Socially responsible stocks can bolster the CSR law

  • Vanita Tripathi and Varun Bhandari
  • Updated: Apr 23, 2014 00:27 IST

Corporate social responsibility (CSR) is the most talked about topic these days, especially after the enactment of the Companies Act 2013. According to the Act, any company with net worth of Rs. 500 crore or more, or a turnover of Rs. 1,000 crore or more or a net profit of Rs. 5 crore or more during any financial year will have to constitute a CSR committee and ensure that it spends at least 2% of the average net profits of the company made during the three preceding financial years, in every financial year, in pursuance of its CSR policy. In the case of failure to do so, it must report the necessary reasons for not spending the same in the Board’s report. This, according to reports, will release Rs. 18,000 crore to Rs. 20,000 crore for social welfare activities.

However, the enforcement aspect of such a regulation is a concern; whether such an amount will be spent on social welfare or companies will find out ways of escaping such a responsibility. So is there a better way to make companies socially accountable and enforce CSR principles? We think it’s possible by using Socially Responsible Investing (SRI) because companies understand the language of stock markets. Put simply, SRI implies that while making investment decision, investors must consider the social and environmental performance and not just the financial performance of a company. A socially responsible investor invests in socially responsible companies and penalises irresponsible companies by not demanding its shares. Unless the investors turn socially responsible, CSR principles cannot be enforced in practice.

The main concern of SRI is whether investment in socially responsible stocks provides significantly lower returns than other stocks. Our recent research shows that there is no penalty for investing in socially responsible companies in the Indian stock market. Mutual funds and other investment funds should launch schemes that invest in socially responsible stocks, to provide the outreach of SRI even to small investors in India. This way, CSR principles can be enforced in an effective way, in the language companies understand.

Vanita Tripathi is assistant professor and Varun Bhandari is research scholar, Department of Commerce, Delhi School of Economics, University of Delhi

The views expressed by the authors are personal

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