As ESG moves from being a buzzword to an industry standard, ESG due diligence methodologies are also becoming more sophisticated and rigorous. In many cases, one of the most crucial components marking the difference between a good ESG due diligence and an excellent ESG due diligence is on-the-ground capabilities.
In a recent on-the-ground ESG investigation of energy assets in the Brazilian Amazon, we came to fully understand the benefits and additional value that such enhanced diligence efforts can bring. Based on this experience and several other recent projects, we have distilled here the key benefits associated with these investigations.
Advantages of on-the-ground ESG investigations
Being physically present on the ground helps investigators develop a profound and first-hand understanding of ESG risks, E&S impacts and the local perception of a company or project and its operations. In our five days spent on-the-ground in the Amazon, visiting sites and talking with a range of local stakeholders with different understandings of and relations with the target company and its operations proved especially valuable when ESG risks and issues emerged that were not identifiable through prior desktop research of public records. In general, such hidden ESG risks could include unexpected legal liabilities, demonstrations or protests that could indicate a larger problem but have not received media coverage, or other situations that could result in future adverse media coverage.
Identifying hidden ESG risks is especially relevant when considering regional variances in the availability of professional journalism and news outlets themselves. Local news outlets often have intricate ties with local authorities and businesspeople, and some remote rural regions (so-called “news deserts”) may receive no media coverage at all. Our investigation, for example, focused on a remote and sparsely populated part of the Brazilian Amazon, which is essentially only covered by one news outlet focussed on the state’s capital with reporting not always living up to journalistic quality standards. This can pose significant limitations for public-records-only investigations. This is also true for jurisdictions affected by limited press freedom and limited freedom of speech. Absent, inaccurate or biased reporting can make it impossible to gain a true understanding of any given environment. Cross-checking media reports and triangulating information through in-person interviews and site visits can increase the accuracy of the analysis of a given asset, allowing for a more thorough and precise assessment of what is at stake. It also allows for a better understanding of stakeholders’ perspectives across various issues, putting these concerns into context.
Many companies have made public pledges in relation to ESG and sustainability. Solely based on public records research, however, it is difficult to evaluate the sincerity and scope of those commitments. Much of the publicly available information, including ESG ratings, is based on self-reported disclosures and policies but not on realities on the ground. The identification of greenwashing and the assessment of a company’s ESG commitments in practice are only truly achievable by cross-checking corporate commitments with observations and interviews on the ground. As such, on-the-ground work provides a deeper understanding of a company’s capabilities and track record in addressing ESG issues.
An on-the-ground investigation can also be beneficial for the prioritization of risks. Locally obtained and cross-checked information enables organizations to rank the significance of different ESG risks and E&S impacts. Local inquires can provide a sharper understanding of the legal, regulatory, reputational and operational repercussions of a particular ESG issue. An interview with a local prosecutor may, for instance, reveal that what has initially been seen as low-risk, abstract problem is actually being actively investigated and high on the prosecutor’s agenda. Issues that initially appeared to be of great concern, on the other hand, may turn out to pose no immediate repercussions and risks after all. Comparably, something that was thought to be an isolated incident in the past may in fact be revealed as an ongoing problem that requires immediate action.
Fieldwork planning and implementation are intrinsically linked to the mapping of key stakeholders associated with an asset, project or company. As such, on-the-ground work has proven especially valuable in identifying key stakeholders and assessing how they are positioned towards an asset or a company, understanding their relevance, their disposition, their capacity and their intent to act. All of this allows for a more precise assessment of how to address the main risks in play, and through which channels.
ESG due diligence – and especially on-the-ground investigations – can identify opportunities and provide actionable recommendations to improve E&S management. For example, during our on-the-ground investigation in the Amazon, through visits to impacted traditional communities and talks with local authorities, we identified the strengthening of community relations as a great opportunity to address the impacted communities’ main concerns and significantly limit the company’s reputational and legal risks associated with such concerns. Measures such as these not only lead to more sustainable business opportunities – increasingly protected by future reputational and legal scrutiny – but also present significant opportunities to positively impact social communities and the environment. Ideally, this can create a “virtuous circle” of business operations within the lines of international social, environmental and governance best practices.
Beneficial across various project stages
While on-the-ground investigations are mostly conducted during the due diligence stage, they may also prove useful during other project phases. At the screening stage, on-the-ground capabilities can help facilitate a profound understanding of ESG risks early in the process, especially if there are already known issues that need to be analyzed. At the ownership and monitoring stage, recurring on-the-ground investigations and site visits can help to evaluate a company’s compliance with ESG-related obligations and a company’s overall ESG performance. Moreover, on-the-ground capabilities can also be utilized to address special issues or events such as a work accident, a change in a company’s management team, an expansion in operations or regulatory changes.
The bottom line
A well-planned and implemented on-the-ground investigation that strikes a healthy balance in obtaining information from government bodies, judicial actors, civil society organizations and social communities is an invaluable asset to any ESG due diligence. Corroborating information across multiple sources provides a more accurate vision of the key issues at play and the key stakeholders involved. Desktop research of public records has its limitations and on-the-ground capabilities can play a crucial role in overcoming those, enabling an enhanced diligence with several advantages that may very well bring to light decisive issues. On-the-ground ESG investigations can not only protect the reputation and operations of businesses committed to international ESG standards but also positively impact those affected by their projects.