Beyond Tokenism: Understanding Corporate Environmental Responsibility in the context of Indian & Foreign Jurisdictions

ABSTRACT

As the Climate Clock ticks ever so swiftly at New York City’s Union Square, marking us getting every second closer to irreparable environmental damage, it is imperative that governments across the globe are coming up with numerous legislations and statutes in order to do their bit to prevent the same. Big corporations being one of the largest holders of resources are rightfully also expected to allocate funds from their vast capital reserves for the purpose of combating climate change. This expectation is given a tangible and actualised form through the concept of Corporate Environmental Responsibility (CER), which mandates companies to renounce any and all activities that harm, or hold the proclivity to harm the environment. This article explores the tenets and implications of CER under the overarching umbrella of CSR, and a comparison with the same in foreign corporate jurisdictions.

INTRODUCTION: THE CSR-CER VENN DIAGRAM

Corporate Social Responsibility (CSR) is a statutory requirement under Section 135 of the Indian Companies Act, 2013 for companies to ensure that their goals and agendas go beyond revenue generation and profit maximisation, and also include things like social welfare and the responsibility to protect the environment. The section is succinct and specific when it comes to the parameters that mandate an organisation to acknowledge and implement CSR initiatives. It states that every company having a net worth of Rs. 500 crores or more, or a turnover of Rs. 1000 crores or more, or a net profit of Rs. 5 crores or more shall spend at least 2% of the average net profits towards social responsibilities as determined by the CSR Committee. Additionally, Schedule 7 to the Companies Act specifies a non-exhaustive list of agendas, such as gender justice and equality, poverty eradication, elimination of the hunger crisis, sanitation etc., which companies can undertake as a part of their CSR initiatives.

CER, on the other hand, is an important subset of CSR, that emphasises for companies to put special focus and allocate a separate percentage of their capital reserves specifically for the protection of the environment. Statutorily, CER was first codified in the form of Guidelines for Preparation and Implementation of Corporate Environment Responsibilities (CER) Proposals by the Government in May 2018.

Visualising the relationship between CSR and CER, one could get a venn diagram wherein a bigger circle (signifying CSR) encircles a small circle within which stands for CER. The implication thereby becomes: All CER activities are CSR activities, but all CSR activities are not CER activities. This implication also makes it important to demarcate the boundaries and distinction between the two concepts, especially when it comes to the practical application of the separate objectives of the two by corporations.

The way environmental responsibility is defined and elaborated by codes and statutes, especially by the National Guidelines on the Economic, Social and Environmental Responsibilities of Business 2018 (‘the 2018 Guidelines’) and the much contested Draft Environment Impact Assessment 2020 (‘Draft EIA’) is emblematic of why CER principles are utilitarian and capable of being realistically implemented only so long as CER remains a standalone practice adopted by companies in addition of their CSR initiatives. Chapter II Principle 6 of the 2018 Guidelines postulates that businesses must respect the environment and all their actions must be in line with the protection and restoration of the environment. Furthermore, the Section 3(16) of the Draft EIA gives a comprehensive definition of CER, reproduced hereunder -

‘“Corporate Environment Responsibility (hereinafter referred to as ‘CER’)” is the part of EMP wherein the project proponent is mandated to carry out certain activities for environment safeguard in the immediate surroundings of the project based on the issues raised during the public consultation and / or social need based assessment carried during the EIA studies;’

What’s interesting about the dichotomy between CSR and CER is something that lies in the government’s outlook vis-a-vis the two concepts. The Companies Act, 2013, does a sufficient job when it comes to including environmental welfare responsibilities within what constitutes CSR, yet the Government has time and again in the form of codes, statutes and guidelines emphasized the more pressing need for separate CER initiatives. This approach has seen backlash from companies that see this as an effort in redundancy and inefficiency due to the overlap of the two overtly synonymous initiatives.

PITFALLS WITHIN THE PRE-EXISTING CER MECHANISM

One of the major criticisms of CER, besides those of duplicacy of efforts coming from the companies’ side, revolves around the largely non-enforceable nature of the Guidelines. The genesis of these guidelines dealing with the environmental responsibilities of companies and corporations are rooted in self-regulation, meaning the Government ends up leaving it up to the interpretation and better judgement of these companies to devise plans and schemes for environment protection as they see fit. In the absence of clear-cut horizontally-applicable expectations from the regulator’s side, the enforcement mechanism weakens leading to excessive leeway for companies to circumvent the CER requirements.

Another important shortcoming with CER is rooted in the point from where CER originates. According to the relevant provisions that delineate the parameters of CER from the overarching principles of CSR, the CER initiatives are categorically applicable on ‘project proponents’ which are basically companies and enterprises that have such projects underway which require them to get environmental clearance from regulatory authorities. This prerequisite conditionality implies that they are yet to make any profit or turnover at all, let alone cross the thresholds mentioned under Section 135 of the Companies Act 2013, meaning that they would be able to circumvent the requirements of CSR under the same section. To prevent such circumvention on account of ‘yet-to-be-made’ turnover and profits, CER was brought into the picture and was bifurcated into ‘brownfield projects’ and ‘greenfield projects.’ A brownfield project is one undertaken on pre-existing infrastructure, leveraging technology and structures that are already available to the corporation. On the other hand, a greenfield project is something that is started entirely from scratch by a company, predominantly on underdeveloped land, with no prior infrastructural work done. Naturally, brownfield projects are undertaken by companies that have a certain amount of in-hand profits i.e., profitable companies, and hence, the requirements of CSR are applicable on them. It’s the greenfield projects, which are predominantly taken up by non-profitable companies, that are able to circumvent any and every CSR requirement. Due to this factor, a slightly higher percentage of CER requirement is levied on companies undertaking greenfield projects in order for them to get environmental clearance for the same. The critique of this bifurcated categorisation lies in the lack of clarity when the clear-cut, defined categories happen to overlap. Critics argue that an unfair precedent is set when overlap of any kind inadvertently leads to redundant duplication of efforts, for instance in scenarios wherein a profitable company plans to undertake a greenfield project.

