CRISIL "Leadership Rating" In ESG - Lessons From Axis Bank

 

I have demonstrated earlier,  the ESG rating, by agency like  CRISIL needs, more  good practice of inducting the third party "Social Audit" before publishing the ESG rating, when there is past history of ESG practice violation.  

Any poor or exaggerated ESG rating shall alter the share market price. Now a days this is the perception of the investors that strong ESG compliance of company, is  good indicator of safe investment and excellent return. This is also the target of the Government of India to achieve the Sustainable Development Goal ( SDG Goal ). This SDG Goal mandate, mostly is achieved through  the regulatory authority SEBI. 

The SEBI has mandatorily implemented the ESG evaluation of various companies. This rating evaluation now is not matured. The rating agency like the  CRISIL so far has been rating the ESG parameter of the various companies.  

CRISIL mostly captures ESG compliance through the document disclosures by company in the public domain. This has been earlier demonstrated that India is a poor rated country on the SDG Goal. India is far behind this goal. The social issues covering poor practice of human resource management, including sexual harassment cases against women employees or job opportunity for women employees are not good in India. This case becomes more complicated, when employees or stakeholders are involved in fraud. 

The company as regular practice, exhibits "ornamental statement"  in the annual report. Mostly such companies, use the "ornamental statement" as the safe gateway of the 100 % compliance on the ESG. 

Though, this  "ornamental statement" is not trusted by the "Social Auditor", while evaluating the Social Impact Assessment Audit of the CSR Projects or conducting rigorous "Social Audit" of the ESG practice. 

The CRISIL in 2022 has published the Axis Bank rating at the "leadership category", where the rating number is 71. The CRISIL rates here that the, Environment; Social and Governance practice in the Axis Bank are better and stronger than the "strong" rated companies. 

Definitely the investors shall choose the  "leadership" category than the "strong " rated company for the investment purpose.  But, this CRISIL rating method is poor and bad. 

The CRISIL  has trusted on the "ornamental statement" published in  the Axis Bank's  annual report. This is demonstrated earlier that India is a corruption hit country. In welfare and social schemes, fraud route has been frequently used for making personal assets. The Axis Bank is not an exception. In this bank, fraudulent practice has been recorded as history in the past.  This is surprising that the CRISIL before rating the Axis Bank, had not taken precautionary measures of conducting the third party "Social Audit", when evident past complain as "prima-facie" is there on the ESG practice violation.       

There are thirty nine listed banks in India. Share prices of the thirty-four listed banks fell between February 12 and February 15, 2018 due to severe fraud in the Punjab National Bank. Alone this bank is not involved here in such serious fraud. Other than PNB, six banks are also involved here in this fraud, in which one is the Axis Bank. The sudden volatility in the prices eroded the market cap of these thirty four stocks by over Rs 36,380 crores. The BSE Exchange lost 1.2 per cent. The Punjab National Bank,  eroded investor’s wealth worth Rs 8,077 crores and its stock values reduced by  20.6 per cent between February 12 and February 15,  2018. The share prices of the Axis Bank lost 3.4 per cent till 15 February 2018 and its market value fell by over Rs. 4,800 crores. Hence, the past credentials of the Axis Bank and  the Punjab National Bank, are extremely poor and bad. In both of the two banks the "Third Pillar" on the ESG practice has collapsed. This is "prima-facie" history. 

Hence, no liberty can be given to trust blindly the "ornamental statement" published by the Axis Bank in the annual report, as an evidence for  full compliance of the ESG in 2022. 

The Axis Bank's Annual Report of 2022 -2023 mentions the "ornamental statement" about the third pillar of the ESG practice ("fraud elimination practice") in this way:  

 " Reporting of frauds by auditors during fiscal 2023, pursuant to Section 143(12) of the Act, neither the statutory auditors nor the secretarial auditor of the Bank have reported any instances of frauds committed in the Bank by its officers or its employees."

