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Contributing Editor

Julie DiMauro
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Thomas Fox
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Marc Alain Bohn
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Bill Waite
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Shruti J. Shah
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Russell A. Stamets
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Richard Bistrong
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Eric Carlson
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Practical tips on conducting ESG investigations in India

Non-profits and media have frequently highlighted and litigated ESG concerns in India including unfair labor practices and forced land acquisition for factories. The business response has typically been to assess if laws were breached and prepare for litigation. Indian laws — which typically come into play in these scenarios — merely prescribe a minimum threshold of compliance and not necessarily the most sustainable, fair practices. If no laws were violated, there are no incentives to improve a company’s larger impact on its community. But this is changing.

Enhanced mandatory sustainability reporting comes into effect in April 2022 (for large, listed companies) and disclosures must be made against the National Guidelines for Responsible Business Conduct published by the Indian government. To meaningfully meet updated reporting obligations, covered companies must assess areas such as OSH and human rights practices at value-chain partners, indirect impact on ecologically sensitive zones, etc. Whistleblowers are also increasingly raising concerns beyond financial matters.

Therefore, preventive and reactive ESG internal investigations are on the rise, and we see certain aspects to keep in mind while undertaking these in India. Our focus is investigations of a “core” set of ESG issues such as human capital matters (workplace toxicity, harassment, etc.) and labor and environmental practices throughout the supply chain, but typically not “adjacent” issues of greenwashing (overstating a commitment to sustainability) and bluewashing (overstating a commitment to responsible social practices).

Evidence-gathering

Often, governance investigations prioritize data on company servers and employee devices. For many ESG matters, however, crucial data is maintained at factories instead of corporate offices, not digitized (commonly manually entered), and in local languages — for instance, registers of working hours and daily wages. India also houses industries reliant on contract manufacturing and subcontracting, including apparel, pharma, and fast-moving consumer goods. Geographical and ethnic diversity also brings a range of protected lands and indigenous rights. Therefore, ESG fact-finding often involves data collection from external sources, such as contractor records, visits to contracted facilities, worker and community interviews, and local government registries.

When physical inspections or interactions with contractors or workers are necessary, timing is key. Many buyers rely on social audits to gauge on-ground conditions at remote factories, but research in India has shown that misleading buyer representatives/independent auditors are common during these social audits. Notification of inspections, and issuance of hold notices, should be timed to reduce lead times and opportunities for cover-ups. If surprise inspections are planned for the company’s factories, there is no requirement to notify employees of inspections or on-site interviews.

Seeking to record interviews or obtain written depositions is often more suited to interactions with supplier representatives than with workers or community representatives who might be spooked, thereby frustrating the process. Contemporaneous notes by the investigation team can be relied on to record evidence. Attorney-client privilege is important here as, along with litigation risks, there may be regulatory scrutiny where ESG reporting or due diligence is mandated.

If workers provide evidence, investigators should maintain confidentiality and prevent retaliation against them. Although Indian whistleblower regulations for the private sector do not prescribe such duties, industrial workers are legislatively protected, and state labor authorities frown upon instances of victimization.

In human capital investigations, we see increasing complaints of rudeness, bullying, and other behavioral issues by high-ranking employees. These allegations often lack specifics (whistleblowers are reluctant to provide them for fear of identification). Keyword searches of electronic data may thus not necessarily provide the full extent of available evidence. In such cases, discreet in-person intelligence-gathering from current and former employees may be useful.

Procuring cooperation

Absent contractual requirements, Indian law does not impose duties for third parties to cooperate in internal investigations. Agreements and policies binding contractors should be checked for audit/inspection rights which could secure their participation. Usually, however, tier one (and lower-tier) suppliers work on a purchase order basis, and these documents typically lack such covenants. Resisting audits/inspections on the grounds of confidentiality concerns is also common, especially if the supplier works for other clients. In such cases, non-disclosure agreements are customarily relied on.

Reporting

Certain reporting obligations (already in effect or imminent) may result in a need to disclose ongoing ESG investigations. For instance, listed companies need to disclose developments “material” to their business or “forensic audits” to the markets. Due to legislative ambiguities, certain ESG investigations (particularly those involving financial misstatements) may need to be disclosed upon commencement, along with subsequent disclosures of the investigation’s findings and management’s responses to the same.

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The ESG emphasis follows from changed expectations, where “corporate purpose” goes beyond profits to acting responsibly and sustainably. In the same vein, conducting and remediating ESG investigations might need to go beyond what is legally mandated and thereby reflect the organization’s ESG values and commitment to social good.

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