Regular ESG Audit & Challenges With Case Study From The Adani Green Energy Limited

 

                                                                           * BIRENDRA K JHA 

So far, what I know about the Adani,  the top leadership Mr. Gautam Adani, is very law adherent person. He has great respect for the social conscious business. People sitting in the downside or even sitting in the board of directors if are not doing their  job properly, then this is a gap point.   It requires complete training of people from top to bottom in the field of ESG skill. This is completely lack of skill,  at Adani, where  ESG practices are not managed correctly.

Regular ESG Audit has become ever more essential tool for the companies to remain in business.  A regular thorough ESG Audit,  allows to identify corporate strategies gaps. A qualified ESG Auditor, tracks down key environmental, social, and governance indicators. This needs the ESG Auditor, to collect company's ESG program from multiple sources using his "professional skepticism" approach in collecting data.  Any "unreliable information" shall not be accounted. The correct and best business practice is that, there should must be third party ESG Audit report presented in original, without interpolation to link the material ESG data & information.  

Adani Case Study: 

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The Adani Green Energy Limited regularly publishes data on the  ESG. This company list down the published policy that the risks and opportunities that lie ahead, has forced the company to design  the business strategy to realize the  opportunities while being mindful of external environment. The Adani, claims to have a robust ESG governance framework that is developed on the principles of sustainability. The ESG vision, culture, policies & framework is governed by the Corporate Responsibility Committee (CRC), constituting 100% of independent directors for administering the ESG-related matters in the business operations. Clearly, the intention of the top management is good. But the quality of the ESG  report is extremely poor. The ESG report published for 2022-23, appears more a "financial data" then disclosure required to be provided for the "non financial materials" appearing from the third party ESG Audit.  Take for example, the two material information required under the ESG. The Environmental and the Social side. 

Environmental Pillar: 

The Scope 3  GHG Emissions are needed in the ESG Report. Adani has reported in 2022-23,  the carbon emission at 4,80,199.17 (MTCO2e). How this Scope 3 GHG Emission, has been accounted? The emission may be more at the vendor point, then accounted here! There is no clarity in the report, how it has been accounted and where is the auditor's report in original ?  Since, this emission,  is generated completely at the value chain. If information is reported in the ESG report,  without conducting any third party ESG audit at the vendor side, then situation is not good. It beats entire approach of the ESG. 

This is only the ESG Audit report in original with auditor's signature, can validate only the  carbon emission reported at the supply chain. The good practice is that the ESG report should be clearly visible and should follow the "Visual Management" principle, with ESG Audit report.   

Social Pillar: 

The Adani ESG  report published so far also do not exhibit clearly what is the status of human resource, labor condition at the supply value chain. The Adani has purchased high cost capital goods from the supply chain in 2022-23, where carbon emission at 4,80,199.17 (MTCO2e) has been reported. Whether such capital goods have been  purchased from the ESG compliant company or not? This is the basic question. The answer to this question is completely not available. Suppose for example,  Vendor A,  is there which supplies capital good to Adani. The Vendor A, never pays salary on time to the employees; or not paying Minimum Wages to the employees; or even uses illegal route to crush and curb trade union or take the worst case where child labor is used on the production process for producing  the capital good. 

This is not only the burden of carbon emission which is reported here for the supply chain. But, when the company exhibits ESG Audit report, then the stakeholder is able to vouch down also the condition of social compliance also. 

The Adani ESG  report is completely silent. This is not clear, whether capital good procured by the Adani is social compliant or not? This is difficult to verify that the human right issues, like child labor, has never  been used at the vendor's end. Good practice is required here. This is completely missing. 

Thus,  it can be claimed that the Adani ESG report is unreliable and not supported with "material information disclosure" as mandatorily required by the regulatory authority.       

So far, what I know about the Adani. The top leadership Mr. Gautam Adani, is very law adherent person. He has great respect for the social conscious business. People sitting in the downside or even sitting in the board of directors if are not doing their  job correctly, then it requires complete training of people from top to bottom in the area of ESG skill. This is completely lack of skill to manage the job of ESG practices correctly and report it.     

 

Challenges: 

Honestly, the Indian companies needs more home work on the ESG Audit side. This is beneficial for them as claimed in various studies. G Pijourlet, in 2013 demonstrated that companies respecting ESG Goal, maintains lower debt-to-equity ratio. Jensen, in  1986 demonstrated that, companies who are more socially responsible are able to maintain lower leverage, which enhances free cash flow, for the benefit of society. In 2010 RE Freeman demonstrated that the ESG disclosure protects the entire stakeholders of the society, where the company is earning profit from business. SP Ferris and others in 2017 demonstrated that there, is dramatic  reduction in equity costs, due to the reduction in the asymmetric information cost  among stakeholders, for  adopting ESG oriented investments.  Armitage & Marston in  2007 also demonstrated the same thing that the ESG impact in companies are larger in terms of adopting ESG oriented capital structures, which  increases transparency and ultimately reducing the  equity costs. Crifo & Forget, in 2015 again demonstrated that efforts to mitigate ESG identified risks, are rewarded by low cost financing from financial sources. Such sources, give top priority only to the companies involved in sound ESG practices. 

Regular ESG Audit, emerged in the mid-2000s, when it became obvious that CSR and ESG  factors were equally essential to investors and consumers, leading to a more sustainable global practices to protect the people and planet. Companies in the United States, Canada, the United Kingdom, France, Germany, Japan, and Australia who wish to be included in sustainability indexes, like Dow Jones Sustainability Index, are mandatorily required to conduct ESG Audit. Similar move has been adopted by the SEBI in India to bring published ESG index as exhibited by the CRISIL. This is demonstrated earlier that the CRISIL data are very poor and unreliable. CRISIL needs to improve the quality of data collection. It can't trust on any published data supplied without third party ESG Audit. The SEBI clearly mandates the responsibility on the ESG rating agencies to collect only those data that have sound assurance and audit trail. This principal equally applies on the Adani also.   

( Birendra K Jha,  is a Pan India Practitioner on the "Social Impact Assessment Audit"; "ESG Audit" & "Sustainable Practices".  He is a Qualified & Certified  Social Auditor from the Institute of Social Auditor of India (ISAI -ICAI). He is also certified professional on the ESG; Environmental Law; Carbon Emission Accounting; Carbon Tax & Sustainable Practices. 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, social audit,  ESG and sustainable  practices for more than a decade. He may be approached at: birendrajha03@yahoo.com ) 

Reference: 

1. Pijourlet, G. (2013). Corporate social responsibility and financing decisions. JEL Classification G, 32, M14

2. Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329

3. Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & De Colle, S. (2010). Stakeholder theory: The state of the art.Freeman, R. E. (2010). Strategic    management: A stakeholder approach. Cambridge University Press

4. Ferris, S. P., Javakhadze, D., & Rajkovic, T. (2017). The international effect of managerial social capital on the cost of equity. Journal of Banking & Finance, 74,    69–84

5. Armitage, S., & Marston, C. (2007). Corporate disclosure and the cost of capital: The views of finance directors. ICAEW Centre for Business Performance London

6. Crifo, P., & Forget, V. D. (2015). The economics of corporate social responsibility: A firm-level perspective survey. Journal of Economic Surveys, 29(1), 112–130.