CER IN FOREIGN JURISDICTIONS

At this juncture, it is important to clarify why we must understand CER at an international level as well. Simple reasoning is because the entire globe shares one singular earth and nature, and the actions of one nation’s corporations bear ecological consequences for the entire world. Keeping this exact thought in mind, international organizations and supranational bodies have had a new wave of awareness and cognizance with respect to associating environmental welfare as a non-negotiable tenet of development.

A fair yardstick of comparison from the western world is the way CER manifests in US markets. In the US, it has been a rising trend amongst market stakeholders to consciously opt for businesses that aren’t fence-sitters when it comes to social and environmental causes. In the past two decades, investors have actively sought information symmetry regarding the company’s real-world, tangible contribution to environmental welfare as a term of their association with the same.

Circling back to the wave of awareness that supranational organizations have displayed over the years with regards to CER initiatives, the European Union (EU) stands to be a prominent example. In 2014, the EU announced its Non-Financial Reporting Directive (NFRD) which was a step in the direction of information symmetry when it comes to a corporation’s environmental actions. The document mandates disclosure on part of large companies, in order to ensure that civil society organizations, trade unions and others have access to adequate non-financial information from companies, so that they are able to hold them to account for their impacts on society and the environment.

21st CENTURY GREENWASHING & EVERYTHING WRONG WITH IT

While on one side of the coin is the bonafide practice of CER, on the flipside exists the concept of ‘Greenwashing.’ The spirit of Greenwashing lies in the tokenistic act of deceiving stakeholders and the general public into believing that corporate practices are environmentally mindful, when in reality it is at best a facade. By definition, Greenwashing is the act of companies making false or misleading statements about the environmental benefits of their product or practice.

While on the outset Greenwashing sounds like a run-of-the-mill advertisement practice and largely a victimless crime, the reality as well as the climate statistics say otherwise. The most prominent issue with greenwashing is the fact that it uses deceptive and misleading methods to take public attention away from pressing environmental matters, and thereby ultimately delaying the implementation of concrete solutions and plans of action by distorting the need for any. The activities of the fast fashion industry, known for its widespread environmental impact, is a prominent example of rampant greenwashing. The 2021 Changing Markets Foundation Report scrutinised leading street-fashion brains to appraise the veracity and truthfulness of their sustainability claims, and found that about 60% of all these claims were misleading. Top of the list was H&M, with a whopping 96% of the sustainability claims made by them not being true.

One of the major downsides of greenwashing is rooted in how it is rather difficult to spot. Today, the average consumer is both educated and conscious enough to actively seek products and services of companies that do their bit for the earth. This consciousness is what has led companies to opt for greenwashing tactics at the core of their supposed CER initiatives, which include but are not limited to misleading labels, irrelevant claims, deceptive imagery etc., so that the consumers can validate themselves for making environmentally-friendly ethical purchases, when the trickledown impact says otherwise.

CONCLUSION & WAY FORWARD

The foremost idea that corporations must principally understand is the fact that CER is more than just an obligatory setting-aside of funds from their capital reserves in order to appear as the more environmentally-conscious options for their consumer base to choose. It is also important for corporations to adequately demarcate their CSR and CER initiatives and not practice subsuming the latter under the umbrella category of CSR, all while fully knowing the more pressing nature of environmental detriment that can be limited by their genuine contributions. The future of CER-related policies in India, taking reference from what worked well for our western counterparts, can potentially be passed in the realm of financial incentives, subsidies, and carbon-taxing. For example, France uses environmental taxation as an economic tool to achieve its net zero emission targets. This French approach involves reducing the accessibility (and hence, the demand) of goods and services that aren’t eco-friendly by increasing the cost of polluting products. This policy seems to have a snowball effect on companies’ incentive to take more environment-friendly decisions and make their CER policies more airtight.

While we owe M. C. Mehta v Union of India for bringing about absolute liability on corporations for damaging the environment, the fact still remains that it is more along the lines of cure for as opposed to prevention of environmental atrocities. In order to take a more preventive approach, companies must adopt and inculcate ‘Precautionary Principle’ in their CER initiatives. This would ensure that corporations are proactively doing their bit to prevent ecological harm rather than committing irreversible environmental blunders and subsequently relying on their ability to pay off people aggrieved by their actions, all while doing little to nothing for the environment.

From a statutory standpoint, while CER guidelines exist in the most comprehensive and extensive forms out there, the nature of those remains more open-ended and non-binding. The lawmakers can lead by example for companies by not restricting their role to releasing notifications and guidelines, and by seeing the impacts of their green legislations through.

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This post is authored by Anushikha Pokhriyal, a final year law student at Dr. Ram Manohar Lohiya National Law University, Lucknow.