ESG Opportunities are Plenty But Effective Planning Helps Reap Benefits

The topic of sustainability is very much in discussion, and investors have plenty of opportunities in an environment, social and governance (ESG)-driven market that is becoming increasingly stronger as governments everywhere have started developing their own rules to enhance ESG regulation. For instance, the European Council has recently given the final go-ahead to a directive on reporting on corporate sustainability, while Australia is chasing mandatory climate reporting as well.

So, investing in clean energy transition projects will make you more socially and environmentally aware, give you more confidence in your return on investment, and help you meet ESG-related legal and stakeholder requirements. 

To get the most out of renewable energy investments, certain ESG due diligence will be useful in identifying the best alternative and mitigating the risks associated with it. So with regard to energy deals, investors need to keep certain things in mind before starting their sustainable journey to effectively conclude any agreement. The following perspectives will help them analyse the ESG market while also maximising value creation and managing ESG risks.

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Is investing in clean energy worth considering?

Clean energy investment is becoming more important than ever, and data show that a large amount of money is pouring into the sector, breaking records in the last year. Bloomberg says around US$755 billion has already gone to support several green initiatives, and the Intergovernmental Panel on Climate Change (IPCC) says we need at least US$3.5 trillion in investment globally to avert future climate catastrophes.

Investing in green projects will provide future benefits, as the ESG concept is in an evolving stage with a lot of opportunities that will align with technological innovations.

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Some best practice ESG due diligence to consider for energy investments

When making an energy deal or transaction, it is important to look at best practices in ESG due diligence to find opportunities and the risks that come with them. ESG issues can be different from one industry to the next, and there is no single way to deal with them, but these steps will help: 

• Thorough Monitoring

Every aspect of ESG has to be taken into account before making your investment in a renewable purchase. That means you should not only consider the environmental aspects of renewable assets but also focus on the ‘S’ and ‘G’ criteria. You must be able to measure how much the company operates with local residents, the wider community, and local landowning interests to gauge how happy people are with renewable project plans. You should also consider doing a detailed study of its supply chain management to see if it has been accused of violating human rights or not following the law.

• Regulatory Aspects

ESG investment has been going through a time of change, and so have the rules regarding it. Previously, it was either governed by soft laws or was entirely voluntary. But because of the threat of climate change, international and domestic laws about ESG investments are changing. To avoid further harm to planet Earth, many strict laws have been written and will soon be put into place by various regulatory bodies and governments. So, dealmakers have to travel ahead of the changing obligation and understand what types of changes may occur within the lifetime of an asset. Simply put, they must keep an eye on the present and future regulatory aspects of clean energy investment.

• Analyse Related Impacts

The company's supply chain might be very long and complicated, so it's important to separate the scope 2 and 3 (indirect) greenhouse gas emissions of the asset. Particularly at a time when greenwashing is rife, its value chain must be monitored before taking the plunge. You must have complete visibility into what is going on upstream and downstream in its supply chains. 

• Run Through Sustainability Reports

Corporate Social Responsibility (CSR) reports or ESG reports of companies will provide investors with relevant information regarding their sustainability commitments. If a company has consistently been publishing one of these reports can be considered as a potential investment option. 

Finally...

Don't try to fix misaligned ESG policies after a transaction has already happened. Instead, assess how things are working and find any gaps right away. You might want to include activities to fix poor ESG alignment as a requirement after the deal closes.

Ask the sellers for warranties to cut down on the chance of gaps or rules that don't match up. Include outside counsel from the beginning when making major decisions or strategising so that everyone is pulling in the same direction and that they can better understand various stakeholders and map their activities.

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