Invest Europe Updates Its ESG Due Diligence Guide
5 April 2019
Katherine Ashton, David Innes, Geoffrey Kittredge, John W. Rife III, Patricia Volhard, Simon Witney
Companies face a pincer movement when it comes to “responsible investment”: there is increasing pressure from all sides, including from regulators and investors, to ensure that environmental, social and governance (ESG) issues are addressed by any business of significant scale. As enlightened, active owners – with a keen interest both in maximising returns and keeping their key stakeholders happy – private equity fund managers have responded very positively to the shifting landscape. Most have ESG policies, and have become used to answering investor questions on the subject. Many others have signed up to the UN PRI, whose six principles help to inform a firm’s investment decisions and the ways in which it exercises ownership rights.
But one problem for firms is deciding which ESG issues to focus on, and when and how they can be addressed. The range of issues that falls within the category of “responsible investment” has rapidly increased in recent years, and many of these could have a very material effect on exit value and saleability. Data security, for example, has jumped up the list of material risks that many companies face, and is now often regarded as an ESG issue. Similarly, as societal expectations have changed regarding supply chain due diligence, many businesses have re-doubled their efforts to ensure their products are ethically sourced. And while environmental considerations have always been important, the growing expectation that carbon emissions will be subject to significantly increased taxes has elevated this issue in energy-intensive industries.
But firms cannot focus on everything, so identifying the most important ESG risks, and deciding in which order to tackle them, is critical.