Screening & due diligence
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Introduction
A contextual approach to screening and due diligence
Evaluating climate risks across a company’s operations and value chain
Impact due diligence and data required to confirm the climate finance qualification
Evaluating gender risks across a company’s operations and value chain
Impact due diligence and data required to confirm the gender-smart qualification
Checklist of questions to consider
Screening and due diligence are crucial steps to identify any pertinent risk and determine whether a deal will qualify as gender-smart climate finance.
Risk assessments for climate and gender should be built into the screening and due diligence processes in order to minimise financial risk. Both climate and gender risks are systemic risks; when they coalesce the financial risk can be amplified for investees and investors alike.
Impact due diligence and data is required to confirm the gender-smart and climate finance qualification. Gathering both gender and climate-related data at an early stage is important to assess opportunities for impact and business performance benefits. Methodologies for assessing impact can seek to align with the 9 Operating Principles for Impact Management; a framework for integrating impact considerations throughout the investment lifecycle. The assessment should use a suitable results measurement framework linked to the climate finance taxonomy and gender-smart criteria applied.
Data gathered during the screening and due diligence stage will also be valuable for informing later steps in the investment process: in particular for structuring the deal and selecting performance and impact metrics.
Your institution or fund should already have a functional ESG screening and due diligence process in place, which covers broader ESG risks such as compliance (see the BII ESG toolkit and the IFCs Environmental and Social Performance Standards for more information). Climate and gender risk assessments should be undertaken in addition to, or integrated into, your existing ESG framework.
Introduction
An evaluation of both gender and climate risks and responsiveness should be embedded as part of your institution’s ESG processes - for example integration into existing due diligence workstreams. Your organisation’s strategic goals for climate and gender should be considered while designing or adapting these processes.
Gender- and climate-related risks and opportunities will look different in different places, sectors and companies, so screening and due diligence questions and methods should be tailored to context. The following guides provide an overview of the climate and gender risks and opportunities in different industries, to deepen sector-specific understanding of a potential deal.
A contextual approach to screening and due diligence
Initial screening of a potential investee should start with ensuring that the company or project is Paris-aligned, using a recognised framework such as the Multilateral Development Banks’ (MDBs’) joint Paris Alignment approach, EBRD’s Paris Agreement Alignment Methodology, or the EIB Group PATH framework. Paris-alignment could be determined via publicly available information, dedicated platforms such as the Carbon Disclosure Project (CDP) or through some initial screening questions, then should be verified in a due diligence process that establishes whether and how the investment qualifies as climate finance.
The Taskforce on Climate-related Financial Disclosures (TCFD) provides a set of good practice recommendations for climate risk management and disclosures Due diligence assessments should seek to align with these. Due to the systemic interconnections and feedback loops between climate and ecological health, investors should also refer to the Taskforce on Nature-related Financial Disclosures (TNFD), especially in sectors with large ecological footprints (such as agriculture, manufacturing, construction).
Investors should evaluate climate risks in the two key areas outlined below:
Evaluating climate risks across a company's operations and value chain
a) Physical risk: The risk of operational disruption and financial losses due to increased severity and frequency of extreme weather events, as well as long-term climate shifts. Studies estimate that 17 percent of financial value is at risk from physical impacts (Network for Greening the Financial System). Investors can use methods such as scenario analysis to generate predictive models on physical risks associated with varying degrees of warming.
b) Transition risk: The risk of financial losses, or economic and operational risk if an abrupt transition to a low carbon economy entails dramatic policy, legal, technical shifts, which can lead to stranded assets. If action on climate is delayed, a disorderly transition to a low carbon economy becomes more likely, which increases this type of risk. A disorderly transition could negatively impact women, as explored in a case study by Climate Investment Funds (CIF) on the transition from coal to photovoltaics in India. For example: losses of family income from direct job losses (e.g. men getting fired from coal mines), indirect jobs losses due to local economic decline, community disintegration, and in some cases an increase in gender-based violence.
Investors should develop a climate due diligence assessment based on an existing climate finance taxonomy. The choice of taxonomy is at the discretion of the investor, but recognised frameworks include the joint MDB methodology for tracking climate finance or the European Union (EU) Sustainable Finance Taxonomy.
In alignment with principle 4 of the 9 Operating Principles for Impact Management due diligence should also incorporate an impact assessment, with a results measurement framework that evaluates, and where possible, quantifies, the concrete, positive climate and gender impact potential from the investment. The assessment should answer the fundamental questions: (1) What is the intended climate impact? (2) Who experiences the intended impact, and do experiences vary for different demographic groups? (such as women, diverse ethnicities, or socioeconomically disadvantaged groups) (3) How significant is the intended impact for both climate and people?
