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ESG Due Diligence – Your Guide to Green Investments

ESG due diligence is vital for investors. We explore the area, how to set up your ESG criteria & and uncover best practice for due diligence questionnaires.

Assessing Environmental, Social, and Governance (ESG) factors is hard. In fact, ESG due diligence is one of the most fluid and tough-to-grasp facets of Asset and Wealth Management research.

The heat is on portfolio managers to integrate real-world sustainability factors into their investment products, without compromising financial performance. Yet ESG due diligence is constantly undermined by unreliable data, unclear criteria, and rampant subjectivity.

Which means Asset and Wealth Managers – particularly those with limited research capabilities – are forever fighting an uphill battle to apply true ESG application to their stock picking processes.

In this post, we’ll talk about the role of ESG due diligence, how to create a repeatable ESG assessment process, and the tools you can use to make smarter sustainable investment choices.

What is ESG Due Diligence?

Every portfolio manager needs to make sure any equities they invest in are of good quality. There are lots of different ways to assess a stock; researching quantitative, fundamental, and qualitative factors through a bottom-up or top-down approach can offer a strong indicator of whether a company is worth investing in.

While these traditional investment methods are tried and trusted, there’s no industry-standard ESG due diligence methodology.

Because the topics within ‘Environmental’, ‘Social’, and ‘Governance’ are so broad and subjective, there’s no common consensus to ESG due diligence – meaning an investor’s goals will often dictate their research. On top of that, there’s often limited data on specific facets of ESG factors – for example, how would you accurately assess a company’s commitment to diversity?

But while there’s no set screening methodology, you can still use a variety of moves to tease out ESG factors from potential investments.

Assessing how ESG factors relevant to a potential investment could create new opportunities or risks – including any impact on financial performance, reputation and long-term sustainability.

Tied to this, you need to identify key risks, including regulatory non-compliance, reputational damage, supply chain disruptions, or legal liabilities. As legal and regulatory restrictions tighten, it’s never been more important to make sure ESG opportunities are above board.

Engage with key stakeholders, like company management, employees, customers, and subject matter experts. These conversations will give you insights into the company’s attitude towards ESG and whether it incorporates sustainability into its practices.

Underpinning all of this is data: portfolio managers need the most relevant information from a wide variety of sources, including company disclosures, sustainability reports, and third-party data providers.

Creating your ESG Due Diligence Checklist

One of the best ways to stay on top of assessing ESG criteria is through a checklist that can guide your decisions. Here are the key things your ESG due diligence checklist should include:

Environmental factors – Assess the company’s environmental impact.

This includes carbon emissions, resource usage, waste management, and pollution control measures

This will help you examine how well (if at all) a company manages environmental risk and finds opportunities to improve sustainable practices and environmental stewardship.

Social factors – Social factors account for a company’s impact on society.

This includes labour practices, employee welfare, diversity and inclusion, human rights, community engagement, and product safety.

These factors will help you evaluate how a company manages social risks and opportunities, including its relationships with stakeholders, employee satisfaction, and supply chain management.

Governance factors – These focus on the structure and processes within a company.

Board composition, executive compensation, shareholder rights, risk management, and transparency are all key things to examine.

Business is about people. Assess the quality of leadership, integrity, and accountability of a potential equity investment, as well as the potential risks associated with weak governance.

Key considerations when creating a due diligence checklist before investing in ESG-oriented companies to ensure you have all the right information to build out your full checklist.

For example, they may need to check that the supply chain is ethical. It could perhaps be best formatted as a list.

The Importance of Getting the ESG Due Diligence Questionnaire Right

Getting your ESG due diligence questions right is essential for many reasons – all of them crucial.

A comprehensive ESG due diligence questionnaire will help you find and manage risks, identify value creation opportunities, meet stakeholder expectations, comply with regulations, attract investment, and contribute to long-term sustainability and responsible business practices.

Your questions should give you the tools you need to align financial and non-financial considerations – increasingly a critical part of investment decision-making and corporate governance for Asset and Wealth Managers.

While these are sector-agnostic questions, your ESG questions should be tailored to specific industries, sectors, and investment objectives.

You should also stay updated with evolving ESG standards, regulations, and best practices to keep the checklist relevant.

How CID’s ESG Screening Tool Can Help you Make Wiser Investment Choices

It’s still hard to assess and integrate accurate, reliable ESG data into wider investment practices.

But it doesn’t have to be impossible – in fact, it’s getting easier than ever.

We’re CID, and we designed our Affinity platform to remove the manual burden from researchers. Affinity provides an ESG screening that uses AI and Graph technology to unlock an instantly accessible universe of clearly defined and relevant companies according to the themes and market events your investors care about.

Affinity makes it easy for researchers to capture, rank, score, and integrate data from sources across the web – including news, filings, and company reports. All of which makes it easier than ever to find investable companies that apply innovation to real-world sustainability practices.

Our ESG screening tool makes it simple to incorporate ESG findings into your investment analysis or decision-making processes – and more accurately determine the overall risk-reward profile of a potential equity, and whether it aligns with your investors’ ESG objectives.

For more information on how CID’s Affinity can deliver better ESG screening in a fraction of the time of traditional methods, you can explore our ESG use case page. Or maybe you’re ready to have a conversation on the topic? Get in touch.

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