This reported statement alone can't be trusted when you have wide scale fraud reported in the past. This statement do not captures the fraud reported in 2022-23 in the Axis Bank. The  branch head of the Axis Bank Ltd, at Gurgaon has booked against two of its employees in major fraud scam. Why this is missing from the Annual Report, is a case of separate examination. There may be similar instances of fraud like the Gurgaon scam, which is not appearing in the report. 

This clearly demonstrates that the "Governance", which is the ESG third pillar, is not strong and healthy in the Axis Bank.    

In ESG, the "Social Pillar" is most important. More than 75,029 of the Axis Bank's employees have exited over the last three years. This is  81% of its headcount in FY2023 and 96% of its headcount in FY2021. The situation is more serious in case of women employees, whose attrition rate is higher ( see below graph). Care and protection of the women employees are top priority in the Sustainable Development Goal in India. The high rate of attrition of women employees at the Axis Bank, demonstrates clearly that the human resource practice is not healthy here. When HR practice is poor or not strong, then  exit rate is higher. Exit of women employees may be for many reasons. One strong reason is poor HR practice on  the  prevention of sexual harassment cases against women. In 2021-22, Axis Bank reports 45 complaints on sexual harassment in the year  2021-22. In "zero tolerance policy" the rate of 45 is very high in 21-22.   Overnight the HR practice,  on women sexual prevention at work place can't be improved in 2022-23. This  shows enough, the poor HR practice demonstrated with the high attrition rate in the women's employees.  

If HR practice is healthy and strong, organization grows in geometrical rate. If practices are poor, the organization pays the price. In HR practice, there are various measuring parameters. The one measuring parameter is "discipline and disciplinary law practices". I can share here my own experience. As HR Head, I do not compromise on indiscipline. I  have with strong and sound legal procedures punished rigorously the discipline breaker. This has ensured "pro-active" measures in restoring the "law and order" in the business. If HR is poor with weak legal knowledge,  complain and bad treatment with women and employees are reported high. India, where "mother-power" is praised, has forgotten the holistic practice of respect towards the women employees. The Axis Bank, needs revision and brainstorming, to address the serious complain rate of the women employees attrition rate. This is exhibited in the above graph very clearly, that something is wrong here, which is not reported in the annual report. How such important data is missing from the annual report is a case of investigation and  examination. 

This is seen, most of the companies annual reports, show  financial side, as  reported by the Chartered Accountant and the secretarial audit report,  on the company compliance. Hardly, any company,  thinks about the ESG compliance, which is just only an "ornamental statement" in the report. This is serious issue and big hurdle on the way of achieving the SDG Goal. 

In this way, this is  demonstrated that the "Governance", which is the third pillar of the ESG and the "Social Practice", which is the second pillar of the ESG  at the Axis Bank have poor practices in the past. In this situation the CRISIL Rating needs utmost care. The ESG rating in 2022 by CRISIL of Axis Bank at  "71", which is the Leadership Grade, is not correct. This needs honest revision.   

Hence, without  "Third Party Social Audit", any rating is poor and bad practice, when established complain is on record against the ESG practice violation in the company's history. 

India is a corruption and fraud hit country. To achieve the SDG Goal, elimination of fraud practice is required through the "Social Audit" as identified by the "Niti-Ayoga" and the top priority of the G20 Agenda. The "Social Auditor",  enters inside the belly of the "stakeholders" including the "beneficiaries" and extracts data and information. A good and qualified  "Social Auditor", tortures the  "collected data",  aggressively to arrive at a truth. Such qualified and good auditor, use  widely the tool of the "professional skepticism"; "why analysis"; "fish bone skeleton analysis"; "Swot analysis" and "visual management" to verify the practice or project delivery. With this skill and quality "Social Auditor" detects even complicated fraud.  

