Star Textiles Ltd. has adopted an ESG framework for its operations. The Company has recently appointed a new contractor for its manufacturing…

CA Final · Advanced Auditing, Assurance and Professional Ethics · MTP · November 2026
Star Textiles Ltd. has adopted an ESG framework for its operations. The Company has recently appointed a new contractor for its manufacturing facility. The contractor offered significantly lower costs than the existing contractor. During the due diligence process, the Company became aware that the contractor had previously faced allegations relating to unsafe working conditions and non-payment of statutory benefits to workers. The management nevertheless decided to appoint the contractor, stating that the contractor was an independent entity and that the lower cost would improve the Company's profitability. The Company did not undertake any further assessment of the contractor's labour practices or require the contractor to comply with its ESG requirements. Subsequently, the Company learnt that the contractor had engaged a number of workers through informal arrangements without adequate documentation of their employment terms. The management continued to maintain that such matters were the contractor's responsibility and need not be considered by the Company for its ESG reporting. (i) Identify the ESG Pillar primarily involved in the above situation. (1 Mark) (ii) Explain the relevance of the identified Pillar to the Company's decision. (2 Marks) (iii) State two ESG-related concerns arising from the Company's approach. (2 Marks)

Suggested Answer and Working Notes:

(i) Identification of Pillar – Social (S) Pillar: The situation primarily relates to the Social pillar of ESG, particularly labour practices, employee welfare, working conditions and human rights in the Company's supply chain. (ii) The Social Pillar requires an entity to consider the impact of its activities and business relationships on employees, workers and other stakeholders. ESG considerations are not necessarily confined to the Company's direct employees. Risks arising from contractors, suppliers and other business relationships may also be relevant to the Company's overall ESG performance. Therefore, the fact that the contractor is an independent entity does not, by itself, make its labour practices irrelevant to the Company's ESG considerations. The Company should undertake appropriate due diligence and establish suitable requirements and monitoring mechanisms for its contractors. (iii) ESG-related concerns: Two major concerns are: (1) Labour and human-rights risk: The Company has prioritised cost reduction over assessment of labour and human-rights risks and has failed to conduct adequate due diligence on the contractor. Unsafe working conditions, non-payment of statutory benefits and inadequate documentation of workers' employment terms indicate potential violations of labour and human-rights expectations. (2) Supply-chain and reputational risk: By appointing the contractor despite being aware of adverse allegations and failing to undertake further assessment, the Company may be exposed to reputational and ESG risks. If the Company subsequently represents that its supply chain follows responsible labour practices, such disclosure may also be misleading or incomplete. Conclusion: The Company's approach of treating the contractor's ESG practices as entirely irrelevant merely because the contractor is an independent entity is not consistent with a comprehensive assessment of the Social dimension of ESG.

Topics: Emerging Areas: Sustainable Development Goals (SDG) & Environment, Social and Governance (ESG) Assurance

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