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05. 06. 2023

What to Avoid When Conducting an ESG Audit

Environmental, social, and governance (ESG) factors have become increasingly important for investors in recent years. Bloomberg Intelligence estimates that global ESG assets may surpass $50 trillion by 2025, one-third of the projected total assets under management globally.

This growth is being fueled as investors recognize the potential benefits that ESG brings, such as long-term value creation, regulatory compliance, reputation and brand building, and social responsibility. Many view ESG investing as key to aligning investments with values and help contribute to a more sustainable future.

But ESG monitoring carries potential risks, including incomplete or inaccurate data, lack of standardization, greenwashing, regulatory and reputational risks, and lack of consensus.

Here are four pitfalls to avoid when conducting an ESG assessment:

  • Ignoring key factors: Investors must consider all ESG factors when evaluating a company’s performance. Focusing on a narrow set of factors may lead to incomplete or inaccurate conclusions about a company’s performance.
  • Over reliance on ratings: ESG ratings from independent rating agencies – such as MSCI, Sustainalytics, and FTSE Russell – are helpful but shouldn’t be the sole source of information for evaluating a company’s performance. It’s essential to consider multiple sources of information, including company disclosures, industry benchmarks, and how the company is covered by the news media.
  • Inadequate due diligence: Conducting thorough due diligence is critical to ensuring that the ESG information provided by a company is accurate and complete.
  • Not considering the local context: ESG factors can vary significantly across regions and industries, making it important to consider the local context when evaluating a company’s ESG performance. Local context is often best understood through open-source media and online sources.

While ESG investing offers many benefits, it’s important to understand how a company’s valuation is made and what information is being evaluated. By considering all relevant ESG factors, using multiple sources of information, conducting due diligence, and considering the local context, investors can make more informed investment decisions that align with their values and contribute positively to their portfolio.

Interested in what Semantic Visions can do for your ESG evaluations? Get in touch for a free demo.

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