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Environmentally sound investment: EDD is key

Kathleen Wainwright
Kathleen Wainwright
Regional Manager of Business Intelligence for EMEA

Environmental crime, such as carbon trading fraud or illegal logging, is a serious and growing problem. On World Environment Day, we examine how enhanced due diligence and trusted ESG data can help investors make sound and ethical investment decisions.

  1. Environmental crime is the world’s fourth most costly crime, fueled by the extensive involvement of organized crime groups.
  2. A holistic view of potential risks before investing in any new investment opportunity is integral to assess any potential risks, including exposure to environmental crime.
  3. Enhanced due diligence and trusted ESG data can help investors to make sound sustainable investment decisions.

Investors adopting a risk-based approach to assessing the level of due diligence necessary to support their investments are increasingly taking into account the environmental impact of these ventures.

Due diligence carries an important social element and is no longer viewed as simply a tick-box exercise necessary for compliance. It is now regarded as an essential tool to uncover risk — financial, operational, regulatory, or environmental — early in the process.

Sophisticated and targeted enhanced due diligence (EDD) can help investors to join the dots and form a holistic picture of risk because it delivers detailed information. Being able to access this critical intelligence empowers organizations to make informed decisions where heightened risk is suspected.

With the right information, investors can not only ensure that they do not inadvertently engage with entities involved in financial and/or environmental crime, but also that they fully understand the broader environmental impact of their potential investments.

The growth of environmental crime

According to statistics released by the UN and Interpol, environmental crime is now the fourth most costly crime across the globe, behind drug trafficking, counterfeit crimes and human trafficking. This growth has been fueled by the extensive involvement of organized crime groups.

Environmental crime is broad and encompasses white-collar felonies such as carbon trading fraud, a potentially lucrative sector for organized crime, with cases of such fraud involving transfers worth hundreds of millions of U.S. dollars.

The trafficking of natural resources — such as waste, forestry products, gold or minerals — can also present opportunities for organized crime groups, as these items can be easier to smuggle than, for example, drugs.

Some of the ways illegal timber can enter the supply chain. Combating environmental crime with green investing
Some of the ways illegal timber can enter the supply chain

This illegal activity is often focused on emerging markets, where information available in the public domain can be unreliable, inaccessible or incomplete.

Ethical investment decisions

Against this backdrop of increased environmental crime and heightened environmental awareness, sustainable and ethical business practices have become a key consideration in any investment decision.

Furthermore, investments that actively reduce pollution and achieve environmental sustainability present significant growth opportunities, particularly in emerging markets.

Wind turbines used to generate electricity are seen at a wind farm in Guazhou, 950km (590 miles) northwest of Lanzhou, Gansu Province September 15, 2013. China is pumping investment into wind power, which is more cost-competitive than solar energy and partly able to compete with coal and gas. China is the world's biggest producer of CO2 emissions, but is also the world's leading generator of renewable electricity. Environmental issues will be under the spotlight during a working group of the Intergovernmental Panel on Climate Change, which will meet in Stockholm from September 23-26. Picture taken September 15, 2013. REUTERS/Carlos Barria (CHINA - Tags: ENERGY BUSINESS ENVIRONMENT) - GM1E99M14RR01

The caveat is that these jurisdictions often introduce corruption risk, further complicated by ineffective enforcement. Moreover, because green industries are often relatively ‘new’, they may lack effective regulation.

This means that investors today must drill down and ask the right questions so that they can understand potential risks and make informed decisions about future investments.

Enhanced due diligence

The scale, complexity and sheer cost of environmental crime mean that it is now critically important for investors to form a holistic view of potential risk before investing in any new opportunity.

This means that they must conduct appropriately targeted due diligence, which in turn relies on accurate and complete data.

In emerging markets and other high risk jurisdictions, interviews with trusted sources can provide crucial additional intelligence that completes the risk picture. Source interviews add context and enable investors to form a well-rounded view, so they can more accurately mitigate risk.

Moreover, intelligence gained from interviews with trusted in-country sources is particularly useful when restrictions on press freedom limit the information available in the public domain.

Refinitiv’s Enhanced Due Diligence (EDD) reports are tailored to support each specific investment decision, combine in-depth public domain research and on-the-ground interviews with expert industry sources.

Life cycle of an enhanced due diligence report. Combating environmental crime with green investing

Powered by our global research teams, EDD reports are an invaluable tool to help investors ensure compliance, but also provide targeted, bespoke intelligence to help make informed decisions about the environmental impact of any potential investment.

Our Global ESG data offers further support by delivering transparent, standardized environmental, social and governance data on thousands of companies worldwide and has been designed to help users understand companies’ relative performance in critical areas such as climate change, executive remuneration, and diversity and inclusion.

The private sector has a crucial role to play in the achievement of wider global environmental and sustainability goals and forward-thinking organizations should remember that whilst these are macro issues, they can be tackled on a micro level. The key is accessing trusted data to enable sound, sustainable investment decisions.

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