Sustainability data and RegTech provider Diginex’s recent acquisition of The Remedy Project labour and human rights advisory illustrates how ESG is transforming from an investment strategy to a risk mitigation objective among financial companies.
The London-based company, which last year purchased sustainability data and analytics provider Matter DK, anticipates that the The Remedy Project’s expertise in supply chains will complement its own risk assessment data and capabilities.
This will help financial institutions and corporates assess their own supply-chain exposures to risks such as wage and physical abuse at a time when regulatory pressure to conduct due diligence raises compliance risks across industries.
“By integrating The Remedy Project’s specialised knowledge in human rights governance, we can amplify the impact of our supply chain platforms, helping clients build more transparent, accountable and humane global operations,” said Diginex chief executive Mark Blick.
Workers’ Rights
The Hong Kong-based Remedy Project addresses workers’ and human rights violations by partnering with companies, governments and civil society to encourage sustainable labour practices. Diginex has bet that the organisation’s expertise in uncovering risks and developing remedial strategies will combine with its data management and reporting capabilities to improve risk identification and disclosures.
The acquisition comes as the momentum of ESG among financial institutions wanes amid political pushback against sustainability-linked investment strategies. Many companies have removed ESG from the names of their business units, concerned that the it has become a dirty word. Nevertheless, the risks to assets posed by environmental decline and social issues remain.
In response companies including GreenFi and Intercontinental Exchange have focused their energies on providing transparency into organisations’ exposure to, impact on, risks such as biodiversity loss, extreme weather events and social unrest. That has seen the growth in interest in tools, including geospatial metrics like CUSIPs, to help them identify where their investments and physical assets are most exposed.
Supply Chains
As the vectors for international trade across and within boundaries, including those of developing economies and countries with oppressive governments, supply chains have become a key focus or ESG risks.
Sustainability specialist RepRisk has sought to shine a light on the matter with the first in a planned series of reports on abuses with supply chains focussed on specific industries. The debut report published in July looked at the fashion retail industry, which was found to have been the subject thousands of reports of potentially damaging breaches including mistreatment of animals and human rights abuses.
The findings of the report, gleaned by mining publicly available data, highlighted how ESG risks could undermine investments through legal, regulatory and reputational censure.
“Companies need a credible way to manage these risks and stay on top of them – not only to identify them, but to mitigate and manage them properly, to avoid significant legal, reputational, and financial implications.” RepRisk chief commercial officer Alexandra Mihailescu Cichon told Data Management Insight at the time.
New Risks
The most recent ESG regulations in the European Union, the Corporate Sustainability Due Diligence Directive (CSDDD), was designed to specifically ensure that companies and investors carefully assess the human rights and environmental impacts of their activities, and the affects those issues have on their operations.
But ESG regulations have been watered down in the past few years as sustainability has been deprioritised by financial firms, driven by energy-security and costs concerns.
They still remain a potent driver of risk management among financial institutions. That’s especially true of those operating in Europe, which is regarded as having the most stringent green rules governing organisations’ operations.
But the de-escalation of regulatory rigour has been seen as a risk in itself. A recent report by Morningstar Sustainalytics said that the move towards greater reliance on fossil fuels, for instance, will expose owners of assets such as power generation plants to increasingly costly maintenance and other costs.
As well, demand for power from energy-hungry data centres will require a greater focus on renewable sources to prevent stoppages and the retreat from climate mitigation measures could raise the likelihood of legal action from local governments and other organisations.
“Deregulation may reduce short-term compliance costs for utilities. However, we should not assume this will ensure long-term financial stability, as it may lead to an underestimation of transition risks.” the report concluded. “Over the medium- to long-term, utilities that fail to prepare for stricter environmental standards risk asset impairment, increased operational costs, reduced investor confidence and reputational damage.”
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