Finance Monthly April 2019 Edition

agreements to drive change, and corporate leaders can take a real and peripheral look at their businesses to assess business risks and deploy mitigation – they cannot afford to ignore it as a ‘nice to have’. The role of environmental due diligence for businesses isthereforeofparamount importance, but the approach needs to change from its current state as a risk-based tick box exercise to one where opportunities and risk mitigation are mapped for the company or project at the outset enabling asset managers and CEOs to bring about this change. And we still need a shift in attitude, one where comprehensive ESG due diligence is instructed early in the process by the deal teams and not at the last minute. This way, real consultative change can be brought about. ESG due diligence needs to be change driven, not just identifying risks but applying the ‘so what’ factor and making recommendations and road maps of what changes can be made throughout the lifetime of the investment to increase ESG performance, reduce risk and increase value. Having practiced in due diligence for over twenty years, I have seen a real change in a purely environmental focus (climate change, natural resources, pollution and environmental opportunities) to the emergence of the “S” part of ESG, covering social issues such as human rights, modern slavery, gender equality, remuneration, supply chains and health and safety, and the ‘G’ representing the important role of corporate governance and behaviour on in these issues, highlighting poor governance such as lawsuits and anti-bribery and corruption issues. And so, the term ESG – Environmental Social Governance has evolved. This is now a term being used primarily by the investment community to assess and benchmark the performance of companies. It is seen as being similar to Corporate Social Responsibly (CSR) which many leading firms now include in their annual reporting, but it should not be confused with being solely about green investing, where funds primarily invest in ‘green’ initiatives. It applies to any company or fund. In the world of finance, ESG is causing much confusion as there is a multitude of standards and guidance published. There is a current drive to covert ESG into a number, and it has been picked up by ratings agencies so they can compare ESG performance, with most large corporations now having a global score. However, when looked at through a purely ratings-based lense, it can be misleading. Information is gathered by assessing public information, board reports and interviews with company management, it is then graded and given a metric so that it can be more easily understood by the financial markets and compared via sectors. Worryingly though, for most, there is little to no ‘boots on the ground’ assurance done on the numbers and as an experienced environmental professional, I can tell you that the working practices of a company are often quite different to the glossy brochures and corporate information that is communicated via a CSR board report in a data room. So ESG cannot be purely defined by a metric, it is a living and breathing process for managing risk and increasing value. You would not invest in a company without a proper set of audited accounts, and therefore metrics should be accompanied by global independent assurance via due diligence. Managed properly at the outset, ESG can help corporations and funders make their desired returns with a clear conscience – that can only be a good thing. www.wyg.com “The working practices of a company are often quite different to the glossy brochures and corporate information that is communicated via a CSR board report in a data room.” Emma Arnold Technical Director - Environmental Due Diligence at WYG 41 www.finance-monthly.com ASK THE EXPERT - ESG