When Profit Meets Responsibility: Relevance of High-Impact Industries

Introduction

Although the aspect of businesses contributing to the societal interests dates back to early days of philanthropy, CSR in the contemporary period calls on corporations to be held legally accountable for their impact on economy, environment and the society.^[1]

In Indian context, this transition has been integrated under Section 135 of the Companies Act, 2013^[2] which makes it obligatory for certain companies to dedicate 2% of their average net profits of the past three years towards the social welfare activities as mentioned in Schedule VII of the said act.^[3] This in turn has induced both judicial interpretation and regulatory scrutiny with the growing significance of CSR.

The blog aims to delve upon how the Indian Courts have elucidated CSR obligations in the sectors of extractive and manufacturing industries (oil, energy, and mining) that have major social and environmental impacts.

The CSR Paradox: High- Impact Sectors and Public Welfare

The extractive and manufacturing industries contribute significantly to the economic growth. Manufacturing sector contribute for approx. 29.5% of India’s Gross Value Added for the FY 2021-22 and approx. 2.6% of the mining sector.^[4] However, these industries have been criticized for the disproportionate impact on the environment and public health. India’s total carbon dioxide emissions from the manufacturing sector involving industries like that of chemicals and steel production has been 21%.  The situation is further aggravated by deforestation caused by mining activities. The damage continues in the form of oil spills, for instance, the 2020 spill in Assam by Indian Oil Limited that caused serious damage to the Dibru-Saikhowa National Park.^[5]

The paradox lies in the aspect that these industries make significant profits, they are incompetent to internalize the environmental and social destruction that is caused.

How Indian Courts Refine the scope of Corporate Responsibility

These two environmental governance principles have played a major role in manufacturing and extractive industries and were raised in the Sterlite Industries Case.^[6] Both have been central in shaping of corporate responsibility for the protection of the environment.

The Precautionary Principle lays anticipating the harm before it occurs and mandates the prevention of the actions that are destructive to the environment even in the absence of any conclusive evidence of the danger at the time.^[7] The said principle requires these industries to adopt cleaner technologies and energy efficient measures through CSR activities.^[8] In the Sterlite Case^[9], an order to close the company’s copper smelting plant in Tamil Nadu was passed by apex court. There was violation of environmental norms and the court mandated that the corporations must take anticipatory measures to prevent the damage along with complying to the minimum standards.^[10]

The Polluter Pays Principle places a monetary liability on the entity that causes environmental harm. ^[11]In sectors involving manufacturing and extractive industries where pollution is ingrained, the principle ensures the companies are held accountable for the destruction so caused.^[12] It is aligned with the idea of CSR in aspects of compensating for the negative externalities generated by the companies. 

CSR, ESG, and Corporate Accountability

The term ESG first emerged in a UN Report^[13] in the year 2004, however it developed into a proactive approach only in late 2010’s and in 2020’s. ESG has evolved as a holistic approach guiding corporations on social and environmental impact.^[14] ESG integrates all these obligations within the company and requires structural changes for sustainable growth and societal benefit.^[15] Both complement each other, with CSR laying the cornerstone that allowed the legal and ethical obligations of ESG to become cemented in place today. Indian courts have played a significant role in the interpretation of these obligations, essentially the ESG factors.

• Environmental Obligation in Manufacturing and Extractive Industries-

Concerning the impact these industries have on the ecosystem and natural resources, there exists a correlation between the CSR and the environmental dimension of ESG.^[16]

As mentioned before, manufacturing sector alone accounted for 29.5% of the GVA of India in FY 2021-22, with 2.6% contribution of extractive sector to the GVA. Due to their harmful impact, these industries are criticized. In 2020, LG polymers was fined relying on Polluter Pays Principle by the National Green Tribunal (NGT) for the environmental damage and fatalities as a result of the gas leak.

• Social Obligation- Community Engagement and Human Rights

The two key concerns in these high impact industries are community displacement and violation of human rights.^[17] In the case of Vedanta Ltd. v. State of Odisha^[18] it was held that CSR efforts must include social rehabilitation programs, particularly to protect the human rights of the indigenous communities.

• Governance and Accountability

This component of ESG emphasizes on the transparency, compliance with the legislative norms and accountability.^[19] Corporations have been consistently held accountable by the Indian judiciary for gaps in governance which leads to environmental destruction.

