Business Standard Column
The Institute of Chartered Accountants of India (ICAI) deserves a pat on the back for its move to frame a new set of rules on corporate social responsibility (CSR), making it a must for companies to report on their social and environmental initiatives. No one can fault the logic of ICAI ‘s decision as a growing body of evidence globally indicates that companies that fall short of the transparency benchmark on CSR risk significant damage to management credibility. That explains the growing "triple bottom-line" approach to business – which balances economic interests against social and environmental concerns. There is a sound economic reason as well for transparent reporting of such non-financial assets. Global examples have shown that companies that report more comprehensively on sustainability issues can often improve their valuation in the capital markets as well. Sustainability has moved from the fringes of the business world to the top of shareholders' agenda in many countries.
Indian companies obviously cannot remain far behind for long. Some might feel ICAI need not make such reporting mandatory as quite a few companies are already giving a detailed account of their CSR activities in the annual reports. But this argument does not hold much water. Despite the obvious benefits, corporate disclosure on sustainability issues is still either peripheral in nature (for example, the number of saplings planted by the CEO's wife) or simply non-existent. For example, a recent KPMG study showed that only 25 per cent of the companies surveyed had filed CSR reports. Just 8 per cent mentioned their social expenditures in their annual reports, making statistics on such initiatives elusive.
While developing a framework for standardising the disclosures, ICAI can look at the guidelines framed by the Global Reporting Initiative (GRI), a collaborating centre of the United Nations Environment Programme. The GRI guidelines are the most commonly used framework in the world for reporting and over 1,000 organisations from 60 countries use them for producing their sustainability reports. The GRI vision is simple: reporting on economic, environmental and social performance by all organisations is as routine and comparable as financial reporting. Besides, such reporting leads to sustainable development because it allows companies to measure, track and improve their performance on specific issues. It is obvious that companies are much more likely to effectively manage an issue that they can measure. GRI guidelines require companies to give detailed performance indicators (for example, the total water withdrawal by source) to ensure that the reporting is real and measurable and not just cosmetic in nature.
It is, however, difficult to figure out whether laws can change the mindset. There are innumerable examples of Indian companies flouting laws openly and without consequences. For instance, lifeline rivers have fallen prey to harmful effluents from factories despite the environmental laws in place; unlisted subsidiaries of many companies, mostly in the small and medium sector, still employ child labour on the sly; and many beverages and paper companies, which have exploited environment, have got away with paltry penalties. Such cynicism notwithstanding, ICAI's efforts in putting together a measurable indicator of sustainability score and its mandatory reporting deserve full support.