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The growing significance of Environmental, Social and Governance (ESG) criteria in the due diligence process
6 months ago by Cedar Rose

The growing significance of Environmental, Social and Governance (ESG) criteria in the due diligence process

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ESG factors provide insights about a company’s environmental, social and governance performance and policies. This information helps investors to make ethical and sound investment decisions by uncovering risks associated with any controversial or illegal behaviours.

Focus on environmental, societal responsibility and governance issues, largely driven by investor, customer, and other stakeholder demand, is on the rise globally, with a failure to address these matters becoming detrimental both financially and reputationally. Therefore, environmental, social, and governance criteria is increasingly becoming an essential aspect of corporate due diligence around the world as governments impose new regulatory requirements related to integrity and sustainability. The recent months have seen a flurry of activity on the ESG front across the public and private sectors. A string of directives and regulations requiring ESG reporting and sustainability disclosures for various industries were for example proposed and adopted by the European Union in 20211.

On the other side of the Atlantic, US President Joe Biden has made climate change and environmental justice priorities of his administration. The ambitious Biden plan for achieving a net-zero emissions economy by 2050, moved ESG up the corporate priority list. He re-joined the Paris Agreement and signed a series of climate change, racial equality and social justice executive orders.

In the Middle East too, there is a growing maturity and understanding of ESG. The Abu Dhabi Global Market (ADGM) has made considerable progress in developing a viable sustainable finance ecosystem to support a diversified green economy and boost investment inflows. The UAE became the first Gulf country to commit to net-zero carbon emissions by 2050. In April 2021, the UAE Securities and Commodities Authority (SCA) released a circular indicating that all listed companies must submit a standalone sustainability report every year2.

All this is changing the way companies do business. Given the growing significance of ESG due diligence, many companies walk away from deals that do not meet their ESG principles. Directors and board committee members now play an important role in overseeing company transparency on their sustainability initiatives and how best to build a proactive and intentional ESG program that can be integrated into their core business strategy and risk program.

How ESG Due Diligence Helps to Mitigate Risk?

ESG analysis provides valuable insights about an organisation’s performance and ability to operate successfully. It allows investors to mitigate risk by better understanding a company’s risk profile and risk exposure. Starting from where a company operates to which sector it belongs to and who its business partners and customers are, it helps to identify any red flags to avoid unsafe investments. Therefore, the way a company handles ESG issues can affect its long-term performance and valuation.  

How can you integrate ESG into your due diligence processes?

Getting ESG due diligence right is critical to managing risk and creating value. In fact, a comprehensive ESG assessment is now a core part of the due diligence process. It assumes even greater significance if an industry is perceived to have substantial environmental impacts, employs vulnerable workers, or is known for a high incidence of bribery and corruption. The potential risk areas are evaluated and incorporated into the broader due diligence process. ESG reporting can be quite challenging and complex. It is a lengthy and time-consuming effort to gather, organize and map data to multiple reporting standards and frameworks for ratings agencies and company stakeholders.

Cedar Rose’s due diligence solutions

Cedar Rose can uncover ESG violations by conducting due diligence checks through source enquiries. These source enquiries can determine if the subject’s corporate structure is well established and is transparent with clear accountability lines, whether the subject has been involved in any governmental violations concerning environmental laws or if the subject has been involved in any social activities that better their community. The results of these checks can help companies better understand who they are dealing and enter compliant partnerships that are aligned with their own company’s ESG values.

Cedar Rose’s multilingual research teams, with over 20 years of experience, have a worldwide network of tried, tested and reliable local connections and resources in the field and are able to conduct international ‘boots on the ground’ investigations discreetly and compliantly. It provides its clients a better understanding of third parties such as customers, suppliers, agents, distributors and consultants among others by conducting extensive investigations on companies and individuals globally. In addition, being compliant with international laws such as the Anti-Bribery Act and FCPA (Foreign Corrupt Practices Act) makes Cedar Rose a trusted organisation by international brand names, banks, auditors, governments, investors, journalists and peers within the business intelligence industry.

For more information call +971 4 374 5758 or visit www.cedar-rose.com

 

Sources

1 Corporate sustainability reporting | European Commission (europa.eu)

1 resource.html (europa.eu)

2 The rise of ESG in the UAE: Mandatory ESG Reporting for UAE listed companies - Al Tamimi & Company


  • ESG
  • ESG Due Diligence
  • Due Diligence
  • Risk Management