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ESG Due Diligence could soon be legislated in some parts of Europe...

Updated: Mar 17, 2021

In recent times environmental, social and governance due diligence, aka (ESG) due diligence has become a new ‘buzzword’, in most sectors, but it’s not something new, and certainly a subject which requires close attention by those it relates to. Be it the financial, motor, or technology sector, ESG due diligence prior to any investment or transaction is critical in understanding the nature of the operation to which one is venturing into.

Likewise for global cooperation's with operations based in every corner of the globe, understanding your own ESG risks is critical to maintaining the reputation of ones brand and the ability to grow and prosper.

Issues such as forced labour, carbon emissions, corruption and child labour are all complex and highly worrying risks for any investor or senior executive running a global operation.

Investors, senior executives, and shareholders alike want to ensure that operations are not only sustainable, but also carried out in a manner which satisfy the end user or customer.

In some countries ESG due diligence wont just be to tick a box on an annual audit, in Germany, draft legislation has been passed legislating due diligence requirements and obliging large companies to ensure supply chain practices are sound, focusing on human rights and environmental issues.

Garments come from Asia, cocoa and fruit from Africa, and coffee from South America – the new Supply Chain Act (Lieferkettengesetz) aims to protect the rights of people who produce goods for the German market. The Cabinet has now launched the pertinent bill. - Source "The Federal Government, Germany"

Recent amendments in Germany to this act relate directly to enforcement. Most importantly, the eye watering fines that will be issued for non compliance, demonstrating the importance of this piece of legislation to the German government and its people. Fines will vary depending on the significance of the breach and its ultimate impact. Companies with an annual turnover of more than 400 million Euros could receive fines of up to 2% of their average turnover.

There is still some way to go before this particular legislation is passed, and there is no guarantee it will, however, law makers are set to have this process complete by September, prior to the German elections. There are mixed responses from companies as to this legislation, most are anxious as to their ultimate responsibilities and how they ensure compliance, but environmental groups on the other hand don't believe the legislation goes far enough in protecting people and the environment.

In the 20 years that I-OnAsia has been operating, it is no surprise that as part of any ESG due diligence request that is received, a large portion of the team’s time is spent researching, investigating and answering the important issues facing global corporations in their supply chains. The importance of these answers couldn’t be greater, they can have a huge impact on the right price and the right terms to which a deal is entered into from an investor, or significantly affect the companies valuation and consumer confidence should an organisation be shown to have failed in its responsibility.

The risks associated with not taking ESG due diligence seriously are easily explained in three specific categories of risk.

Financial Risk

ESG due diligence does constitute a very real risk in a financial transaction for the seller, an example of this risk would be the discovery of non-compliance with financial rules, policy and procedure around corruption within the organisation, this may result in monetary fines, prosecutions both civil and criminal, sanctions, loss of global contracts, and of course the overall valuation of the organisation.

Reputational Risk

There is no greater risk to an organisation, than permanent damage to its reputation.

Purchasing or investing in an organisation which can be shown to have severely breached human rights violations or committed serious environmental breaches will have serious ramifications in reputation, and thus affect the organisations ability to trade, to seek investment, and to be accepted into countries it wishes to operate.

For global executives, it is critical they understand their operations outside of their office and in the countries they operate. Not knowing, could lead to disastrous consequences and years of recovery.

ESG – Non-Compliance

For those organisations that don’t take ESG compliance seriously the consequences are inevitable with governments legislating to take action and handing out fines which could amount into the millions. But, for the investor, this could result in inherited legal liabilities both criminal and civil in multiple jurisdictions.

Not carrying out ESG due diligence also leads to unknown behaviours and risks continuing on within the organisation long after an investment, another risk which can cost a lot more than the investment.

I-OnAsia’s Chairman Derek Elmer believes more and more organisations will seek ESG Investigation Services;

“It’s quite apparent with the number of enquiries which lead to investigations that we are receiving globally, through all our offices, that ESG investigations are becoming a priority for a lot of our corporate clients.

As society continues to focus on issues such as climate change, how we treat our people, and our long term sustainability and impact across a number of sectors, senior executives are ensuring they themselves, are across the detail of ESG due diligence globally of their operations and supply chains.”

I-OnAsia's ESG Due Diligence is informed by our experience undertaking serious internal and external investigations into corruption, child labour, forced labour, human trafficking, natural resources smuggling, environmental crisis, and other sensitive issues.

Our experience extends across the region: from Guam to Pakistan, from Bangladesh to Inner Mongolia.

I-OnAsia digs deeply into the key sustainability dimensions: Environmental, Leadership & Governance, Business Model & Innovation, Social Capital, and Human Capital.

Today, I-OnAsia's ESG Due Diligence product satisfies leadership approaches, policies, standards and metrics for investors that have implemented an ESG program.

For many of our customers in Asia, this means digging deeply into the Supply Chain. We have moved beyond "key man risk" to "key supplier risk".

Investor capital is increasingly being awarded to companies with higher quality ESG performance, and poor ESG can come at a great cost as outlined in the risks associated with not taking it seriously.

The world is taking note of our work forces, how our products are made and services delivered, our impact on the environment and ensuring we make every effort to protect those that work for us.

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