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Insight

ESG diligence needs analysis

Simon Mendum Financial Sector Leader - US
Simon Mendum

Simon works in partnership with Financial Sector organisations to deliver ESG Advisory and EHS Transactions Advisory. Simon’s focus is driving EHS and ESG strategies that focus on value-driven actions and opportunities. In ESG and climate change advisory, Simon has successfully developed strategies to enhance and quantify value at mission-critical assets, with positive balance sheet returns. In EHS transactional diligence, Simon has a pragmatic business-issues based approach, to answer the critical questions related to the transaction under consideration, driving at the value consistent with the investment thesis.

Usually overlooked but a critical part of a good due diligence is the initial needs analysis.

Why are you conducting diligence? What do you need to know? What are your goals and objectives? How will you use the diligence? What stakeholders will need access to the diligence?

These all appear to be basic questions, but asking the right questions up front, challenging your diligence consultants and providers and entering into a dialogue with them at the onset will create a much more effective diligence strategy and assure that diligence funds are deployed both efficiently but in a timely way, and only after certain milestones have been satisfactorily achieved on the deal, to minimise potential lost deal costs.

At SLR we recognise that the potential materiality of ESG on a transaction can vary considerably from sector to sector and from business to business. We can build an ESG diligence strategy that integrates your transactional milestones and objectives. This can involve a later entry into diligence for certain businesses, or a more front-loaded diligence where potential ESG exposure or risk may be high. Sometimes a comprehensive diligence is not warranted, and a lighter touch is the most appropriate approach.

     

    Diagram showing questions involved in an ESG analysis

     

    Some questions that can be asked around your next ESG diligence include:

    • Are we exposed to potential supply chain risk?
    • Have I recognised ESG opportunities with the greatest financial returns?
    • Are we capturing all operational improvements with a positive ESG story?
    • How do we integrate ESG into our investment thesis?
    • How are LP fundraising ESG requirements evolving?
    • Do we understand our exposure to climate change related transition and physical risks / opportunities?
    • Are we fully leveraging our ESG case at fund raising?
    • Are we effectively communicating our ESG successes?
    • Where are our unrecognised ESG opportunities across our portfolio?
    • How do we monetise and recognise the full value of future ESG-driven cost savings at exit?
    • How can we effectively address climate change reporting requirements?
    • How are our peers managing ESG?