The ESG Due Diligence Process – Why It’s Important

There are several key steps used to perform ESG due diligence. While you may use a third-party risk management solution to help guide this process, review these steps to become familiar with due diligence.

1. Collect Key Performance Indicators and Documents

To conduct an effective analysis, you need to collect all relevant information and set KPIs (key performance indicators). This information will differ slightly depending on what your company does. For example, a private equity firm looking to acquire portfolio companies will have different documents than a corporation evaluating a new supplier. 

Regardless of company type or size, determine what metrics and goals are relevant to your business. What information do you need to determine if the target company poses ESG liabilities? 

Determine how you will make decisions with the information you uncover. This will serve as a guide through the process and help you assess risk. Also, gather and organize all relevant documents. Gathering this information will streamline the process and aid decision-making later.

2. Interview Company Stakeholders

Once all information is gathered, interview key stakeholders. This includes getting to know your customers and third-party stakeholders. Stakeholders may include company employees, executives or board members. Get an understanding of their impact on ESG performance. 

Typically, these empowered stakeholders are familiar with the company’s policies that uncover corporate governance issues. Speaking with these individuals can help determine if the company has anti-corruption and anti-bribery measures in place.

Depending on what areas of the company the stakeholder is involved in, they also may be able to speak about environmental issues or social practices. Note any red flags in your conversations.

3. Perform Background Checks on Decision-Makers

It’s vital to uncover problematic patterns and behaviors of key stakeholders. Run background checks on these individuals to gather evidence of previous charges or convictions. This will help you assess the ESG risk level of working with each individual.

4. Review All Accounts

Accounting issues fall under the governance category of ESG due diligence. Review the company’s accounting records to understand its financial position. Assess the accounting policies and ensure they are not misrepresenting any financial information. If the policies are sound and the accounting is accurate, this may not be an area of concern. 

5. Execute Inspection Initiatives

Once you have gathered information on stakeholders and accounts, perform any necessary inspections. Visit on-site locations, factories, and distribution centers. Doing so will shed light on potential human rights violations and the environmental impact these physical locations have.  

6. Conduct and Compile an ESG Risk Assessment

The final step in performing due diligence is compiling a risk assessment. After completing the above steps, you will have an overview of how a company is run and what risks it may pose. Review information about the company, its stakeholders, and its physical locations. Evaluate the risk level of any environmental, social, or governance issues that came up. 

Then, make recommendations based on the information. If your company is looking to make an acquisition, you will have the information needed to determine if the investment is low-risk and will provide your company with long-term value. If your company is looking for a new supplier, you will be able to make a decision to ensure that your supply chain is sustainable and ethical.