In 2013, India enacted a pioneering mandate that required companies above a certain size, revenue or profit threshold to invest 2% of their net profits on corporate social responsibility (CSR) projects every year. A recent paper that identified patterns of CSR investments after the law was enacted holds pointers for other countries that may consider similar mandates, said Wharton management professor Aline Gatignon.
“Most firms chose a narrow focus on similar projects, whereas leading firms and state-owned enterprises typically adopted a broader and more distinctive approach,” according to the paper titled “When Few Give to Many and Many Give to Few,” which Gatignon co-authored with Christiane Bode, professor of strategy at London’s Imperial College Business School.
The study examined the nature of firms’ CSR strategies along four dimensions: their choice of target social causes, locations, implementation channels, and number of projects. It identified two types of CSR strategies at Indian firms.
The authors analyzed nearly 87,000 CSR projects implemented by more than 12,000 firms in the first four years after India enacted the law. Most of the firms covered in the study were domestic Indian firms (foreign firms made up 4% to 6%), and most were also private sector firms (2% to 4% were state-owned firms). The law applies to companies with a net worth of 5 billion rupees ($100 million when it was passed), a turnover of $10 billion rupees ($200 million), or net profit exceeding 50 million rupees ($1 million) in the preceding year. It has since undergone several amendments.
Addressing Stakeholder Concerns
The findings identified two broad trends. First, firms across the board aligned their CSR strategy with the interests of “influential stakeholders” — investors, the government, and the general public — by focusing mostly on the two social causes of education (35.6%) and healthcare (20.1%). The second tier of projects focused on rural development (6.1%), eradicating poverty and hunger (5.6%), and environmental sustainability (5.2%). The 22 remaining social causes collectively accounted for just about 27% of projects.
Most firms implemented CSR projects close to their head office locations, except leading firms in an industry and SOEs. “Because there are more firms in these typically wealthier and more populous areas, we end up with a concentration of everybody doing CSR projects in the same places, which are also the places that tend to already have higher scores in terms of education and health care, and are also getting more attention from the government and NGOs,” Gatignon said. “It’s a clustering that appears suboptimal from a social perspective. It’s also not great for firms because their CSR projects are all very similar.”
“Even when firms were in industries that were directly related to eligible social causes, they didn’t engage in those social causes, unless they were education and health care.” – Aline Gatignon
Therefore, the majority of CSR projects (53%) were located in only four states – Maharashtra (25%), Tamil Nadu, Gujarat, and Karnataka (about 9% each) – without substantial variation over time. The next seven states comprised 31% of the CSR projects. Almost 85% of the projects occur in less than half of India’s states. Most CSR projects were implemented directly by firms (52%), 6% through firms’ corporate foundations, and 39% through NGOs.
Why are so many firms adopting this strategy? Most firms in the study sample (79%) were not in industries that are directly related to any of the eligible social causes, which meant that they couldn’t directly leverage their resources and capabilities. “Even when firms were in industries that were directly related to eligible social causes, they didn’t engage in those social causes, unless they were education and health care,” Gatignon said.
However, the share of CSR projects by state correlated with the population size and the seats they hold in the Lok Sabha (the lower house of India’s Parliament), as well as the number of seats controlled by the Bharatiya Janata Party (BJP), the ruling political party. “The states where there are the most CSR projects are also states where the BJP has a majority,” Gatignon said. “[Conversely], the states where the BJP is in a minority are also places where there are very few CSR projects. Our analysis is not causal, but it’s a piece of the puzzle that leads us to think that firms are attentive to government influence, in addition to investor preferences, when designing their CSR strategies.”
Leading firms within an industry and state-owned enterprises (SOEs) chose a different strategy where they attended to “a wider variety of stakeholder concerns with larger and more diverse portfolios of CSR projects,” which leading firms implemented through NGOs. Of the two, the strategy adopted by leading firms and SOEs “holds greater potential for social impact,” the paper noted. But neither strategy leverages the comparative efficiency of firms, which is contrary to the goals of the mandate, the authors added.
The paper also identified actions firms and governments can take to enhance the benefits of legal mandates for CSR. The paper avoided making “causal arguments” about the social impact outcomes of the CSR investments because the available data did not cover that for the periods before or after the law became effective. But the data provided by such a mandate can help policymakers refine its legal parameters and firms reassess their CSR strategies over time, in ways that could ultimately enhance the mandate’s social impact.
At the time India passed the CSR law, 176 million Indians (more than half the entire U.S. population) “lived in extreme poverty despite high macro-economic growth,” the paper noted. According to Gatignon, the paper gives “unprecedented insights” into how a variety of firms choose to spend CSR money across different dimensions.
“We’re looking at one of the largest emerging markets in the world, with a huge population and high economic growth, but also very salient social problems,” Gatignon said. “The potential implications [of the paper’s findings] could be generalized to other settings, at least to some extent.” Those implications include the level of reporting on project outcomes and transparency.
“There is growing discussion around legislating the nature of ESG (environmental, social and governance) disclosures and growing pressure for firms to invest in or report on ESG/CSR activities,” Gatignon continued. “Although this may be a less formal or stringent constraint on firms, it could have similar consequences.”
In the U.S., CSR can support firms’ ESG activities. ESG investments are not mandatory for U.S. companies, but the Securities and Exchange Commission in May 2022 proposed rules that would require disclosures of incorporation of ESG factors, especially around climate risk.