Thanks to Andrew Britton for the heads up on this article in his newsletter. Germany’s Der Spiegel magazine published a fascinating piece (in English) about a social audit of VW’s operations in operations in Xinjiang, China. A bit of background to begin:
“The influential rating company MSCI gave VW a so-called red flag because of its operations in Xinjiang, a warning that the company’s stocks are no longer appropriate for funds that adhere to sustainability criteria. The company wanted to remove this rather compromising label, one that makes investors shy away from the already wobbly stock. So, executives decided to perform an audit to demonstrate that everything was just fine at this controversial factory.”
The article presents a byzantine tale of
- Involvement in the audit process by a local pub owner/restaurateur who was responsible “for reviewing sensitive human rights issues”,
- Employees of the consulting firm hired disavowing the audit,
- Ambiguity about whether the founder of that firm actually participated in the audit,
- Potential Communist Party connections by the Chinese law firm hired, and
- Questions about the diligence of the audit process and its conformance to the international standard to which it was to be conducted.
Yikes. The magazine reported they have seen the actual audit report, which was not intended for distribution outside the company:
“The document is 71 pages long, a mishmash of methodological flaws compiled by lawyers from a dubious Chinese law firm – and by Clive Greenwood, the former restaurateur. After reading the report, the question necessarily arises: Did the company seek to mislead investors by presenting a finding that the deficient report didn’t actually prove?”
The matter was also covered by China Brief in a report called An Assessment of the Audit of Volkswagen’s Controversial Factory in Xinjiang, a lengthy review of the situation that includes images of what the authors claim are of the actual audit report.
ESG/sustainability leaders, staff and advisors: There are many layers to this story and before you conclude this isn’t relevant to you, ask yourself how confident you are in your third party social auditors and audit process? Social audits long ago became a commodity, with many buyers considering lowest cost as the primary criteria. Lower priority is given to quality of the auditors or adherence to standard audit practices or specific sustainability/social audit standards.
Keep in mind this from the Der Spiegel quote above: “Did the company seek to mislead investors by presenting a finding that the deficient report didn’t actually prove?”
Poor quality social audits are riskier than ever given new disclosure requirements in the EU and the SEC’s enforcement strategies related to ESG/sustainability. Don’t think that audits conducted through or by industry associations are terribly different – to what extent have you directly evaluated those auditors or their practices?
Members can learn more about social audits here.
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Photo credit: Björn Wylezich – stock.adobe.com
