Governments negotiate trade deals in various formats for better market access and preferential terms of trade for their country’s products and services. These preferential terms are then utilised by companies to secure and expand their commercial footprints in these partner countries, through cheaper inputs and larger export markets.
Trade liberalisation is, therefore, commercially important for corporations, particularly for the larger enterprises which are best placed to capitalise on the opportunities created by freer trade, thus enabling them to maintain highly profitable ventures. Corporate social responsibility (CSR) seeks to balance this profit-making by nudging, or, in certain cases, mandating, companies to forsake a part of their profit towards shouldering larger societal responsibility. This, at least, is the theory of it.
Does it work?
For any enterprise to successfully integrate with the global trading system, and for its commercial activities to become a profitable venture, it needs to be highly competitive. Many would remember economist Milton Friedman’s prescriptions in his enduringly controversial essay published in 1970, The Social Responsibility of Business is to Increase its Profits. These are the ideas which have limited appeal today.
There is a case, instead, to be made today for flipping this notion on its head—that is, getting businesses to see that a greater emphasis on social responsibility can yield rich dividends commercially.
These advantages can include product differentiation in developed markets, where social impacts of the process and production methods of commodities are major factors in consumer tastes and preferences, and attract inward investment from sustainable financing firms for domestic expansion.
For this to happen, an essential prerequisite is the corporate stewardship of social responsibility, instead of it being driven by a governmental authority. Once firms see the commercial prospects of the potential competitive advantages accruing from a conscious effort toward greater social responsibility in operations, they have every incentive to voluntarily incorporate such aspects in their ecosystem.
Even on the international plane, the references to social responsibility of corporate entities in certain free trade agreements (FTAs) among developed countries are only hortatory, and not binding. For instance, aspects in these FTAs relating to responsible supply chain management through conscientious business conduct and social responsibility in services amd investment liberalisation and facilitation encourage the uptake of supportive policies.
Is mandating CSR, then, the right way to go about cultivating social responsibility among firms operating in India? Arguably, no. CSR is often reduced to a mechanical exercise, focusing only on ensuring compliance with the letter of the law, and effectively translating into just a few additional pages in the company’s audit reports.
On the other hand, encouraging firms to adopt environmental, social and governance (ESG) frameworks can give the appropriate incentives at the outset, which can then nudge them along a sustainable pathway. By treading such a path, firms can adopt practices which will directly translate into competitive advantages for them, while parallelly meeting their societal obligations as well.
The uptake of such a framework will be high in the long term, because it is ultimately driven by economic incentives and can positively affect a firm’s growth by both preserving as well as expanding markets. A greater uptake of ESG frameworks domestically will eventually result in a greater buy-in from domestic businesses when the government has to negotiate international trade agreements, where sustainable development issues have gained prominence.
In the ongoing FTA negotiations with the European Union, for example, social issues, such as labour rights and environmental protection, will be key points of discussion under a potential trade and sustainable development chapter in the agreement.
However, we must also recognise that calling for a greater emphasis on social responsibility through ESG as an operational strategy for Indian firms is not without accompanying challenges. There are huge constraints of capacity and resources under financial, infrastructural and human heads.
Informal sector and micro, small and medium enterprises constitute a large proportion of our commercial establishments. They have limited trade linkages and little capacity to absorb external investment. Their commercial prospects already face hurdles in the form of high input costs, limited access to credit and scant market integration. For such firms, any potential increase in competitive advantages through good ESG practices will come at the cost of diluting the very comparative advantage, such as low labour costs, that keep them afloat.
Overall, like similar trade-related issues, developmental concerns should, thus, be at the heart of discussions around the social responsibility of firms. There are more questions than answers for now. Are we currently at a stage of development where we can mandate social responsibility for firms? Has the outcome of the CSR mandate for certain firms in any way contributed to overall efforts towards cultivating sustainability? Have our firms been able to achieve a minimum level of global competitiveness that they can now fine-tune to incorporate ESG frameworks?
The key message is that “freer” trade and “fairer” trade are not necessarily antagonistic to each other. Sensible economics and good governance can catalyse both. “Freer” trade can be made “fairer” through a right mix of incentives and regulation. It is ultimately the direction in which this delicate balance tilts which decides our notion of how “free” or “fair” trade is at any given point of time.
Advaiyot Sharma and Shiksha Srivastava of CUTS International contributed to this article
Pradeep S. Mehta is secretary general of CUTS International