In Essar Oil Case^[20], the company was directed by the Supreme Court to provide compensation for contravening the coastal regulation laws. Lack of proper governance had led Essar Oil to cause long term ecological balance.

When CSR meets the Circular Economy and becomes a Business Strategy

A Circular Economy (herein referred as CE) acts as a sustainable substitute to the traditional model of economy that follows a “take, make, dispose” approach. In a CE, it is ensured that the resources remain in use for the longest time possible, extracting the most value from them, thereafter, recovering and regenerating the materials and the products at the end of their lifecycle.^[21]  Thus, aims to minimize waste and reduce the depletion of resources.

Both CSR and CE are aimed at minimizing the negative impact on the environment. While the concern of CSR is on the ethical responsibility towards the society, CE goes a notch higher by restructuring the operation of the companies to reconsider their processes. 

• Waste Reduction and Resource Efficiency

Amalgamation of CE principles into CSR aims at minimizing waste and increasing resource efficiency during the process of production.^[22] For instance, Godrej Consumer Products Limited has opted for CE principles y using 100% recyclable materials in order to reduce the packaging waste.^[23]

• Generating Shared Value by Circular Supply Chains

Another innovative alignment of CE and CSR can be observed in companies reconstructing their supply chains.^[24] For instance, a major player in the manufacturing industry of India, ITC Limited shifted to sustainable sourcing by using post-consumer waste for its packaging and paper division signifying the co-existence of social responsibility and profitability within corporate framework.

Through consumer demands, regulatory compulsion and judicial interpretation, the synergy between CE and CSR is leading towards a more sustainable corporate framework, where societal and environmental obligations co-exist to create shared value for both the society and corporations.

Is CSR in Really Working in India?

The statutory mandate governing CSR in India under Section 135 of CA, 2013, provides a minimum standard for CSR expenditure but faces certain limitations. While it is mandatory for the companies to allocate 2% of their average net profits for the societal welfare, it does not lay down comprehensive and detailed guidelines on the effectiveness and nature of these activities. As a result of which the companies discharge the CSR obligation superficially by involving in non-impactful or minimal activities to meet the requirement. Moreover, lack of intensive auditing and compliance procedures leads to inadequate monitoring in which misutilization or ineffectual utilization of the CSR funds.

The “comply or explain” provision under Section 135(5) of the CA, 2013^[25] further compromises the efficacy of the CSR initiatives as it allows the companies to circumvent the substantial consequence for defiance by merely providing explanations. This has resulted in situations where the CSR expenditure is reported by the companies without any actual practical impact, as highlighted in the case of Adani Enterprises Limited. The dependence on the regulatory structure by voluntary obedience and the and the disjointed nature of CSR operations themselves impact to an ostensible approach to the critical environmental and social issues. This discrepancy demands the need for more stringent enforcement and amalgamation of CSR into corporate strategies.

With respect to extractive and manufacturing industries, due to major social and environmental impact these sectors have, the CSR framework has become even more pronounced. CSR is often used by these industries as an ostensible remedy for the community displacement and the environmental destruction they lead to. The CSR initiatives often bypass the Polluter Pays Principle that is well established in law. The companies often dedicate the CSR funds to mitigate the harm in a limited manner rather than internalizing the full cost of harm.

CSR initiatives remain ineffective in addressing major environmental and social concerns due to lack of ‘outcome- based’ evaluation. Rather than being an instrument for social benefit, CSR in some cases has evolved as a tool for public relations. The absence of clear procedure to measure long-term impact of the CSR initiatives allows companies to reflect short-term gains which contribute little to bring sustainable change. Therefore, there is a need for stringent regulation, one that views CSR as a core strategy internal to long-term corporate sustainability and ethical accountability.

The Road Ahead or Responsible Growth

There exists a complex interaction between corporate profit making, societal welfare and environmental accountability within India’s extractive and manufacturing industries. Indian Courts have played a significant role molding CSR to a legal mandate, especially for the corporations that have a disproportionate impact on the society and the environment. From landmark precedents involving M.C. Mehta to recent judgements like the ONGC and Essar Oil, the judiciary have been influential in expansion of interpretation of the constitutional rights, particularly Article 21 to include within its purview, a right to healthy environment.

