to tangible and intangible benefits to stakeholders in terms of social inclusion. Developments such as CSR Accounting and Social Audit can bring efficient, effective and impactful results in the ensuing years. CSR spending in prominent areas of education and health augurs well.
During the pandemic, governments are pursuing the aim of implementing widespread healthcare measures in emerging economies. There had been a reduction in CSR spending during the period of COVID-19. The major shift in spending on CSR from the education to health category during the pandemic period was apparent. COVID-19 has intervened in spending on CSR. Data on CSR have indicated the emergence of need-based, focused, strategic, and sustainable CSR practices. CSR spending can facilitate resolving myriad societal issues and it provides support for protecting People, Planet and Profit (Triple Bottom Line).
Under CSR, part of the profit made by corporations is spent on society in a meaningful manner. The government or regulator’s understanding to allow broad-based CSR activities deserves appreciation. CSR Accounting and Social Audit provide ample scope of engagement for professionals. CSR is expected to be an ever-green corporate phenomenon. Its importance cannot be undermined until business entities continue as going concerns. ■■■