The urgency of conducting due diligence for ESG investments

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The urgency of conducting due diligence for ESG investments

esg due diligenceInvestments related to Environmental, Social and Governance (ESG) have been in the spotlight in recent years. This is because an increasing number of individuals are becoming aware of and seeking alignment with sustainable ecosystem-based enterprises.

This global trend has had an impact on the abundance of investment related to ESG. ESG assets reached $22.8 trillion in 2016, $30.6 trillion in 2018, and touched the $35 trillion mark in 2020. Assuming a 15% growth, ESG assets may surpass $50 trillion by 2025.

On the other hand, the higher the consumer demand for sustainable products and services coupled with a more rapid flow of investment funds, the greater the potential for fraud. It is clear that due diligence plays an important role in the decision to invest in an ESG framework.

The risk of investing in a sea of ​​ESG capital

The Securities and Exchange Commission (SEC) has issued a warning to prospective investors regarding the risks related to ESG investing. One of these risks is the emergence of some unfounded and misleading ESG investing claims. The Vale S.A. scandal is one example.

The SEC filed a lawsuit against the Brazilian mining corporation for misleading investors about the safety of the Brumadinho dam. In fact, in 2019, this dam collapsed and claimed lives.

The Coca-Cola scandal of 2021 can also be a lesson. The beverage giant claims its company is practicing sustainability by recycling its plastic bottles into bottles made of 100% recycled plastic so that none of the packaging goes to waste.

However, a non-profit organization filed a lawsuit against the company because the campaign did not reflect reality. On the other hand, the company, which was founded 130 years ago, is the highest ranked plastic polluter in the world.

Another risk is inadequate control mechanisms for ESG practices. Boohoo, a British fashion retailer, was investigated by the authorities after a media company published an article regarding the practice of modern slavery by a supplier in the company’s supply chain.

Learn the risks before investing

Investing in businesses without first analyzing the risks indicated above has the potential to jeopardize investment continuity and investor reputation. Therefore, before investing, thorough studies into the business that will be the investment target is required.

Some examples of risks like the ones above can actually be mitigated by conducting due diligence. Comprehensive due diligence may uncover potential risks that may result from the company’s misleading claims about ESG practices, in addition to disclosing current problems.

How is due diligence carried out? Integrity Asia, with over two decades of compliance expertise, provides due diligence services using both open-source and desktop searches. We also assist clients in mitigating supply chain risks via our one-stop portal, Know Your Vendor.

Thorough due diligence ensures that investment funds are managed effectively. The right investment in ESG concept companies also contributes to sustainable ecosystems and economic relations.

To find out more about due diligence services, contact us today.

 


Putri

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