What is ESG Due Diligence? Who and what is it for?
In today’s investment environment, the significance of ESG factors cannot be underestimated. Arising from the growing impact of ESG, Due Diligence has become an increasingly important and valuable part of transactions. ESG Due Diligence involves a thorough examination of the performance of assets. This evaluation is designed to verify that, when assets are being bought or sold, they adhere to applicable regulations and benchmarks. Through a comprehensive analysis, Due Diligence captures the entirety of an asset’s ESG initiatives, offering insights into its current state and potential avenues for improvement.
Awareness of ESG Due Diligence is vital for several stakeholders, as it ensures alignment. The key players who should be aware of this concept include: Investors, Sellers, Buyers, Lenders, and Developers.
The urgency for ESG Due Diligence is accentuated by the significant impact of climate change on the built environment. Assets need to be benchmarked against industry standards and future-proofed against evolving challenges. Due Diligence, in this context, provides stakeholders with a roadmap to align assets with legislations and stakeholder expectations, mitigating potential risks.
How ESG Due Diligence can help?
There are many benefits to conducting a Due Diligence assessment on an asset. For vendors, it serves as a powerful tool to enhance the asset’s value, offering a transparent showcase of its ESG credentials. On the other hand, investors reap the rewards of an accurate and holistic assessment of the asset which highlights both the inherent risks and potential opportunities post-acquisition, encapsulated in a detailed risks and opportunities register.
Similarly, bank lenders utilise this process to assess and mitigate risks associated with a property’s ESG performance, aligning with both regulatory expectations and the broader goal of supporting sustainable lending practices. The transparency and ethical practices fostered by ESG Due Diligence extend to various market participants, including asset managers and advisors, contributing to the overall integrity and sustainability of asset value.
What should be included in an ESG Due Diligence assessment?
The key to the success of the Due Diligence process lies within the metrics and benchmarks used. Adherence to local building regulations, alignment with investment objectives through relevant ESG indicators, and compliance with EU-level legislation ensure a comprehensive evaluation. Such meticulous scrutiny not only enhances asset value but also expands the buyer’s market, fostering competition and potentially elevating sale prices.
ESG due diligence captures performance metrics, ranging from energy ratings like EPC to renewable energy adoption and waste management, which are foundational. Any green building certifications or social and biodiversity initiatives affiliated with the asset are noted and add layers of credibility and value. The asset’s future performance and suggested pathways for energy efficiency and carbon emission reductions are also determined using the CRREM (Carbon Risk Real Estate Monitor) tool.
An ESG Due Diligence checklist typically includes a comprehensive list of documents, reports, and information that the seller should gather and provide to potential buyers during the Due Diligence process. It’s important to note that the specific items on the Due Diligence checklist can vary depending on the type of asset being sold and the legal requirements in the jurisdiction where the transaction is taking place. The following are some sample headings that outlines some of the key items typically included:
Environmental
- Risk Assessment
- Energy Efficiency
- Green Building Certification
- Carbon Emissions
Social
- Community Engagement
- Supply Chain Labour Practices
- Diversity, Equity and Inclusion
Governance
- Stakeholder engagement
- Risk management
- Ethics and compliance
When to prepare your ESG Due Diligence?
The timing of Due Diligence is crucial. Vendors are advised to commence the process as soon as an exit strategy is envisioned, ideally 9-12 months prior to a potential sale. Such a proactive approach seamlessly integrates ESG considerations into the asset’s overarching strategy and allows for some upgrade/retrofit works to take place before the sale process kicks-off. If time doesn’t allow for it, then a period of 4-6 weeks should be sought for an ESG Due Diligence to take place, depending on the depth of analysis required. Conversely, investors benefit from a consistent approach to ESG Due Diligence, even when faced with limited information. It offers invaluable insights into asset performance, allows for international benchmarking using EU legislation such as the EU Taxonomy, and minimises risks.
Conclusion
ESG Due Diligence helps both vendors and investors to make informed decisions, minimise risks, negotiate effectively, and protect their investments in the real estate market. Ultimately, this will help to deliver a greener built environment with stakeholders doing well while doing the right thing!