In Andhra Pradesh, we learnt how Rs 935 crore so far misappropriated in welfare schemes have been detected by the "Social Auditor" in various "Social Audits". The Chartered Accountant earlier had failed  to detect this fraud, as they have limitation expertise to vouch only the financial papers.  The "Social Auditor" do not rely on the physical financial documents, like the Chartered Accountants.  So far scam of Rs 12.5 crore has been recovered and other is in the recovery pipeline. Many hundred officers involved in this fraud have been arrested and booked behind the bar. The Telangana Law has  linked the "Social Audit",  as the only tool to eliminate corruption. The "Telangana Promotion of Social Audit and Prevention of Corrupt Practices Act", so far has arrested and booked many corrupt officers.  Under this Act, the "Social Auditor" report is treated as "enquiry report". No further enquiry is needed against the offenders. A fast track mobile court  moves behind the "Social Auditor". In this way, both the  "Social Auditor" and the  "mobile court", move from    village to village. The "Social Auditor" hands over audit report to the mobile court at the site. Then and there action is taken against the offender. This is excellent learning lesson how "Social Audit" can prevent fraud in India.

On the specific direction of the Government of India, the  Ministry of Finance, is working on the separate cadre of the "Social Auditor".  The SEBI & the Institute of Chartered Accountants of India are developing a separate cadre of the "Social Auditors", who are the registered members of the Institute of Social Auditors of India (ISAI).  Now, only empaneled  member registered in the ISAI, are only eligible to  conduct the  "Social Impact Assessment Audit" or any "Social Audit" in the SEBI listed entities. The qualification of the "Social Auditor" is endorsed clearly in the SEBI ( ICDR) 2018 and the SEBI (LODR) 2015 with latest amendments changed in 2022 and 2023. These two laws are applicable entirely on the SEBI listed companies with immediate effect. Any violation of the SEBI law shall attract heavy punishment to the Board of Directors. This is required urgently to achieve the SDG Goal Target immediately in India.  

Hence, this is only the Axis Bank, which should learn from the best "Social Audit" practice. It should do honest practice on the ESG areas. Now days are over with the "ornamental sentence".  The Axis Bank should must  conduct third party "Social Audit" from a qualified "Social Auditor" and improve the ESG area according to the advisory given by the "Social Auditor". Honestly, the Axis Bank should publish the "Social Audit" report given by the "Social Auditor" on the Axis Bank web site, for honest rating by the CRISIL. The advice and report of the "Social Auditor" may be harsh and highlighting many weak areas. But this is healing medicine and opportunity to improve the banking business honestly. This shall give positive confidence to the investors. 

This is also lesson for the CRISIL, to sit and rethink with its team and brainstorm what went wrong in the CRISIL rating procedure, which has collapsed now in the case of the  Axis Bank's rating. The bank doesn't deserves this rating, without any "Social Audit".  The investors may  lost trust not only on  the Axis Bank but also on the  CRISIL, which is the rating agency. 

The CRISIL can introduce here in the "business subscription agreement" with the companies for mandatory third party "Social Audit" in every financial year, subject to SEBI permission. The contract should also bind the company to publish in original form the   "Social Audit"  report without any manipulation on the company's website. If report is not published on the website by company, then rating can be mentioned as  "Doubtful- Company not cooperating". The matter should also be reported to the SEBI, for taking disciplinary measures against the "doubtful companies".  This shall assist the CRISIL, to capture and exhibit "fair rating" data. This is the "lean business process", what the CRISIL can introduce at the ground level, as precautionary measures to avoid any wrong rating.        

(  Birendra K Jha,  is a Pan India Practitioner on the "Social Impact Assessment Audit" & "ESG Audit".  He is a Qualified & Certified  Social Auditor from the ISAI (ICAI). He is Director of HR Lab, a Social  Audit firm. Apart from Social Audit, he provides consultation on the CSR Audit, ESG Audit, CSR funds; CSR Programs; CSR Need Assessment; CSR Program Measurement; Entry & Registration- Social Stock Exchange & provides Capacity Development Training to industries on the CSR & ESG. He is based at Delhi-NCR. He overlooked at senior position as General Manager and Deputy General Manager in the previous South Korean MNC Company in India handling human resource and social audit of ESG practices for more than a decade. He may be approached at: birendrajha03@yahoo.com )