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Regulators increasingly require corporates and financial services firms to incorporate Environmental, Social and Governance (ESG) risks into their due diligence and reputational risk management processes. ESG also brings opportunity: asset managers and investment banks have enjoyed significant returns by moving assets into sustainable funds, while companies who are transparent about their ESG commitments have been profitable. In the final blog in our ESG Risk series, we break down the “G” in “ESG” by identifying the main factors companies need to consider when assessing governance risks–and explain how Nexis® Solutions can cut through the noise to help surface and mitigate these risks.
Governance is probably the least well understood pillar of ESG, but for the C-Suite it should be a standing item on their agenda. An assessment of a company’s governance record should consider the following:
A lack of good governance spreads risks throughout the business, and undermines the confidence of consumers, investors and regulators in the leadership–which could be terminal for a company. A financial services company should therefore include governance in its due diligence checks on current and prospective clients and other third parties. There are several reasons for this:
1. Regulatory risk: Most countries have laws which mandate good governance to counter the risk of illegal activity in a company and its supply chain. The UK Corporate Governance Code 2020 codifies the principles of good governance that companies should follow. More recently, legislation has been introduced which requires companies to promote ESG through their governance approach. As part of its response to the Covid-19 crisis, the European Union stressed the “importance of embedding sustainability into corporate governance”, with specific rules on corporate governance for banks and investment firms.
2. Legal risk: Where firms suffer a failure of governance, or fail to spot one in a third party, enforcement actions and fines will follow. For example, a major global bank was recently fined £64 million by a UK regulator because of “serious weaknesses” in its Anti-Money Laundering controls for monitoring suspicious transactions.
3. Financial opportunity: Where a company’s management has made good governance a priority and taken a value-based stand on societal issues, that company has often acquired new business and increased its profits and long-term sustainability. Our micro-documentary, Purpose & Profit, showed how a company in the Netherlands which only buys from sustainably sourced fashion brands has expanded internationally thanks to an explosion of interest from young consumers who want to pay more for ethical products. Related to this, there has been a move towards companies’ performance being measured against a ‘double bottom line’ of social impact, rather than purely profit.
Nexis Solutions: cutting through the noise to surface ESG risks and insights
Nexis Solutions helps firms to tackle the challenge of assessing governance risk, and other ESG risks, head on and surface insights related to ESG risks across our comprehensive data sources, from our news archive to company data to PEPs and sanctions lists. This supports companies’ reputational risk management, due diligence, and data-driven investment decisions.
In addition to our existing data, we have recently added ESG content to Nexis Diligence that enables users to confidently incorporate an ESG risk assessment into their due diligence research and reporting workflow, within a single interface of content chosen specifically for fast, cost-effective, and comprehensive due diligence:
For more information about Nexis Diligence, click here
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