The ESG Risk Series: How Due Diligence Helps to Protect Companies’ Reputations Against Social Risks

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 third blog in our ESG Risk series, we break down the “S” in “ESG” by identifying the main factors companies need to consider when assessing social risks–and explain how Nexis® Solutions can cut through the noise to help surface and mitigate these risks.

Social factors: a broad spectrum of issues with specific risks for companies

The category of social risk covers a much more disparate set of issues than the environmental factors we explored in the last blog in this series. But like the environment, recent trends have led to social risks becoming one of the most pressing issues facing boardrooms. Social factors include:

• Employment standards: Do your third parties and suppliers engage and consult with their employees and prioritise fair pay, good working conditions, and health and safety?
• Human rights: Are companies taking the required steps to monitor for human rights violations such as forced labour right down their supply chain?
• Societal benefit: A growing proportion of consumers, investors and employees will only engage with companies who are good neighbours to the community around them. Are your third parties benefiting or harming society? How are their relationships with government stakeholders and civil society?
• Diversity, equality and inclusion: Do companies reflect society through the diversity of their workforce and leadership? Are they committed to equal opportunities and the training and development of all staff, or have they been implicated in allegations of biased hiring and firing, or gender or racial inequality? Social media allows allegations to reach a wider audience than ever before.

The drivers of social risk

Financial institutions are particularly vulnerable to social risks because they deal with companies and individuals from every virtually every industry and jurisdiction around the world. Managing these risks and seeking to benefit society are clearly the right things to do, but there are three main drivers which mean they are also in a company’s best interests:

1. Regulatory risk: The proliferation of mandatory human rights due diligence legislation requires companies to identify and mitigate social risks or face enforcement action. The UK’s Modern Slavery Act and the Netherlands’ Child Labour Due Diligence Act are just two examples of this growing legislative trend.

2. Financial risk: Investor scrutiny is driving change in corporate attitudes towards social risk. For example, group of investors managing £9.6 trillion in funds are currently targeting 43 companies that have failed to file a report on how they identify, prevent and eliminate modern slavery in their supply chains.

3. Reputational risk: Companies’ reputations suffer if they fail to manage social risks, often irreparably. The Rana Plaza factory complex in Bangladesh collapsed in 2013, killing more than 1,000 people. Major fashion brands who sold clothes made in the factory have faced enormous reputational damage in negative headlines and social media campaigns in the nine years since that tragic event.

Social issues in corporations are rarely out the headlines. In 2019, the former employee of a major technology firm was jointly named Time Magazine’s “Person of the Year” after that firm was forced to pay over $4 million to settle claims of gender discrimination in the workplace. Many firms held difficult and honest conversations in light of events like the #MeToo campaign and the death of George Floyd. Employees and consumers have put pressure on firms to take a public stand on these issues and make commitments to promote gender and racial equality.

Nexis Solutions: cutting through the noise to surface ESG risks and insights

Nexis Solutions helps firms to tackle the challenge of assessing social 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:

• ESG Ratings is a new content type in Nexis Diligence, which displays an at-a-glance view of a company’s ESG profile. These ratings, provided by CSRHub, help customers understand a company’s reputational or ethical business risk. The ESG Ratings break down ratings for each ESG category into further sub-categories, as well as providing an overall rating for the company.
• ESG Custom News delivers users a set of predefined search terms, enabling them to carry out ESG research within our extensive set of news sources, customized to their preferences.
• ESG Factors Power topics allow users to post-filter all their news results using ESG specific topical indexing.

For more information about Nexis Solutions, click here!