Good Practice On ESG Audit Rating - Learning Experience From the CRISIL :

 

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When some complain is there on the ESG Practice,  then continuous third party Social Audit is required from the "Social Auditor". This is mandatory to validate the  ESG practice whether improved or not ? This is good practice.  Rating validation through any public domain information, mostly the voluntary BRSR document,  is bad practice, when past complain is there.

In the ESG Rating, Social Audit, is necessary for accounting the business risks including the  impacts to all stakeholders, global citizens and covering mostly the human resource capital working in the company. This is basically the audit of the dominated HR function. This "Social Audit" needs, trained human resource expert to scan the social issues and welfare aspect on the human resource practices.    

Since, ESG Audit, is mostly audit of the "non financial practices". Hence, the "ESG Audit", which is gaining shape compulsorily in the SEBI listed entity, needs honest effort from the company side to improve the function of the three essential sustainability pillars, comprising the ESG ( Environment - Social - Governance). This compliance is required at the ground level. Once the practice is achieved. This is required to be validated and  audited by the independent "Social Auditor." The report is required to be uploaded on the website, for proper reporting by the rating agency.  

The ESG evaluation in SEBI listed entity, where compulsory ESG compliance is required, is conducted by independent agency,  based on publicly available information released by the companies through their websites, exchange filings, annual reports, investor presentations, sustainability reports, CDP filings, etc. It also factors in,  other material available in the public domain through reliable sources, such as data reported by industry associations, regulators and various government agencies. 

Without physical field "Social Audit", any rating devised on "non financial area" covering Environment & Social is risky, poor and  not reliable. This can be demonstrated through a case study from the rating supplied by CRISIL. This agency provided in 2022,  ESG  rating of various companies on following factors, shown in the image:  

In coming years the ESG Audit Score has wide impact in business. If ESG rating is not correct,  it shall break down the entire system of share market price. Investors are not interested in companies with poor ESG rating. 

Hence, the ESG rating provided by the agency, like CRISIL here, needs good practice. So far the CRISIL practice is not good and reliable. This is  based on the following case study. Now employees are representing a wide spectrum of society. Such third party social audit is compulsory required at the "physical spot" through an independent "Social Auditor". If without independent audit evaluation at the site, any ESG rating is given by the rating agency, based on just public domain documents including the financial records, are poor practice. Exactly this poor process has been adopted by the CRISIL. This is unfortunate Indian experts, including SEBI have not understood yet the impact of such error process. This is big error, which  is implemented by CRISIL without proper research.  

 CRISIL Case Study & ESG Rating:

The CRISIL is publishing ESG rating  on the ESG. This rating is based on disclosures by the company on the websites and available on the public domain.  Based on such poor practice, it has rated companies, without any onsite "Social Audit", when evident complain is there clearly on past practices. 

The CRISIL rated "Ahluwalia Contracts India Limited" in the overall rating at "Below Average".  In other words "Below Average" means Environment, Social and Governance angle are extremely poor in this company. At the other side,  CRISIL has given to the "Asian Paints Limited" an overall rating as "Strong". The rating "Strong" means,  the Environment, Social and Governance angle are strong in the  "Asian Paints". 

Through financial disclosure like balance sheet or other disclosures like annual report, how any social or environment practice can be measured ? These are completely nonfinancial issues. Any audit of  "non financial issues", like human resource capital, including employment related practice, trade union practice or the issues involving illegal dismissal from service, is not traceable through the "balance sheet" or the "annual report". This is completely "Social Issues", where "smoke" is seen coming out of the huge heaps of "non financial practices".  This is entirely the job of the "Social Audit" and the "Social Auditor". 

Following numerical rating has been given by  CRISIL  for the above two mentioned companies in the year 2022. The  ESG Rating is based on the  disclosures in the public domain.  Here, no physical audit has been conducted at both of the two companies. The  ratings are given by CRISIL which is difficult to agree:     

1. Ahluwalia Contracts India Limited: Environment Score: 29; Social Score 45; Governance Score: 56. Total ESG Score: 44. Overall Rating is "Below Average"

2. Asian Paints Limited :  Environment Score : 61; Social Score: 59; Governance Score: 80. Total ESG Score:68.The Overall Rating is "Strong"

These two different scores may impact the share market. The "Asian Paints" can have better share market value then the "Ahluwalia Contracts India Limited". As investors look ESG rating now a days. Investors are interested to invest only in companies, where ESG rating is "Strong". This ESG index is one important scale of measuring the company practices. 