This stage is important as reputational risks could arise if you or your future investee is accused of greenwashing, or environmental malpractice in operations or reporting is publicly exposed.
Impact due diligence and data to confirm climate finance qualification
Data availability and support with Technical Assistance
Where data is unavailable, for example GHG footprint, investors can model these themselves using tools such as the Joint Impact Model. Furthermore, GHG footprinting or climate risk assessments carry high transaction costs, which may be challenging for some companies – such as for women-led start-ups or SMEs in developing or emerging markets, for example. Initial funding or technical assistance can help to embed climate risk management in the operations of investees.
Evaluating gender risks across a company's operations and value chain
Investors should take care to assess how both physical climate risks and transition risks might disproportionately affect women and girls to protect impact and financial value creation:
a) Reputational risk: might relate to gender discrimination (such as gender pay gaps) Gender-Based Violence and Harassment (GBVH), sexual exploitation, human trafficking, health and safety risks, displacement or resettlement, failure to consult stakeholders impacted (such as establishing Free Prior Informed Consent with women in Indigenous communities) or other human rights abuses. Malpractice can cause workers or communities to take legal action against companies, and result in negative media coverage, litigation costs, damaged relationships, reduced impact, and loss of a ‘license to operate’. For example, women agricultural workers in Morocco can face heightened risk of sexual harassment and social stigma if engaged in mixed gender agricultural work.
b) Financial risk: can arise from legal action, for example on on the basis of gender discrimination, harassment or GBVH. For example, a woman employee’s position in Kenya was advertised as a vacancy immediately after informing her employer of her pregnancy.
c) Operational risk: can include gender discrimination in staff recruitment, retention, career advancement, training, or a lack of gender-sensitive stakeholder consultation. It can also relate to working environments or labour conditions which are unsafe or pose health risks that disproportionately affect women. For example, women horticultural workers in Tanzania had pregnancy complications which appeared to be linked to increased pesticide exposure.
d) Compliance risk: such as pay equity, Equal Opportunities Policies, pregnancy/maternity leave, legally binding gender quotas, or other regulatory requirements. For example, in Pakistan, the Code of Corporate Governance requires all public interest companies (listed on the stock exchange and others with or above a specified threshold of paid-up capital, turnover, etc.) to have at least one-woman board director.
Resources
The BII ESG Toolkit for Fund Managers and the Gender Risk Assessment Tool by IDB Invest provide practical information on identifying and addressing gender risks as part of a risk assessment.
BII’s guidance note Mapping gender risks and opportunities for investors in Africa and South Asia also identifies key gender-related risks and opportunities under the IFC Performance Standards. This document aims to highlight the most important risks to women and girls and provides a practical tool to help ESG specialists prioritise risk issues during due diligence of climate finance deals.
Addressing Gender-Based Violence and Harassment – Emerging Good Practice for the Private Sector, developed in partnership with EBRD and IFC, provides comprehensive guidance on emerging best practices to prevent and respond to the risk of violence and harassment.
Screening to assess whether a potential climate finance investment is gender inclusive or “gender-smart” should start with checking it indicatively aligns with at least one of the 2X Challenge criteria. In some cases, relevant data may be available through platforms such as WEConnect International (for certified women business owners); UN Women Empowerment Principles (list of signatories); and indices such as Equileap.
This should be verified by a due diligence process which assesses the concrete, positive gender impact potential from the investment, in alignment with principle 4 of the 9 Operating Principles for Impact Management. This should include a results measurement framework that integrates 2X assessment questions for the appropriate sector. Investors can also refer to the resources listed below.
As well as ensuring that prospective investees meet the minimum quantitative thresholds for their sector, investors should include qualitative analysis in due diligence assessments, to identify opportunities for value creation and positive outcomes. In line with 2X criteria, gender considerations should extend beyond the workforce and leadership to encompass the supply chain and end consumers - and the extent to which the product/service tackles a known gender gap. For example, a company could be selling a clean technology product designed by a majority-male team which does not consider women consumers’ needs. Without diverse representation in the design process, the company could fail to meet gendered consumer needs and miss out on market expansion.
Impact due diligence and data to confirm gender-smart qualification
Checklists to support the climate and gender-smart screening process for different sectors can be found at the links below (pdf download):
Questions to consider