Sustainable investing was once a niche investment area, but the last few years have seen a surge of interest as a new generation of investors comes forward. Environmental, social, and governance (ESG) risks are now real-time financial issues and can no longer be pushed to the sidelines. Sustainable investment options attracted $120 billion in investments in 2019, and Bank of America estimates there will be $20 trillion of asset growth into funds focused on impact investing in the next 20 years.

The financial sector is also under growing pressure from investors and climate activists to “think twice” about the social impact of existing portfolios. Financial institutions are now in the sights of climate extremists, a shift from the traditional focus on corporates, and as such must be prepared for targeting and direct action. Over 50 financial institutions, with $2.9 trillion in assets, have committed to disclosing the carbon emissions of their loans and investments to satisfy increased public scrutiny. As impact investing moves to the mainstream, businesses will be eager to attract investors and promote their ESG capabilities.

The challenge for investors and stakeholders will be determining whether an enterprise is walking its talk on the ESG front. It is easy to make sustainability claims, but much more difficult for interested parties to substantiate them. We take a look at the current shortcomings of most impact investing products and what corporate risk managers need to know to accurately identify ESG risk exposures.

Beyond Sustainability Disclosures

Currently, there are gaping holes in the impact investing due diligence marketplace. Where once a few paragraphs in an annual report would have sufficed, stakeholders now expect a detailed impact map of ESG risks and how they will be mitigated to achieve desired sustainability outcomes. Regulators are getting involved as well, with the EU imposing a non-financial regulatory requirement for large public-interest companies to report how they address and manage social and environmental challenges.

As we see it, there are three issues to address. First, there is a lack of consistent and replicable due diligence that covers multiple sectors, asset types, investments, and portfolios. Second, there is a lack of organized, verified ESG data. Most data sets about various companies are, at the moment, chock full of self-reported information, raising questions about credibility. Third, there are little to no governance frameworks established to guide operations and decision making.

Addressing these concerns requires due diligence that uncovers accurate and complete information on the following:

  • Underlying corporate governance practices
  • Risks associated with scarce or vulnerable resources
  • Supply chain weaknesses
  • Successor liability issues specifically relating to ESG Compliance with labor and health & safety laws
  • Non-compliance with environmental standards and regulations
  • Anti-bribery and anti-corruption efforts

Bridging the Gap

Whereas most approaches to impact investing risk management only evaluate an organization’s “talk,” IntegrityRisk drills down into each of the environmental, social and governance elements to not only verify claims made on paper, but to show that a business is adhering to its ESG principles in practice.

With ImpactCheck, foundations, asset owners, funds, investors, and rating agencies can  identify, track, and evaluate impact risks and outcomes through the following offerings:

Governance Screening

  • Corporate governance scorecard based on a unified ontology
  • Screening tool for benchmarking by sector, market segment, and impact area
  • Enhanced due diligence (EDD) reports incorporating primary research, commercial data sources, and bespoke investigations where necessary

Governance Monitoring

  • Continuous monitoring of news, risk events, and governance changesEmail alerts on events affecting specific
  • investments or total portfolioEvent-driven and time-based EDD updates

Impact Portfolio Support

  • Governance scoring on total impact portfolio
  • Portfolio “tilting” driven by governance materiality to clients or investors
  • Quarterly reports on portfolio governance quality and impact performance

Risk professionals who get ahead of impact investing risk management will find themselves in the lead of what looks like a marathon race. And it is not all about shedding light on the negative. Impact due diligence done correctly will also identify opportunities and value-adds that can promote sustainable long-term growth. Those businesses that can identify strategies to do good within their business agendas will reap both the financial and social benefits.

Contact us to learn more about our approach to impact investing due diligence and how you can find the truth behind sustainability claims.