The CRISIL rating is poor. That is exactly demonstrated here. The "Asian Paints", whom overall rating is given "Strong", has some negative element in the "Social Management" as well as the "Environment" side. Hence compulsory site audit is required by the "Social Auditor", before CRISIL publish any rating. This was not done by CRISIL as precautionary measure.  This  confirms the CRISIL evaluation, is not based on good practice. This needs honest improvement.  

Without fire "smoke" is not there. This is simple logic. Workers agitation has long been seen in the "Asian Paints". This says suspicious human resource practice observed in the year 21-22 in "Asian Paints". The human resource practice needs audit validation, whether practice has improved or not? The United Labor Federation (Regn. No.2657/CNI), which is the association of workers from the  Asian Paints Private Limited, is complaining of wrong disciplinary proceedings against the two workers members, where one disciplinary proceeding is set to "ex-parte" and against the other enquiry is conducted without affording fair opportunity in 2021 -22. If complain is correct and true.  Then this shows that the social pillar at the "Asian Paint" is suspicious. This "professional skepticism"  warrants  for conducting essential  "Social Audit" at this company to validate the practice of human resource and other social issues, which  may be healthy and may not be healthy.  This is only "Social Audit", which is competent to measure and examine the human resource practice. This practice can't be measured through balance sheet, annual report or other company return documents, what exactly the CRISIL did. There are  similar types of hundred situations and complains on the plight of the workers, what "Social Auditor" measures. This is not the job of chartered accountant, who is competent enough to audit only the financial documents.   

Though in social issues various individual factors are also measured. For example, if Social Auditor is measuring compliance of dismissal of employees on discipline. Then there should must be show cause notice, charge sheet, departmental enquiry and before termination one more opportunity of show cause based on enquiry, is mandatory procedure. If this practice is adopted by the  Asian Paint, then the Social Auditor rating is "Strong" otherwise "Poor". 

Any dismissal from service without "Affording Natural Justice", is the breakdown of the Social Justice. Exactly, this complain has landed at the "Asian Paint". Hence,   a "Social Auditor"  like me, examines this factor at the site deeply. If further instance is repeated or found there,  where employee has been dismissed without the procedures of the employment law, then this is a sufficient sample of whole poor management  of human resource practice in managing the disciplinary procedures.   

The purpose of the SEBI's ESG Audit is to cover the "Social Justice and Issues" risk area. Similarly most of the environment and pollution compliance by companies in India are not so proper and honest. A "Social Auditor" do not rely on all these physical documents. He examines the compliance site physically. The environment department in India is not honest enough. The ground situation is exactly different then what is shown on the papers. 

One further complain is there against "Asian Paint", handling poor practice on the Environment.  The grant of Environmental Clearance (EC), is one such area, where through  unfair tactics EC is taken, even when there is no authority. There is a similar complain of "Asian Paint" at the Ministry of Environment, Government of India at New Delhi. The complain against this company is that the  Environment Clearance is taken by the Asian Paint,   in the Cuddalore Industrial Estate in very unfair way, compromising the Environment. The EC was granted by the Chennai based Authority to the Asian Paint, which is not competent to issue the same. Since Cuddalore Industrial Estate is a critically polluted area and in such cases, even as per the EIA Notification of  2006, it will be considered as Category - A project and the same will have to be considered by Ministry of Environment, New Delhi  and not the Chennai based authority. What is the status today on the Environment practice at the Asian Paint?  In past company record on the Environment practice is not good, as per this complain as Environment factor has been compromised. What is the current status. The Environment practice is good or bad? Without physical "Social Audit", the question remains unanswered.  

Two important cases are demonstrated here. One against the social issues, where  poor human resource practice has been compromised with illegal termination order of employees and the environment side, where the company again compromised with the environment practice. Since, complain is here in "smoke" form,  which holds ground for "fire". Hence there should must be third party social audit at the site by competent "Social Auditor". This is necessary, before deciding any ESG rating by the CRISIL. This was not done by the CRISIL. Hence, the entire CRISIL rating is not fair and clearly has no meaning. SEBI as regulatory authority has wisdom to examine this thing that the BRSR related document filed by company which is voluntary disclosures, can't be accepted as basis for ESG rating.  

I can share here one example from my previous experience. My previous company was procuring material from the vender companies. I, as HR Head,  ensured the ESG Compliance and Audit for the same at the vendor companies.   I had conducted numerous Social Audit in the vendor companies. Mostly reports are shown to me that everything is good here. Even the labor law compliance is 100%. The labor department return is also shown here as the requirement of compliance. I normally use different methods and style to audit the site, when doubtful. In the night, when managers are out and company is running by supervisors. I had the opportunity, to examine factory in the night.  One shall get very clear visible picture. I came under observation that visible child labors are working with doubtful age proof document. This was highly objectionable. They were  doing mistakes in "counting" and packing the products. The business of the vendor company was terminated at one stroke for playing with the company and strong practice was implemented by me at the security gate to random examine consignments and counting coming from the vendor supplier. This saved not only huge revenue of the company,  but the South Korean company restored the faith on the Social Justice. 

The Environment, Social and Governance practices both are seen unparallelly very strong  in the South Korean MNC or Japanese MNCs. These practices are hardly seen in the Indian companies.    

In this background the CRISIL rating of the ESG  Rating needs more improvement with aggressive physical social audit  at the location. This is not balance sheet, financial statements and annual report of the Asian Paints, where one finds the "Strong Rating". This method  is not reliable as demonstrated in the above case study.  This is only and only physical "Social Audit" at the spot, what has not been conducted by the CRISIL rating agency.  

This has been demonstrated earlier that "social issues" and "social welfare issues" need compulsory Social Audit in a corruption hit country like India.  The Andhra Pradesh Social Audit Law  or  the Telangana Social Audit Law  have shown that, the  published paper report on social issues are  different and ground situation at the site is different. Several fraud officers have been booked here in criminal court for digesting the welfare schemes.        

The CRISIL work is paper work only, far from reality. It has no reality with the ground "Social Audit".  When visible complain is against the company, then precaution is required to be taken as  "pro-precaution" measure on  ensuring physical "Social Audit" at the site. Unfortunately this was not done by the CRISIL. 

The "Ahluwalia Contracts India Limited", which rating is shown here "Below Average", may have better practice on the Environment - Social and Governance domain on the site,  then appearing on the financial statements or published documents. This is only "Social Audit", which can validate the rating.  

The ESG  is aggressively not  practiced within and across the ESG domain. This is pertinent to note here that major information is public domain  disclosure including financial documents and the annual reports. All these documents, do not scan deeply the social and environment practice. 

Hence, the better practice is that the company should must deliver good practice in ESG side on ground. For example, social issues covering human resource practices including  areas like labor practices, employees relation practices, compensation & benefit practices, trade union practices, social security compliance and other practices are captured well in "Social Audit". 

This is one learning lesson,  that the SEBI Listed entities do regularly conduct ESG Audit through an independent "Social Auditor" of there business practices and do upload the "Social Audit Report" on the website. This shall prevent  CRISIL like agency to put wrong rating. Any wrong rating based on voluntary disclosures,  is blunder mistake, as demonstrated here. The final morale lesson  is any wrong reporting by the "Rating Agency", shall damage the share price of the company. This is difficult to regain or repair. 

 ( The writer is a Pan India Practitioner on the "Social Impact Assessment Audit". He is a "Qualified Social Auditor" from the ISAI (ICAI). He is Director of HR Lab, a "Social Impact Assessment Audit" firm. Apart from Social Audit, he provides ESG Audit; Consultation on the 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 MNC Company in India for more than a decade. He may be approached at: birendrajha03@yahoo.com )