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CSR AND ESG: THE KEY DIFFERENCE


Introduction

Businesses are deeply connected with environmental, social, and governance concerns. Two terms that we often hear in connection with sustainability, and sometimes used interchangeably are Corporate Social Responsibility (CSR) and Environmental, social, and governance (ESG). While there are many areas these two terms overlap each other, still there is difference in both terms and their real implications. While CSR aims to make a business accountable, ESG criteria make such business’ efforts measurable.

CSR is about how companies manage the business processes to produce an overall positive impact on society. Environmental, social, and governance (ESG) criteria are a set of standards for a company’s behaviour used by socially conscious investors to screen potential investments.

Although ESG and CSR both focus on a company's influence on society and the environment, the key distinction lies in the fact that CSR is a corporate strategy employed by individual companies, whereas ESG serves as a metric utilized by investors to evaluate a company's viability for investment.

In this Article we are looking at the legal difference in both ESG and CSR. How it is implemented in India and framework adopted for application of both.


Legal Provisions for CSR in India:

Section 135 of the Companies Act, 2013 ("Act") provides that certain companies must mandatorily contribute a certain amount towards CSR activities. As per the Act, 'Corporate Social Responsibility' means and includes but is not limited to:

·         Projects or programs relating to activities specified in Schedule VII to The Act.

·         Projects or programs relating to those activities which are undertaken by the Board of Directors of a company in ensuring the recommendation of the CSR Committee of the Board as per declared CSR Policy along with the conditions that such policy will cover subjects specified in Schedule VII of the Act.

As per section 135(1) of the Companies Act 2013, the CSR provision applies to companies which fulfils any of the following criteria during the immediately preceding financial year: –

·         Companies having net worth of rupees five hundred crore or more, or

·         Companies having turnover of rupees one thousand crore or more, or

·         Companies having a net profit of rupees five crore or more.

·         As per Rule 3, Every company, including its holding company, subsidiary, and foreign company with a branch office or project office in India that has a net worth of rupees 500 crore or more, a turnover of rupees 1000 crore or more, or a net profit of rupees 5 crore or more during the immediately preceding financial year will also be subject to the CSR provision

·         According to Section 135, sub-clause 5 of the Act, all the companies which satisfy the criteria mentioned under Section 135(1) need to spend at least 2% of the average net profit earned during the immediately preceding three financial years in accordance with the company’s corporate social responsibility policy.


Legal Provisions for ESG in India

There are various laws and regulations that companies must adhere to, some of which include Water (Prevention and Control of pollution) Act, 1974Air (Prevention and Control of Pollution) Act, 1981Forest (Conservation) Act, 1980Wildlife Protection Act, 1972 etc. The Companies Act of 2013 serves as the primary legislation governing Indian companies and provides a comprehensive framework for their governance. 

Section 166 of the Companies Act 2013 establishes the duty of a director to act in the best interests of the company, its members, shareholders, the community, and the environment. Non-compliance with this provision can result in penalties. Section 134(m) mandates companies to include a report by their Board of Directors on conservation of energy, along with annual financial statement. This requirement is further detailed under Rule 8(3)(A) of the Companies (Accounts) Rules, 2014, which mandates the board to provide information regarding conservation of energy.

In addition to this, companies are mandated to include disclosures on opportunities, threats, risks and concerns as part of their annual reports under Regulation 34(3) of the SEBI (Listing Obligation and Disclosure Requirements) Regulation, 2015 (“LODR Regulations”). However, such disclosure requirements do not seek details about the metrics and processes adopted by companies to identify such opportunities or risks nor mandates the companies to chart its progress over the course of time.


The Key differences between CSR and ESG:

1.      Corporate Social Responsibility (CSR) covers the overarching social, environmental, and economic concerns in a company’s policies, practices, and decision-making.

Whereas ESG practices can be used to evaluate how well a company is adhering to the sustainability and corporate responsibility goals they set.

2.      Though CSR is about accountability, the qualitative nature of CSR makes it difficult to pin down.

ESG criteria focus on quantitative results that help investors make better decisions about the risks and ethics of particular companies.

3.      CSR starts with recognizing the key sustainability concerns in your industry and incorporating improvement as part of your culture. 

Implementing ESG is a more involved process than implementing CSR because it requires measurable goals, data collection, and reporting.

4.      CSR activities are structured to motivate employees while also improving a company's public image among customers and invested communities through related reports.

Conversely ESG reporting and disclosure is mainly devised to meet the requirements of investors and stakeholders.

5.      CSR considers how a company treats its employees, customers and suppliers, whereas ESG broadens this scope to consider how a company monitors and reduces its environmental footprint in addition to workforce treatment and governance transparency. 

6.      CSR initiatives may be goal-oriented and include reporting, yet ESG is the more systematic of the two. Companies engaging in ESG will require a larger scope of quantitative information to disclose - though qualitative data also plays an essential role. Furthermore, worldwide frameworks, standards, questionnaires, as well as ratings, offer some uniformity for gauging ESG exposure & performance, while CSR outcomes generally depend on each company's own efforts.

7.      CSR may reflect values held within the company itself, but ESG reporting focuses solely on materiality in order to identify potential areas for improvement.

In conclusion:

Corporate Social Responsibility (CSR) primarily focuses on the social component of ‘Environmental, Social, and Governance’ (ESG), encompassing how a company impacts society through initiatives like diversity and inclusion programs, charitable donations, volunteer efforts, and grants. Although ESG is still emerging, the growing worldwide emphasis on sustainable practices, reducing carbon footprints, and attaining positive social and environmental goals will urge investors to carefully assess ESG and CSR criteria when choosing impactful investments. Investors will particularly scrutinize ESG standards as part of their due diligence. These efforts are crucial elements of a company's self-defined CSR strategy.


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