Shareholders Call for ESG Investment Due Diligence

In the last month, some of the world’s biggest banks have faced votes from investors to improve their ESG investments and climate records. This is just the latest evidence that a growing proportion of shareholders, employees, and consumers want to invest in, work for, and buy from companies that can demonstrate a positive, ethical impact on the world.

In this blog, we explain how Nexis® Solutions can help companies to retool their due diligence approach to better understand the impact of their subsidiaries and third parties on the environment.

New due diligence in finance for companies around environmental disclosures

Financial services companies simply cannot ignore the views of their shareholders. They should therefore take note of the ESG investment demands made by a substantial proportion of their investors at recent Annual General Meetings (AGMs). For example:

• 30% of voting shareholders in Goldman Sachs went against the recommendation of the company’s Board to support a resolution calling for them to put forward a climate risk transition plan that integrates its activities with targets to reduce greenhouse gas emission.
• 31% of shareholders at Wells Fargo called for the bank to put in place a climate transition plan.
• 5% of shareholders at Bank of America went against the board’s advice to vote for a climate transition plan.
• 31% voted for Citigroup to stop funding a company involved in an oil pipeline between the US and Canada which indigenous communities claim is damaging their land.

Although most shareholders voted against the proposals in the end, the proportions of the vote share are significant. Research by BlackRock has found that three-quarters of proposals that gain at least 30% of votes lead to companies taking action, while the Financial Times reports that “significant shareholder dissent is generally regarded as being a vote against a management recommendation by at least 20% of the shares voted”.

Beyond the voting statistics, the prominence of some of the shareholders who backed the votes should be particularly relevant for banks. They included:

• The Norway Oil Fund, which is among the world’s largest sovereign wealth funds, supported the transition plan resolutions at Goldman, Wells, and Bank of America.
• Institutional Shareholder Services, which guides voting decisions by large investors, also backed the plans.
• Legal and General Investment Management, the UK’s largest asset manager, signaled it would support transition plan resolutions at upcoming meetings for JPMorgan Chase and Morgan Stanley.

It isn’t just financial services companies who are facing these calls, but firms in every sector of the economy–even oil and gas. For example, resolutions are being brought to this year’s AGMs of major extractives firms Shell, BP, ExxonMobil, Chevron, and TotalEnergies. These resolutions, drafted by activist shareholder group Follow This, called on the companies to align their emission reduction strategies with the Paris Climate Agreement goals.

MORE: Updated Wolfsberg Principles and what they mean for due diligence

Rhetoric isn’t enough: Companies must show evidence of ESG progress

Many companies are responding to investor activism by setting climate targets. A common example is a pledge to become carbon neutral by 2040 or 2050. While this represents progress, investors want to see more than just warm words, but evidence of a company’s impact on the environment–and that of its third parties and suppliers. This requires companies to carry out effective due diligence for ESG risk.

Investors’ expectations around ESG are aligned with a trend towards countries introducing legislation which makes it mandatory for companies to assess the environmental and human rights records of themselves and their third parties. Germany’s Supply Chain Due Diligence Act, which came into force in January, requires companies to publish information on ESG-related activities. In addition, US regulators have set up a Climate and ESG Task Force division to identify and enforce against ESG-related misconduct by companies.

Traditionally, due diligence involved assessing the legal and financial risk of current and prospective third parties. But the twin trends of investor activism and regulatory requirements suggest this is no longer sufficient. An effective due diligence process must now weigh up the ESG record of all third parties. This can be done using several data sources:

• Annual reports: These should be scrutinized for a company’s written commitments around ESG.
• Legal records: Any legal cases which could suggest wrongdoing by a company should be assessed.
• Media sources: News articles give a broader sense of a company’s ESG record. For example, an interview with its CEO might spell out plans which have not yet been finalized and enshrined in the annual report.
• Adverse media data: It is particularly important to find any adverse media coverage of a third party which could hint at a negative ESG impact. For example, there could be reports on allegations which have not been made through the legal process, but which a compliance officer might want to follow up on. Social media data can also help to surface allegations.
• Company data: Information on a company’s structure and beneficial ownership gives further context on whether it is practising good governance–and whether its owners or affiliates are too.

The high volume of data available makes it impossible for effective due diligence to be carried out exclusively manually. Ideally, the compliance team should be given access to technology which brings together these data sources to allow for ease of searching. Some applications, like Nexis Diligence+™, can helpfully provide an ESG risk score for any given entity.

MORE: Six questions to ask your due diligence tool

Assess ESG claims with data and technology from Nexis® Solutions

Due diligence is the best way to understand a company’s true ESG impact. Nexis® Solutions helps firms to implement a more efficient and effective due diligence process which can identify and mitigate ESG risks by providing relevant data from the most authoritative sources, including:

• News data to surface reputational risk of third parties.
• Compliance data to identify third parties which may require enhanced due diligence.
• ESG data to assess third parties’ compliance with growing expectations from regulators and the wider public around human rights and environmental due diligence.
• Company data to help build a picture of a company’s structure, directors, and beneficial owners.

We support firms to deploy technology across these sources to improve their approach to due diligence and risk management. For example:

• Nexis Diligence+™ supports an effective due diligence process with our extensive archives and news searches going back more than 40 years.
• Nexis® Data+ delivers a robust collection of licensed and web content, deep archives and data, through our flexible data API.