New Law "Green Mutual Funds" & The ESG Audit Compliance


                                                  * BIRENDRA K JHA

The SEBI(Mutual Funds) Regulations, 1996 has been amended in 2023. This has allowed multiple "green investment" in mutual fund. But, to meet this multiple investment,  the Asset Management Company (AMC) shall obtain an independent reasonable assurance on an annual basis regarding their ESG scheme’s with the strategy and objective of the scheme, as stated in respective Scheme Information Documents (SID). For 22-23, this is required to be filed by 31.12.2023. After 2023, this assurance is required in the Annual Report.

The Board of AMCs shall ensure that the ESG scheme shall be audited properly with the necessary expertise. There should not be any conflict of interest, with the AMC and the audit agency.  The board of directors of AMCs, based on comprehensive internal ESG audit, shall certify the compliance of ESG schemes with the regulatory requirements including disclosures, in annual report of the scheme. This shall help the CRISIL and PwC to capture correct data. 

ESG audit shall inter-alia include verifying the Scheme Information Documents, Stewardship Reporting and Responsible Investment Policy of the ESG Funds and any other relevant document, to ensure that what the statements made in these documents are correct in factual.

ESG data is different from the traditional financial data and reports. The ESG has nothing to do with the "financial data". These are completely "non-financial-issues". For example, "employee welfare" or "employees disciplinary conduct" or trade union matters are completely, "non-financial-issues". They have nothing to do with the pure financial issues. Hence, when Chartered Accountant or Cost Accountant, try to understand the human resource administration side in depth. They fail to understand correctly the non financial issues. This needs expertise in "Social Audit". Hence, the Social Auditors are best fit to understand and audit such ESG matters. This is the major reason, CRISIL like rating agency did blunder mistakes in ESG rating in 2022. They mostly caught data from the Chartered Accountant and Company Secretary filed report on the company web site.

The CA or the CS mostly provide,  financial statement reporting, which  is increasingly automated, with appropriately designed controls and processes. But, the ESG parameter is completely a different world. This is demonstrated in one example earlier that the CRISIL rating of 2022 in Axis Bank's case placed ESG rating at 71 keeping the bank at the "Leadership Grade". This was based on the CA and CS report on the web site, where the ESG was just a passing remarks. The rating agency failed to note that the Axis Bank's past history is involved in fraud cases and involvement of high numbers of employee attrition rate and sexual harassment cases. Some of the fraud cases even not reported in the annual report. In this circumstances, rely on the CA and CS statement as 100 % compliance on the ESG was completely a bad idea and practice for the CRISIL, which didn't  conducted any  "third party social audit" against the Axis bank and published the rating in 2022. This provided wrong information to the investors.   

Similar, to CRISIL,  the PriceWaterhouseCooper, the PwC,  has also entered the rating business. The "PwC’s ESG Pulse" also capture data just like the CRISIL. Both the two rating agencies, capture data  from the published reports given on the company web sites. The CRISIL and PwC, both rely badly on the software options designed to generate enterprise level analytics. Such analytics are wrong and bad for the ESG rating. Till date the SEBI has not given any resolution on such defective data capturing practice. 

 (  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 )



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