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Regulators increasingly require corporate and financial services firms to incorporate Environmental, Social and Governance (ESG) risks into their due diligence and reputational risk management processes. The year of 2023 alone has seen massive increases in corporate responsibility in this area; for example, the European Union’s Corporate Sustainability Due Diligence Directive (CSDDD) requires companies with 250 or more employees to comply to unprecedented environmental standards.
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. But ESG is often poorly defined, and acquiring the right data to uncover these risks is difficult.
In this blog, we explore the trend towards ESG risk management; break down the factors companies should consider when trying to assess ESG claims; and explain how Nexis® Solutions can help to identify these risks.
At one point, ESG was recognized as a worthy aspiration for companies, but rarely prioritized at the expense of profit. Today, mandatory human rights and environmental due diligence has become a regulatory expectation for financial services companies and other firms. It is no longer enough for them to limit their monitoring of third parties to long-standing risks like creditworthiness or exposure to money laundering.
Numerous jurisdictions have brought in–or are planning–ESG legislation requiring companies to demonstrate that they are carrying out due diligence on the records of suppliers, agents, and joint venture partners. For example:
Another important development is the EU Sustainable Finance Disclosure Regulation, which has been introduced to improve transparency around sustainable investment products. It requires asset managers across EU member states to disclose whether they have considered ESG factors in their company’s portfolio and their own funds.
MORE: How financial services can keep up with ESG regulations
Failure to properly consider and manage ESG risks poses a reputational risk to companies. Activist investors are moving money away from firms with poor records, while consumer campaigns boycott products with unethical sourcing in their supply chains. ESG failures put companies and their third parties in the spotlight with negative press and social media commentary, leading to a loss of consumer confidence and revenue.
Carrying out ESG due diligence is not simply about managing risk, but also a financial opportunity. Reuters reported that a record $649 billion was invested in ESG-focused funds in 2021, meaning they now account for 10% of worldwide assets. These investments have generally outperformed the market averages.
Companies that demonstrate a positive ESG commitment are also enjoying more sustainable profits setting them up for long-term success. Customers, investors, and employees increasingly want to buy from, invest in, and work for firms that can demonstrate a positive ESG impact. Increasingly, businesses are recognizing the concept of a "double bottom line"–that their performance should be measured in terms of positive social impact as well as profit.
MORE: Gaining executive support from ESG communication initiatives
Companies of all stripes can mitigate the reputational, regulatory, financial, and strategic risks posed by ESG–and exploit its opportunities–by taking the following steps:
MORE: Key trends in risk and compliance
It is undeniably important for companies to monitor for ESG, but it is not a straightforward task. Challenges include:
MORE: How to deal with political pushback to ESG initiatives
Nexis Solutions helps firms to tackle the challenge of assessing ESG risk head on and surface insights related to ESG risks across our broad range of data, 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. Get started with a free trial today!