India became the first country globally to introduce mandatory requirements on corporate social responsibility (CSR) for companies, under Section 135 of the Companies Act, 2013. The mandate’s objective was to make companies “discharge their social responsibility through their innovative ideas and management skills,” and government hoped it would breathe new life into the development sector.
Against the backdrop of widening income inequality and an estimated 260 million people living below the poverty line, CSR funds accounted for a mere 1 percent of the total public spending in India in 2015-16. So far, companies have preferred to spend their CSR monies on programmatic grants that focus on direct delivery of services. But if companies are to make meaningful progress against the development challenges at hand, the very nature of how they see CSR needs to evolve.
Companies need to shift focus in two ways: from individual to ecosystem, and from delivering services to building capacity and enabling the market.
In other words, companies need to become catalysts for development.
A catalytic intervention is defined by its ability to:
- Unlock more resources by seeding the flow of mainstream capital
- Address market failures
- Reduce transaction costs and information asymmetry between various actors
- Introduce new stakeholders to the ecosystem and leverage their competencies
Furthermore, there are three ways in which companies can be catalytic: through how they spend their CSR funds, who they work with, and how they leverage their core business competence to achieve social outcomes.
Application of certain blended finance instruments, such as loan guarantee funds (LGFs) and syndicate funds, could push the envelope to achieve sustainable impact and generate greater social returns for CSR.
Let us take the case of loan guarantee fund that facilitates lending to micro-enterprises at the bottom of the pyramid. An LGF is a non-bank financial instrument aimed at helping micro, small, and medium-sized enterprises access formal lending through the provision of credit guarantees that mitigate the risk of non-repayment.
The business-as-usual model of CSR would be to give a grant to an agency for imparting vocational training to, for example, 1,000 young adults who have dropped out of school. But while this addresses the problem of making the youth employable, it does not consider the inelastic nature of the formal job market in India, where there are more job seekers than jobs. Instead of or in addition to creating 1,000 job seekers, a catalytic intervention would create 1,000 job creators through the use of LGFs.
Godrej Properties Ltd. (GPL), one of the leading real estate companies in India, has created an innovative model that boosts micro-entrepreneurship within the construction industry. GPL observed a short and irregular working capital cycle—the amount of time it takes to turn current net assets and liabilities into cash (essentially the operational liquidity of the company)—and a lack of access to loans for small contractors. Both of these factors were deterrents to scale.
In response, GPL provided a one-time grant to Pratham, a large nonprofit, which enabled Pratham to use the funds as a loan guarantee through a collaboration with a financial institution. The project currently extends loans to micro and small contractors without a formal financial footprint or credit history. Pratham runs the program, and helps micro contractors connect to new clients and scale their operations sustainably.
The first year saw a matched funding model where the financial institution sanctioned a total loan amount equivalent to the size of the guarantee. In subsequent years—buoyed by the success of the pilot, where the default rate was 20 percent, and backed with more data—it is expected that the guarantee will lead to the creation of a loan book three times the size of the guarantee fund.
Another example of a blended finance model gaining some traction in CSR is syndicate funding. A syndicate is an investment vehicle that allows investors (backers) to co-invest with relevant and reputable lead investors.
We recently worked with The Power of Nutrition— a standalone, UK-based charitable foundation established by the Children's Investment Fund Foundation, UBS Optimus Foundation, Department for International Development, UNICEF and World Bank—to test the waters in India, building on the foundation’s investments and partnerships in Africa.
The Power of Nutrition has an interesting model, wherein, much like syndicate funding, it operates as the lead investor and invites companies to be the backers through CSR. The syndicate multiplies each dollar of CSR investment by four times. The money goes toward providing basic nutrition supplements, services, and education through implementing partners.
This model has many advantages for CSR in India. Chief among them is its ability to scale impact via a critical mass of investment in a specific cause. The professionalism of the approach is guaranteed through the presence of expert leaders, who understand policy and practice, guide companies in making optimum allocations, and ensure holistic interventions to maximize impact. This also significantly reduces the transaction costs of multiple companies identifying interventions, credible NGOs, monitoring activities, and so on. An instrument like this can also ensure that CSR becomes a vehicle for companies to invest in sticky, wicked issues by bringing in global best practices and spreading the risks due to multiple investors. Most importantly, it provides support and accountability to all firms, whether they have a large or a small CSR budget, allowing all parties to contribute to large scale impact.
Given the size of the programs that The Power of Nutrition brings together—all greater than $10 million after the leverage—its model is geared toward working with and through existing government priorities, which both strengthens and incentivizes government best practice.
Of course, all of these instruments require careful structuring to comply with section 135, and to align with and generate value for local stakeholders in a variety of contexts and ecosystems.
Another way in which companies can be catalysts is by encouraging new forms of partnerships. While nonprofits have been Indian companies' partners of choice for executing CSR programs., companies stand to benefit from organizations with other types of competencies.
Consider: India has the third-largest business-incubator ecosystem in the world. It abounds with technology and innovations, which can help accelerate socio-economic development. At the same time, it has seen persistent gaps in financial and non-financial capital available to social enterprises. Partnerships between companies and start-up social enterprises open up a plethora of opportunities.
Capital First Limited (CFL) is a highly successful Indian financial institution that partnered with Zone Startups, an incubator that provides hands-on strategic and tactical guidance to empower women-led start-ups. CFL provided both monetary funding and mentoring to the starts-ups via the incubator and through direct engagement with the entrepreneur cohort. Historically, the company had supported livelihoods and women’s empowerment through scholarships and skill training. But when it discovered a suitable incubator partner that aligned with its mission and values, and had the ability to offer support to women, CFL took the leap of faith and experimented with a new CSR model.
In order for more companies and social enterprises to work with each other, the sector needs: 1) a knowledge database and a marketplace to create awareness among companies and social enterprises about each other’s models and connect them, and 2) more enabling platforms or intermediaries, who can support and manage relationships and expectations between companies and social enterprises until they are used to each other’s ways.
Our experience has shown that CSR programs that leverage a business’s core competencies have more potential to create impact.
Technology, media, and telecom companies, for example, can create widespread social change by bridging knowledge and information gaps, empowering the voiceless, and influencing behaviors and attitudes.
Through its flagship CSR project Chakachak Mumbai (chakachak is a colloquial term for “spotless”), the media conglomerate Viacom18 has been supporting the Municipal Corporation of Greater Mumbai to make Mumbai free of open defecation. The company is using its skill at powerful storytelling to change public mindsets. Viacom18’ adopted a two-pronged approach that connects with all age groups across the diaspora of communities, and uses art and social experiment to question the status quo around cleanliness.
Its #GetAngry video campaign asked citizens to consider whether they were “getting angry” for the right reasons—whether unhygienic practices such as spitting and urinating in public were really more acceptable than social taboos such as couples openly displaying affection. These videos garnered more than 2 million views on Facebook and #GetAngry was one of the trending topics on Twitter the day it launched. Its art-based strategy involved converting public spaces, such as railway stations and bridges, into canvases for emotive messaging around cleanliness.
India has the fastest-growing economy in the world. Its stock market is booming, the recent fall notwithstanding. It currently has 119 billionaires—18 more than the previous year. And last year, it jumped up 30 notches into the top 100 countries in the World Bank’s “ease of doing business” index.
And yet, India ranks 116th out of 157 countries on the 2017 Sustainable Development Goal Index; 132 out of 152 nations in an income-inequality index by Development Finance International, Inc. and Oxfam; and 108 out of 144 countries in the World Economic Forum’s 2017 gender equality index, down 21 places from the previous year.
By themselves, Indian companies are cognizant that they may not move the needle on critical development problems. CSR funding, even at $2 billion a year, is a fraction of the overall funding needed for social development in India. However, catalytic models like those highlighted here leverage traits unique to companies—including rigor, the ability to innovate, and the willingness to collaborate—that can lay the groundwork for greater efficiency and impact, and facilitate scaling.