Garment manufacturing subcontractors avoid detection, social audits. This Financial Times article shines a light on a big gap and risk that hidden subcontracting in the garment industry creates when audit scopes are limited more than they should be. It also shows that if someone really wants avoid detection and perpetrate a fraud, they can find ways to do so. You might be surprised to learn that the manufacturing subcontractors of concern in this story are located in … England.
Our view: I have been critical of social auditing practices for years, and it is easy to point to audit firms as the problem. While auditors are complicit, those who buy social audit services define the scope/effort. In the social audit market, buyers emphasize low cost, limit audit activities effectively handcuffing auditors and drive out quality. Unfortunately, it created a race to the bottom due to the focus on price and check-the-box mentality without acknowledging risks. Low cost means reducing audit effort and increasing audit risk. For folks who aren’t audit nerds like me, audit risk is the potential for flaws or omissions in audit results because of limitations faced by auditors in executing their tasks or procedures. While advances in IT stand to augment or possibly replace social audits in the future, I expect social audits will continue to be the method of choice for many, many companies. The question is – will companies acknowledge the audit risks and be willing to pay more for improved audits that extend to subcontract manufacturers?
GRI agrees to ISSB collaboration. The two organizations announced an agreement to “coordinate their work programmes and standard-setting activities.” GRI emphasizes the impact of companies on society/environment regardless of financial contexts, whereas the newly formed ISSB looks primarily to the impact of ESG matters on corporate finances (“investor-focused capital market standards”).
And speaking of ISSB, they just announced the availability – beginning tomorrow March 31, 2022 – of their exposure drafts for General Requirements for Disclosure of Sustainability-related Financial Information and Climate-related Disclosures. The documents will be available to download from the Open for comment section and from their project pages, General Sustainability-related Disclosures and Climate-related Disclosures. To comment on the Exposure Drafts you will need to have an IFRS Foundation account, which can be created here.
Our view: The GRI collaboration is somewhat different than the mergers into ISSB that SASB/VRF, CDSB and IIRC agreed to, but it is a good sign nonetheless. I hope the organizations will be successful in finding common ground and compromise. Ultimately, consolidation – at least of ideas if not organizationally – should benefit all. At the same time, a move toward double materiality (financial materiality and separate environmental/social materiality) would not be consistent with the US SEC’s statutory regulatory boundaries and could cause difficulties down the road.
With regard to the exposure drafts, it will be interesting to see what direction those go and of particular consequence to those subject to US SEC jurisdiction – how/if ISSB’s climate-related disclosure document is aligned with SEC’s newly released climate disclosure proposal.
ESG News from TheCorporateCounsel.net:
- Thoughts from Liz on Larry Fink’s 2022 CEO letter, which is ESG-heavy. Adding to what Liz says, some have criticized the letter as not taking an aggressive enough stand on fossil fuels. Fink has been clear about his understanding and support of a transition economy, which will take years to get through. As energy cost inflation and embargoes on Russian oil and gas have recently shown, acute shocks to the current energy infrastructure are highly problematic to put it mildly. In response to the public’s economic pain, there are discussions about various governmental gas rebates in the US and energy cost control measures in the EU – knee-jerk reactions that may foreshadow public reactions to/expectations of more permanent, long term energy cost hikes. A planned and governmentally supported multi-year transition plan would avoid help reduce these kinds of shocks while putting us on a defined more orderly path to a lower carbon economy.
- John on cutting business ties to Russia. It’s easy to talk about cutting ties, but the devil is in the details.