ESG regulations, such as the Corporate Sustainability Due Diligence Directive (CS3D) passed by the European Parliament in June, and clarifications to existing directives, such as those on SFDR published in the spring, are posing growing challenges for companies. Even more so that we see the same trend in the USA, the UK and even in Asia, where ESG legislation have been introduced and will continue to be strengthened and broadened. \u201cSo corporations need to navigate through all of these regulations and ensure their due diligence approach is adequate\u201d says St\u00e9phanie Lhomme<\/span><\/a>, Head of Forensic Investigations, Corporate Intelligence & Litigation Support at Arendt.<\/p>\n ESG issues also vary from sector to sector and from one geography to the other. They will be different in retail to what they are in banking or in the petroleum industry, for example and different in Germany than in Brazil\u201d. St\u00e9phanie Lhomme comments that \u201ca one-size-fits-all solution is not the answer. It should start with a proper risk assessment that goes beyond the compliance risks to consider the operational and contextual risks, which too often is still lacking\u201d.<\/p>\n Unique in the EU<\/strong><\/span><\/p>\n St\u00e9phanie Lhomme, who was hired to set up the Forensic Investigations, Corporate Intelligence and Litigation Support practice within the regulatory consulting practice of Arendt, says that the model of adding Forensic Investigation and Business Intelligence expertise to support the work of the lawyers and regulatory experts is very common in the US and has started a few years ago in the UK, but remains quite unique in Europe. \u201cI think that in today\u2019s risks landscape, our investigation and intelligence capabilities added to the solid legal foundations bring critical value to our clients.\u201d says St\u00e9phanie. <\/p>\n Indeed, Arendt’s range of Regulatory & Consulting services covers a wide spectrum of services in the ESG area. The teams can assist with risk mapping and perform a comprehensive assessment of material ESG risks and, equally importantly, opportunities, it can deliver in-depth due diligence (i.e. information gathering and analysis which will supplement the self-disclosed information provided on a voluntarily basis by the third parties) and that includes when necessary field verification such as site visits. \u201cEnhanced due diligence will be part of the compliance requirements and is certainly a key success factor in the decision-making process, but it is still too often seen as a cost and not as a competitive advantage,\u201d St\u00e9phanie Lhomme explains. \u201cEven less is it viewed as a way to avoid litigation and investigation, and these cases are rising significantly.\u201d <\/p>\n St\u00e9phanie Lhomme says that in her experience she sees two different approaches to due diligence, \u201cone is pure compliance and gives you a false sense of security in front of your risks; the other is risk-based and proactive decision making. Due diligence is nothing more than being diligent in what you do, what you invest in, whom you partner with and making informed decisions\u201d.<\/p>\n Interrelated regulations<\/strong><\/span><\/p>\n It is hardly a surprise that litigation is increasing, especially as regulation tightens and becomes all encompassing. CS3D, for example, requires that due diligence be conducted not only on a company\u2019s own activity but also on their entire supply chain worldwide. Arendt can perform stress testing for ESG concerns across the supply chain.<\/p>\n Another challenge is that regulation is very interrelated, says Nevine Elsherif<\/span><\/a>, Senior Advisor and expert in ESG and sustainable finance in the Regulatory & Consulting entity of Arendt \u201cAny update or clarification published by the European Commission or the regulator has some sort of ripple effect.\u201d She cites, and for example, the SFDR Level 2, published in July 2022 and that came into force since 1st<\/sup><\/span> of January this year have introduced significantly more detailed disclosure requirements for the entities and for their products compared to the SFDR Level 1 that came into force in March 2021. \u201cSo, you have had a tremendous shift in the level of disclosure requirements in the SFDR in a matter of three years, which makes it very hard for the market to adapt quickly.\u201d<\/p>\n The data challenge<\/strong><\/span><\/p>\n The difficulty many entities face when trying to fulfil disclosure requirements, to organise their due diligence approach, communicate on their ESG strategy and performance is the quality of the data that is available to them. Data is often inconsistent, the methodologies to collect it and analyse it are inconsistent and they might not be used objectively and consistently even within the same corporation. \u201cDifferent data providers implement different methodologies,\u201d says Nevine Elsherif. \u201cIt is very important that the market reaches a common understanding on how the data is attained, processed and calculated.\u201d She says that the European authorities are aware of such limitation as per the European Securities and Markets Authority\u2019s (ESMA) recent Progress Report on Greenwashing of March this year where the lack of clarity on how the ESG-related data is computed by ESG rating and data providers was considered as one of the main channels of transmission of greenwashing occurrences. This in turn sheds the light on the need for adequate channels for due diligence to help investors, corporates and other stakeholders assess ESG performance. Nevine adds that the market is acknowledging the current increasing challenge with ESG data, especially for private equity and non-listed firms that are not covered by third party data providers. Which was already foreseen by Arendt as it has built a web-based due diligence solution that enables concerned stakeholders to collect, process, and analyse ESG related information directly from companies. <\/p>\n And St\u00e9phanie Lhomme has a stark warning: \u201cIt\u2019s becoming dangerous for companies to make claims without having challenged the data. Data analytics can be of significant value in compliance but the market especially in Europe is not yet ready for it. There is so much we can do however to make better use of this data\u201d. Stephanie\u2019s team also comprises data analytics experts which can assist clients identify trends and patterns with their data that can highlight red flags; \u201cthis is a very effective mean to be proactive in managing and mitigating risks that are not just regulatory but reputational as well and in case of regulatory investigations (they will come) or ESG litigation, data analytics will help establish the facts and determine how decisions were made\u201d. <\/p>\n Investigations <\/strong><\/span><\/p>\n The team is comprised of experts assisting clients manage regulatory investigations from various authorities (corruption, AML, greenwashing, market abuse\u2026), conduct internal investigations (fraud, misconduct, whistleblowing\u2026). <\/p>\n Arendt has developed a web-based due diligence tool designed to assist you in performing ESG due diligence on your corporate, your investments and even your portfolio. Our experts in ESG\/Sustainability are available to help you complete the due diligence process and identify key ESG risks and factors. <\/p>\n Corporate Intelligence <\/strong><\/span><\/p>\n Our expert in intelligence gathering provide enhanced due diligence with public information and source enquiries on AML, Anti-Corruption, Sanctions\u2026 We also provide transactional intelligence in the context of mergers and acquisitions, restructuring, market entries.<\/p>\n Litigation Support<\/strong><\/span><\/p>\n We complement the legal experts by provided the information they need to build and win a case. <\/p>\n More info on Arendt Forensic Investigations, Corporate Intelligence and Litigation support<\/span><\/a> and our ESG Services<\/span><\/a>.<\/p>\n<\/div>\nIt’s becoming dangerous for companies to make claims without having challenged the data<\/q><\/p>\n
You have had a tremendous shift in the level of disclosure requirements in the SFDR in a matter of three years, which makes it very hard for the market to adapt quickly<\/q><\/p>\n
Forensic Investigations, Corporate Intelligence & Litigation Support. <\/h2>\n
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