Within the legal framework and judicial scrutiny, CSR in India still remains suspectable to ostensible compliance and “box-ticking” exercises, where companies fulfill the 2% mandate but fails to generate meaningful long-term social effects. CSR is often used as a shield by the high impact industries which diverts their attention from the core obligation under the precautionary and polluter pays principle. Therefore, CSR acts as a mere tool for enhancement of corporate image instead of actual efforts towards sustainable growth.

Moreover, the amalgamation of CSR with the contemporary aspects like CE and ESG signifies the developing nature of corporate accountability. The integration of the framework requires stringent enforcement, corporate leadership and innovative thinking to expose it to its full potential. Following measures can be taken -

1.  Internalizing Environmental Costs by the high impact industries and moving beyond compensatory CSR to ensure compliance with the Polluter pays principle and investment in environmental rehabilitation.

2. Strengthening Regulatory framework by instituting outcome-based evaluations and introducing independent audits for CSR to generate long term environmental and social impact.

3. Embedding CSR into core corporate strategies for aligning it with societal benefit and long-term profitability, particularly in high impact industries.

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This blog has been authored by Anushka Matta, a student at Symbiosis Law School Noida.

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REFERENCES

[1] Sharma, Seema. “Corporate Social Responsibility in India.” Indian Journal of Industrial Relations, Vol. 46, No. 4 (April 2011) Pg. 637-649

[2] The Companies Act, 2013, §. 135 (India).

[3] The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India).

[4] Press Information Bureau, First Advance Estimates of National Income, 2021-22, Ministry of Statistics & Programme Implementation, https://pib.gov.in/PressReleasePage.aspx?PRID=1788380. (accessed August 18, 2024).

[5] Ujjal Dutta & Shivangi Kalita, “An Analytical Case Study of the Oil Well Blowout at Baghjan Oil Field, Assam: a Human and Environmental Perspective”, Research Gate, 2024.

[6] Sterlite Industries (I) Ltd. Etc. Etc vs Union of India And Ors. Etc. Etc, (2013) 4 SCC 575 (India).

[7] Singh, C.P. “The Precautionary Principle and Environment Protection.” Journal of the Indian Law Institute, Vol. 52, no. 3 / 4 (2010): 467-483.

[8] Ibid.

[9] Sterlite Industries (I) Ltd. Etc. Etc vs Union of India And Ors. Etc. Etc, (2013) 4 SCC 575 (India).

[10] Sterlite Industries (I) Ltd. Etc. Etc vs Union of India And Ors. Etc. Etc, (2013) 4 SCC 575 (India).

[11] Shastri, Satish C. “The Polluter Pays Principle and the Supreme Court of India.” Journal of the Indian Law Institute, Vol. 42, no. 1 (2000) 108-116.

[12] Ibid.

[13] UN Report, 2004 United Nations – Who Cares Wins: Connecting Financial Markets to a Changing World.

[14] Shaukat et al., “Borad attributes, Corporate Social Responsibility Strategy, and Corporate Environmental and Social Performance.” Journal of Business Ethics, Vol. 135, no. 3 (2016): 569-585. 

[15] Ibid.

[16] Ibid.

[17] Shaukat et al., “Borad attributes, Corporate Social Responsibility Strategy, and Corporate Environmental and Social Performance.” Journal of Business Ethics, Vol. 135, no. 3 (2016): 569-585. 

[18] Vedanta Aluminum Limited vs State of Orissa And Others, W.P. (C ) No. 8889 of 2017.

[19] Shaukat et al., “Borad attributes, Corporate Social Responsibility Strategy, and Corporate Environmental and Social Performance.” Journal of Business Ethics, Vol. 135, no. 3 (2016): 569-585. 

[20] Essar Oil Ltd vs Halar Utkarsh Samiti & Ors (2004) 2 SCC 392 (India).

[21] Ibid.

[22] Ibid.

[23] Godrej Consumer Products Limited: Godrej Consumer Products Ltd. Annual Report 2022, https://www.godrejcp.com/sustainability.

[24] Donato Morea et al., “Circular Economy and corporate social responsibility: Towards an integrated strategic approach in the multinational cosmetics industry.” Journal of Cleaner Production, Vol. 315 (2021) https://www.sciencedirect.com/science/article/pii/S0959652621024495 (accessed 21 August 2024).

[25]  The Companies Act, 2013, §. 135(5), (India).