When it comes to the data used for predictive modeling and risk management, you can’t afford to leave anything to chance. Risk managers today have an ever-increasing number of AI applications and risk...
Risk management is paramount to the upkeep and success of a business. To make sure you are staying compliant, you should continuously check all operations for potential pitfalls, like illegal trades or...
In the quest to achieve unrivaled business growth, organizations show increasing interest in Decision Intelligence (DI) . Whether you use DI to augment, recommend, or automate decisions, the effectiveness...
When it comes to business, it’s important to have high standards—especially when evaluating risk and protecting your reputation. To do so requires a comprehensive due diligence process that’s powered by...
Companies operating in today’s global business environment must navigate ever-strengthening anti-bribery and corruption regulations. Some of the most significant recent enforcement actions against companies...
New report shows the urgent challenge of understanding third party environmental impacts and the opportunity of effective due diligence
Only 5% of the UK’s largest companies have published a ‘credible’ environmental plan that would comply with forthcoming regulations, according to a new report. This stark statistic shows the difficulties facing compliance officers seeking to assess the ESG impact of third parties and suppliers. In this blog, we look at three ways companies can overcome the challenge by improving their due diligence–with help from Nexis® Solutions.
New regulatory requirements on companies around environmental disclosures
Among the UK government’s announcements during the United Nations’ COP26 climate summit in November 2021 was a forthcoming piece of regulation around environmental compliance. It said that major UK companies would soon be required to publish plans for how they would “decarbonize” their activities. A Taskforce was set up and draft has since been published listing standards around environmental disclosures that firms will have to meet. The guidance is expected to be finalized this year, and the regulation to come into force soon. Moreover, the Financial Conduct Authority said in February that financial firms and listed companies should draw up their plans to transition to net zero even before the rules have been finalized.
Yet a recent review of companies’ activities by EY claimed that only 5% of FTSE 100 firms have published net zero plans that would be deemed “credible” under the government’s guidance. 78% of these companies have published partially developed plans that don’t yet address certain key requirements. By contrast, 80% of FTSE 100 firms have committed to becoming “Net Zero” by 2050. Although companies still have time until the regulation comes into force, this should remind compliance officers that there is often a gap between stated commitments and the actual data.
The challenges of ‘greenwashing’ and ESG assessments
The EY report illustrates one of the major challenges facing compliance officers today. They face ever-growing expectations to monitor and understand the environmental impact of their company and its clients and third parties. But while many companies have made ambitious commitments to reduce their environmental impact, it is more difficult to find concrete evidence of their real ESG record.
A related challenge is the rise of “greenwashing”, in which claims by investment funds to be environmentally sustainable have turned out to be false. This makes it difficult for compliance officers to accurately assess claims around ESG impact. The problem is such that most investors are now sceptical of companies’ environmental claims–a 2021 survey by PwC found that 87% of investors “suspect that corporate disclosures contain some greenwashing”.
Investors are increasingly moving their money away from companies which cannot demonstrate an understanding of their impact on the environment and other ESG factors. For example, in February 2023 the UK’s Local Authority Pension Fund Forum (which comprises 86 public sector pension funds) wrote to FTSE 100 companies calling for “disclosure of robust transition plans, and governance and accountability mechanisms that support their delivery”.
Taskforce reflects a wider trend towards climate-related regulations
The UK government’s regulatory intervention is part of a wider global trend towards mandatory ESG due diligence and reporting. This adds an extra layer of legal risk to the existing reputational, financial and strategic risks of failing to understand ESG impacts of a company and its third parties. For example:
As a result, we expect to see more examples of enforcement action against companies which fail to disclose their environmental impacts or carry out effective ESG due diligence. For example, in November 2022 a financial services company in the US received a penalty of $4 million to settle claims that it did not sufficiently assess ESG factors in some of the investment products it offered.
Three tips for identifying and mitigating ESG risks
How can compliance officers confront this twin challenge of greenwashing and expanding regulation? Three best practices around due diligence stand out:
Assess ESG claims with data and technology from Nexis® Solutions
Effective due diligence is key to understanding a company’s true ESG impact. Nexis Solutions helps firms to implement a more efficient and effective due diligence process to identify and mitigate ESG risks by providing companies with authoritative data from the most relevant sources, including:
We support firms to deploy technology across these sources to improve their approach to due diligence and risk management. For example: