The beauty of due diligence is that it can be employed from a distance and without the slightest contact with the target organisation. So, it is relevant to bring it to the attention of management practitioners that they can inadvertently miss the opportunity of having that business/investment/partnership discussion, even without the opportunity of saying a word to your potential source of capital…
Sustainability is concerned with the effect a business has on the environment and the society. Sustainability, as a management practice, is a focused on improving an organisation’s environmental, social, and governance (ESG) performance in areas where the company or brand has material environmental or social impacts (such as in their operations, value chain, customers, employees, et cetera). These can constitute significant risks, if not well managed; and that’s what sustainability risks mean.
In 2016, for instance, Nike was embroiled in a wave of protests culminating in Georgetown University students occupying their institution’s president’s office and demanding that the institution cuts its licensing ties with Nike – the global apparel giant. One of the conditions outlined by the students for the restoration of business relationship with Nike was a commitment from Nike to allow independent monitoring of the working conditions at Nike’s suppliers’ factories overseas. This demand was in the light of findings about poor conditions at Hansae Company Limited, which operates Nike’s Vietnam factory.
The evidence of serious labour rights violations at one of Nike’s supplier’s business was obtained in 2015 through an investigation by Worker Rights Consortium (WRC) – an independent labour rights monitoring organisation that investigates working conditions in factories around the globe. However, at that time (2015), Nike refused to facilitate access to the factory for a full investigation. In the end, Georgetown University, pressured by its students, was able to get Nike to facilitate the access required by WRC to conduct a full investigation at Hansae. The cause championed by Georgetown University students amplifies one of the considerations of sustainability-based thinking.
Consumers such as Georgetown students are not alone in demanding that organisations incorporate sustainability in their strategy. Other critical stakeholders are towing this line as well, which makes sustainability risks boardroom issues.
In a recent letter to investors, BlackRock (arguably the world’s largest asset manager, with $7.4 trillion in assets under management as of end Q4 2019) stated that, “We believe that sustainability should be our new standard for investing.” In another letter to CEOs of investee companies, BlackRock’s CEO Larry Fink unequivocally wrote that BlackRock is “increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” BlackRock’s commitment to “place sustainability at the centre of its investment approach” may be the giant impetus required to mainstream sustainability in the corporate world. Or at least, some management scholars think so.
For instance, in a 2020 HBR article, Mark Kramer, a renowned management guru, likened BlackRock’s CEO’s letter to “a warning from the world’s largest shareholder that public companies dare not ignore.” If this thinking is anything to go by, BlackRock has set the stage, from investors’, to drive the sustainability agenda through shareholder activism, which will put subtle pressure on firms to mainstream this sustainability agenda.
However, it is important to note that the inclusion of sustainability as an issue for discussion in the boardroom and reporting thereof have largely remained voluntary. Whilst sustainability is yet to be mainstreamed by way of laws/legislations or regulations, it is worthy of note that locally, the Nigerian Stock Exchange (NSE) in 2015 commenced a phased integration of sustainability reporting for listed companies in Nigeria.
This baby step by the NSE, alongside BlackRock’s conscientisation of providers of capital to demand that sustainability be placed in the same room as finance, is very likely to put firms in a difficult situation. This will particularly affect organisations who do not yet see the connection between sustainability and improved bottom line. It might to an extent put them under significant pressure to embellish their sustainability reporting in order to appear attractive, as they internationalise/seek capital, patronage and business from enlightened investors, consumers and business partners.
Globally and largely, the implementation of sustainability practices as a strategic consideration, is often followed by a reporting of some sort to relevant stakeholders. Notwithstanding, sustainability reports, at the moment, are not compulsory and do not enjoy the same level of scrutiny as financial reports/statements.
Despite the efforts put into these sustainability reports and the assurance statements offered by experts, they often come across as grand exercises in impression management. As such, they are often not trusted and significantly discounted – especially by investors. But what is the big deal if there is any embellishment here and there? Can organisations be legally liable for information they provided voluntarily?
Obviously, organisations can be sued for providing misleading information, especially where it was relied upon in making an investment/business decision. Aside the legal liability linked to an embellished sustainability report, the organisation in question can lose reputation, business, partnerships, investments, et cetera, by failing the due diligence tests on their published reports, which are likely to be critical to decisions related to these going forward.
Institutional investors, Original Equipment Manufacturers (OEMs) and major players in heavily regulated industries are always minded of the “trust-but-verify” undercurrent in their investment/business decisions. Hence, in most cases, they often turn to due diligence experts as part of their risk management framework when investing or doing business in highly regulated industries/regions or with businesses and individuals, especially those suspected to be Politically Exposed Persons (PEPs).
The current pressure from BlackRock and like-minded investors on firms to take their consideration of the sustainability agenda more notches higher, is likely to force fund managers to also look the way of due diligence researchers (in-house or outsourced) in their desire to independently validate the claims in any sustainability report of interest to them.
It is recognisable and has been accepted by many that the on-going digital transformation of businesses and the society in general has brought with it limitless boundaries to the information accessible to anyone with the right skill and motivation. In my opinion and experience, as one who has worked in the intelligence gathering for strategic decision-making space for a significant period of time, sustainability reporting and reports will be a goldmine for due diligence, using such techniques as OSINT (i.e. the collation, processing and analysis of publicly available information from government and company reports, , newspapers, magazines, radio, TV, websites, blogs, forums, social networks, et cetera, with a view to providing actionable intelligence). For instance, information available here on how Nike responded to the students’ pressure shows that Nike urged one of its suppliers to pay US$4.5 million to employees who were unfairly treated, as found in an investigation by the Worker Rights Consortium (WRC) in 2018.
The beauty of due diligence is that it can be employed from a distance and without the slightest contact with the target organisation. So, it is relevant to bring it to the attention of management practitioners that they can inadvertently miss the opportunity of having that business/investment/partnership discussion, even without the opportunity of saying a word to your potential source of capital, business or a relationship that can afford you the much needed competitive advantage. Another downside to failing the due diligence test is that it may be taken as indicator of the organisation’s ethical climate/orientation because, actions they say, speak louder than words.
Donald Amaeshi is a Due diligence researcher and OSINT practitioner based in Lagos, Nigeria. He can be reached at: [email protected].
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