ESG due diligence

What is ESG due diligence

ESG refers to a framework and set of standards that enable investors and other stakeholders to evaluate and measure a company's impact on society and the environment, as well as its corporate governance practices.

Diligence over ESG is the process of assessing a company’s response, performance and financial exposure in relation to those environmental, social and governance topics considered relevant to its business and industry.

Why ESG due diligence

A company’s ESG performance is intrinsic to its economic value and prospects and should as such form a core part of an investor’s considerations during the diligence process. The overall objective of the ESG diligence process is to identify and quantify any ESG related matters and exposures that could impact an investors assessment, and consequently valuation of the target company. The main considerations are:

• Considering the impact of a target company’s ESG strategy, approach, and performance on that of the investor’s current ESG performance and goals
• Identification and quantification of ESG related matters and exposures that could have an impact on the value and performance of the target, now and in future
• Assessing performance and readiness against specific ESG regulatory compliance, such as the mandatory sustainability disclosure requirements introduced by the CSRD
• Identification of upcoming ESG rules and regulations that could impact the target’s operations and performance
• Enabling the supervisory board in the discharge of their duties over ESG oversight and care

How does ESG diligence work

ESG diligence takes a pragmatic approach in assessing an organisation’s ESG exposures, performance, and maturity:

• Identify material ESG topics as basis of the assessment, i.e., topics that could cause a company to have a significantly impact on the environment or individuals; or could have a significant financial impact on the company
• Assess the company’s performance against the material topics, this includes a benchmark against ESG standards and peers
• Consider a company’s readiness and response towards current and upcoming rules and regulations
• Quantify material ESG observations and how that could impact valuation and future performance
• Conclude on the company’s overall ESG performance and maturity and how that could impact an investor’s value assessment and current ESG performance and goals