Companies must demonstrate a commitment to ESG factors due to a demand for greater transparency and accountability by investors, along with 88% of people in the UK and US who want brands to help them be more ethical and environmentally friendly in their daily lives.
In today’s rapidly evolving business landscape, where sustainability and ethical practices are increasingly scrutinised, Environmental, Social and Governance (ESG) due diligence has become a critical component of corporate success.
This article explains how a company can undertake the ESG due diligence processes, including the steps involved within an assessment and what questions to ask.
What is ESG due diligence?
As outlined in our previous article, ESG strategy is a framework that businesses use to evaluate their impact on the environment and society, as well as their ethical practices within their operations and decision-making processes. ESG due diligence is a process that evaluates this decision-making process including reviewing ESG policies, performance and track records.
Why is ESG due diligence important?
ESG due diligence is a critical process for businesses to assess and manage ESG risks and opportunities within their operations and supply chains.
Identifying and addressing potential risks associated with climate change, resource depletion and human rights issues means that companies can mitigate the risk of costly fines, lawsuits and reputational damage. But while steering clear of anything that could lose the company money, carrying out due diligence on ESG performance can help to enhance brand image which in turn attracts customers, investors and top talent.
ESG due diligence is crucial for building a resilient supply chain and securing investment. As companies work through each stage, valuable insights will be uncovered that can inform strategic decision-making and drive innovation, leading to a more sustainable and competitive business.
Take the example of a supply chain audit which involves assessing suppliers’ ESG practices. This enables potential risks to be identified and ensures that products or services are sourced ethically and sustainably, which not only strengthens the supply chain but also demonstrates a commitment to responsible business practices, attracting socially responsible investors and enhancing investor confidence.
The benefits of standardised reporting systems
While companies can develop their own ESG reporting mechanism, for example, reporting against KPIs, a standardised reporting system ensures credibility and trustworthiness. Reporting systems provide a common framework for companies to disclose their ESG performance.
These systems offer several benefits:
- Consistency and comparability: Standardised reporting ensures that companies are disclosing information in a consistent and comparable manner, making it easier for stakeholders to assess performance and identify trends.
- Efficiency: Standardised reporting can streamline the process of collecting and reporting ESG data, saving time and resources.
- Stakeholder engagement: Standardised reporting can facilitate better communication with stakeholders by providing a clear and structured way to disclose ESG information.
Steps involved in an ESG due diligence process
Here are the key steps involved in an ESG due diligence process:
Step 1: Define Scope and Objectives
Clearly outline the scope of the due diligence process, including the specific ESG factors to be assessed and the overall objectives of the assessment.
Step 2: Develop the Checklist
Create a tailored checklist based on the identified areas of focus and industry-specific standards.
Step 3: Gather Information
Collect relevant data and information from various sources, including company reports, public records, industry data and stakeholder interviews.
Step 4: Assess Existing ESG Practices
Evaluate the company’s current ESG policies, procedures and performance against industry standards and best practices.
Step 5: Identify Environmental Risks and Opportunities
Identify significant risks and opportunities that could impact the company’s operations, reputation and financial performance.
Step 6: Assess Social Practices
Assess the company’s labour practices, working conditions and adherence to human rights standards.
Step 7: Evaluate Governance and Ethics
Assess the company’s corporate governance practices, ethical standards and risk management systems.
Step 8: Conduct Supply Chain Assessment
Evaluate the ESG practices of suppliers and other third parties involved in the company’s operations.
Step 9: Develop an Action Plan
Create a plan to address any identified ESG risks and opportunities, including setting goals, timelines and resource allocation.
Step 10: Monitor and Report
Continuously monitor ESG performance, track progress towards goals and report findings to stakeholders.
How to use an ESG due diligence checklist
An ESG due diligence checklist is a valuable tool for conducting a comprehensive assessment of a company’s ESG practices. By using a checklist, companies can ensure that their due diligence process is thorough, consistent and efficient. A checklist helps to inform the questions you need to ask as part of the ESG due diligence process and typically includes questions related to:
- Environmental factors: Energy consumption, waste management, pollution, incidents and breaches, and climate change
- Social factors: H&S practices, modern slavery, human rights, community engagement, diversity and inclusion, and supply chain compliance
- Governance factors: Corporate governance and board structure, risk management, ethics, transparency and disclosure, whistle blowing policy, anti-bribery or anti-corruption, and cybersecurity
Creating a checklist acts as a starting point to develop a customised set of questions that address specific concerns and industry requirements. These questions can then be used to guide interviews, document reviews and other data collection activities during the due diligence process.
The power of asking the right questions
A well-crafted set of questions can identify potential risks, uncover hidden opportunities, demonstrate due diligence and even gain a competitive advantage. The right questions are targeted, insightful and detailed to uncover hidden opportunities for improvement and innovation related to ESG factors.
This can lead to cost savings, enhanced efficiency and a stronger brand reputation. Avoid asking vague or generic questions, keeping them specific and tailored to each ESG area to ensure relevant and actionable information is received. Asking insightful questions allows you to delve deeper into potential risks and vulnerabilities, enabling you to identify areas that might be overlooked.
Examples of ESG due diligence questions
Building on the framework provided by an ESG due diligence process, companies can formulate specific questions for each area. Remember, the specific questions you ask will depend on your industry, risk profile and overall objectives of the process.
Environment
- Provide details of any initiatives that have been implemented to improve environmental performance
- What is our strategy for reducing our carbon footprint?
- How do we manage our waste disposal and ensure responsible environmental practices throughout our operations?
Social
- How do we ensure fair labour practices and comply with human rights standards throughout our supply chain?
- What initiatives do we have in place for diversity and inclusion within our workforce?
- Describe any formal programmes in place to promote company involvement with the community.
Governance
- Do we have a robust corporate governance structure with clear lines of accountability?
- How do we manage ESG risks and integrate them into our overall risk register?
- How do we ensure transparency and disclosure of ESG performance data to stakeholders?
ESG due diligence challenges
Conducting ESG due diligence can be a complex process and organisations may face several challenges along the way.
For example, the regulatory landscape for ESG is constantly evolving so it can be challenging to keep up with the latest requirements and best practices, identify all the areas where compliance is required, and to assess the potential risks. Additionally, gathering accurate and reliable data for ESG assessments can be time-consuming and resource-intensive which is particularly challenging for companies with complex supply chains or operations in multiple locations.
Even when data has been collected, it is essential to analyse it and create a comprehensive report that allows meaningful conclusions to be drawn.
How Verita can support your organisation
As ESG consultants, our experience in the healthcare, education, business and Government sectors equips us to support organisations to achieve regulatory compliance, improve levels of service, create cost efficiencies and measure their impact on society.
By partnering with Verita, you can benefit from our deep understanding of ESG issues, our experience in conducting rigorous due diligence for corporate and healthcare organisations, hundreds of independent investigations, and our commitment to providing impartial and objective assessments.
We are dedicated to helping organisations achieve their ESG goals and build a more sustainable and responsible future.
If you’d like to learn more about ESG due diligence and how we can help your organisation, please book a free consultation or contact Ed Marsden on 020 7494 5670 or [email protected].
