The Power of ESG Due Diligence

In today’s world, businesses are under increasing pressure to ensure that their operations and those of their suppliers are ethical, sustainable, and responsible. But ensuring responsible business practices across complex global supply chains isn’t an easy task. This is where ESG due diligence comes in. This is the process of evaluating whether a company and its suppliers adhere to best practices within:

• Environmental impact – Are they reducing waste, carbon emissions, minimizing pollution and mitigating biodiversity loss?
• Social responsibility – Do they ensure fair labor practices and safe working conditions?
• Governance – Are they operating legally, ethically, and transparently?

In this article, we’ll explore some of the biggest challenges companies face when trying to assess ESG risks.

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Why ESG Due Diligence Matters

Tracking environmental, social, and governance risks isn’t just about meeting legal requirements, it’s about building a resilient, competitive, and future-proof business. Without including your value chain and specifically your suppliers, all your sustainability efforts will fall short of real change. 

Here’s why ESG due diligence is important for companies to prioritize:

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1. Staying compliant with regulations

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Multiple regulations have popped up over the years aiming to make companies take responsibility for the impacts in their supply chains. Although the EU Corporate Sustainability Due Diligence Directive (CSDDD) is part of the EU Omnibus simplification work (and therefore likely to be delayed and simplified), there are a close to 30 countries with national laws with similar scopes: the Norwegian Transparency Act (Åpenhetsloven), the UK’s Modern Slavery Act and Germany’s Supply Chain Due Diligence Act. These laws require companies to:

• Conduct risk-based due diligence to identify, assess, and address potential adverse impacts on human rights and working conditions.
• Take proactive measures to prevent, mitigate, and remediate risks throughout their supply chains.
• Communicate transparently by reporting on due diligence efforts and engaging with stakeholders, including affected communities and customers, especially when harm has occurred.

Compliance with these laws goes beyond checking a box, it’s about actively preventing harm and engaging transparently.

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2. Reducing Risks & Strengthening Resilience

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Unethical labor practices, environmental violations, and governance failures can:

• Disrupt supply chains and create bottlenecks.
• Increase operational costs due to legal fees, fines, and inefficiencies.
• Damage brand reputation and erode customer trust

By proactively identifying and addressing ESG risks, businesses can prevent crises before they escalate, ensuring ethical sourcing and operational stability

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3. Competitive Advantage and Long-Term Growth

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Sustainability is a business advantage, and ESG due diligence is key to understanding and acting on your exposure. A key competitive aspect of sustainability is reducing carbon emissions across your value chain, with ESG due diligence serving as a foundational element in this effort. Companies with strong ESG strategies can:

• Attract investment from ESG-conscious funds.
• Strengthen brand reputation and customer loyalty.
• Stay ahead of evolving industry expectations and sustainability standards.

“By performing comprehensive and regular due diligence, you demonstrate to existing and future clients your commitment to responsible supply chains and are therefore better positioned to pursue commercially astute opportunities”

- EU Commission

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What’s Next? The Challenges of ESG Due Diligence

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Understanding why ESG due diligence matters is just the beginning. The real challenge lies in execution.

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Many companies struggle with:

• Outdated Screening Methods – Traditional risk assessments that only focus on Tier 1 suppliers and broad industry averages, missing deeper supply chain risks.
• Time-Consuming Research – Gathering supplier data, policies, and past reports is a slow, manual process that makes ESG assessments inefficient.
• Lack of Ongoing Monitoring – Once risks are identified, tracking supplier actions and ensuring continuous compliance remains a hurdle.
• Unclear Reporting Standards – Companies often ask: What do we need to report? How do we structure it? Are we compliant with key regulations?

These challenges make ESG risk management complex and resource-intensive.

In our next article, we’ll explore how the platform we’re building for ESG due diligence challenges traditional methods, and aims to help companies overcome these roadblocks with a smarter, more scalable approach to ESG due diligence. Stay tuned! 

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