ESG Practice - SEBI - The World of Child Labor & "Social Audit"

                                                                                    * BIRENDRA K JHA 

Bangladesh, Pakistan and China are the worst poor rated countries, with poor human resource practices. Many garment factories and fastener industries  in Bangladesh   are supplying to the Indian industries and automobile industries, various supply chain products, for such leading brands in India. The iPhone market in India is mostly depended on China, where large scale worker disturbances and clash with Chinese police are seen frequently for poor and awful working condition and bad human resource practices. This doesn't mean the supply chain position of India is good. The large scale big companies in India, are sourcing supply chain products from the black listed companies with poor ESG practices. The finest apparel what you are wearing in India or the finest automobile what you are driving, have child blood. This is shame for that company and society, which compromised on the ESG blindly and intentionally to procure cheap products and supply in the market with high profit. 

The SEBI CRA Regulation has been amended. A wide scale changes is reported in the ESG Rating. Hitherto earlier the ESG compliance was voluntary, now this is compulsory. 

In this amended regulation there is explicit provision to outsource ERP rating procedure, to "third party", keeping an arm’s length distance between  the ERP and the third party. 

This provision is given to capture reliable and authentic ESG Rating. So far now the rating agency like the  CRISIL, has so far rating the financial parts of credit rating. There is deep lack of specialization and qualified people  in the CRISIL like rating agencies, where poor ESG rating has been demonstrated. This fails to capture the social issues major problems like child labor in the system.

This needs a culture of  efficient ESG Rating through the "SEBI Qualified & Certified Social Auditor", which is efficient in auditing the Non Financial Matter. This shall open the wide responsibility of the "Social Auditors", who are trained in auditing the Non Financial Issues. The ESG issues covers entirely the non financial issues, where Environment and Social Audit are the most important part. In the Governance part, the "fraud elimination practice", is the social issues, not the Governance issues.  The "Social Auditor" has wide responsibility here to meet and provide expertise on the human resource side in the social issues. 

This is demonstrated earlier that in the ESG  rating of 2022, how CRISIL rating method was poor. This is due to lack of qualified people. The CRISIL agency mostly dependent upon the Chartered Accountant and the Company Secretary, who failed in capturing the ESG issues properly in the report due to poor skill and experience.   

The new provision address this part very clearly. The "Social Auditor", as third party shall provide actual site rating, which shall be used by the CRISIL like rating agency to publish the rating. As in the ESG major part is the Social and Environmental issues. As mentioned, the "fraud elimination", though covered under the Governance part, is completely social issues, what the Social Auditor is handling very efficiently in auditing the CSR and the social projects. 

This needs, "Social Auditor" to equip sound knowledge with the  vast practices covering the human resource management, from performance evaluation practice, trade union handling practice, disciplinary law, talent hiring  practice, training practice, prevention of sexual harassment prevention practice,  women equality, women  empowerment, human right protection to elimination of the child labor. This "Social Audit" shall cover well the vendor supplier to the customer voice.  

The company,  which the "Social Auditor" shall rate for the ESG compliance, shall examine deeply the supply chain position. Many big, reputed and branded companies in India from the garment industries to automobile industries, have compromised on the ESG. Presence of child labor and other social issues are seen clearly, which can't be denied on considering the cheap economic scale.  This rigorous audit, shall bind to procure only the ESG compliance supply products. If non ESG compliance products are entering the supply chain, then this is the  parent company, which is encouraging to compromise on the ESG. This shall drastically  alter the  ESG rating.

This is widely demonstrated earlier  that the branded European clothes coming to India are sourced from Pakistan and Bangladesh. These two countries use "child labor". Thus black listed products, move to Europe from Bangladesh and Pakistan, from where,  supply chain products  enter to India as branded European products. 

This is worst form of the supply chain. This has converted black products into white products.  Similar problem is seen with the automobile industries and electronic industries. Air-conditioner, heat exchanger, which cools your house in the summer, is mostly the Chinese products. The Chinese companies, source very cheap products to India, compromising the human resource practices. Most electronic industries in China, now a days facing labor disturbances with Chinese police for poor working condition in China.

Hence, the SEBI listed companies, who are sourcing products from China, Bangladesh, Pakistan or even from the Indian source, where human practice is poor, need homework to improve their vendor supply chain. If rating is poor this shall alter the share market price.

Now SEBI and Government of India is soft. This is a strong planning to punish the companies with poor ESG rating. Their export potential shall also be discontinued with more punishable measures, if not improving. This is challenge to the human resource department and the sustainability practice manager to improve business condition in their companies as well as supply chain condition. A pro-regular "Social Audit", may provide clear window to the companies,  where and what to improve.          

By 2070 zero emission rate is expected from the Indian corporate side. To meet this essential parameter. "Parivaratan Score" is introduced, where the "Social Auditor" shall audit various Indian companies, rating current emission levels  and what is required year to year reduction.  Evaluating Indian corporates on an absolute yardstick recognizing the efforts they make, and results they achieve, is transition, which lead to the appropriate incentives for generating green environment.

India in this way from the rest of the world is introducing toughest law on the ESG. So far in other parts of the world  such stringent measures not introduced. This shows determined commitment of India, to show to the whole world the ESG practices. America and Britain are deeply watching India. They are watching what reforms India has achieved in the ESG Practices. 

The job of the "Social Auditor" is tough and challenging. It has responsibility now to curb and fight with the disease against the  "fraud practices" in social projects and big social issues, like, curbing  the use of child labor in the supply chain. The Chartered Accountants are not equipped with this skill, as mostly they focus on financial documents. They have little expertise on the human resource administration.  This is right time when the Government of India has  generated separate cadre of the Social Auditors under the Institute of Chartered Accountants of India, when most of the countries around the world are sleeping on the aggressive practice on the   ESG.    

 (  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 ESG Audit & Practice; CSR 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 practice and social audit on the  ESG practices for more than a decade. He may be approached at: birendrajha03@yahoo.com )