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In the last month, some of the world’s biggest banks have faced votes from investors to improve their ESG 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.
Financial services companies simply cannot ignore the views of their shareholders. They should therefore take note of the ESG demands made by a substantial proportion of their investors at recent Annual General Meetings (AGMs). For example:
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:
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.
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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 sources:
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.
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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:
We support firms to deploy technology across these sources to improve their approach to due diligence and risk management. For example:
Get on top of your ESG tracking, and sign up for a free trial today.