The effects of climate change and global warming are pushing large investments into renewable energy generated from clean sources; wind, biomass, solar, geothermal and hydro, away from conventional fossil and carbon emitting sources.
The United Nations agency for environment, UNEP states in its Global Trends in Renewable Energy Investment 2019 report that renewable energy production rose from 414 gigawatts in 2010 to about 1,650 gigawatts in 2019, with cash investments set to reach US$ 2.6 trillion by the end of 2019. The agency says, “renewables generated 12.9 per cent of global electricity in 2018, avoiding 2 billion tonnes of carbon dioxide emission”.
While these figures look good for clean energy proponents and campaigners, businesses should be aware that any new booming industry hold risks and that these figures should signify the starting point for identifying obscure risks that reside in large-scale investments such as renewable energy. Many governments, private companies and individual entrepreneurs are investing heavily in renewables. However, some of them are not taking time to carefully identify and manage compliance and integrity risks that come with such enormous projects.
For instance, the UNEP report says China has by far been the largest investor in renewables, yet from our many years of doing due diligence work in China, we have consistently found that the country has one of the most challenging compliance landscapes because of its complex regulatory and legal framework. Numerous MNCs have operations, partners and suppliers in China and are involved in renewable energy projects. Thus, companies doing business in renewables, not only in China, must be aware that such lucrative business opportunity has associated risks that needs to be meticulously identified and managed effectively before impact.
Common clean energy risks
The Red Flag Group has identified 30 key areas under four categories where serious integrity, compliance, business and reputational risks reside - antitrust and corruption; employment, safety and reputation; cyber security and business stability, and environment and governance. Although these red flag areas are not exclusively found in China, they are prevalent in any jurisdiction that is engaged in renewables through state enterprises or private entities.
- Corruption and bribery: Corruption and bribery issues arise when acquiring permits, licences and other related documentation from local authorities or customs agents while prospecting or transporting equipment such as wind turbines. Unaware companies have found themselves in breach of the FCPA, UK Bribery Act or other bribery laws when dealing with dishonest local representatives, government authorities and foreign officials. Corruption and bribery are considered problematic in many industries, including renewable energy, because they are difficult detect especially for large corporations with multiple operations in different countries and industries.
- Modern slavery, human rights and reputation: Some companies use unorthodox means to generate clean energy which involves gross human rights violations or employee rights breaches. Human rights, workplace safety, employee rights and modern slavery are hot topics globally such that if company violates them, they are likely to suffer severe reputational damage or even massive financial losses through customer boycotts and regulatory penalties. Human rights abuse in renewables occurs mostly in jurisdictions where companies tend to engage under age employees, trafficked workers or force employees to work in servitude conditions. Others do not have proper workplace health and safety protocols which exposes to employees to hazardous working conditions.
- Environmental, social and corporate governance: Due to ever-increasing interest in ESG, some companies are losing or have lost considerable customer and investor support because they lack proper ESG policies and procedures. Customers and investors alike are increasingly looking at companies’ ESG practices before they invest or acquire certain products. Investors evaluate a company’s ESG framework before they invest. Customers want to know how companies manage the environment they do business in, how they relate socially to local communities and the company’s governance structure. A renewable energy company without an ESG framework is highly likely to lose the trust, confidence and support of both investors and consumers. This can cause revenue loss and brand damage because no investor or customer wants to be associated with a company that generate clean energy using unsustainable means that destroy the environment or shows no form of social responsibility. ESG-related risks are common in renewables because clean energy is mainly generated from natural resources. Customers and investors want to do business with companies that are ESG conscious.
- Sanctions, export controls and organised crime: Renewable energy could be susceptible to sanctions regimes, export controls issues and even organised crime due to its widespread global reach and interest. Unscrupulous companies and entrepreneurs are taking advantage of porous regulation in the industry to do business with sanctioned parties or blacklisted individuals on watchlists. Organised crime has been reported to be involved with clean energy projects in several recent cases.
- Politics, power, influence and government connections: As a highly lucrative business undertaking, renewable energy attract investments from different stakeholders including powerful politicians, politically exposed persons, state-owned entities, mafias and oligarchs. In certain countries, the state or high-ranking politicians like presidents have business interests in private companies. They can misuse their political power and influence to engage in illicit practices like awarding hefty governmental contracts to family businesses or appointing close relatives and business associates in influential posts at entities where they have a stake. Other powerful politicians tend to use special purpose vehicles to indirectly operate and manage companies doing business in clean energy.
Things to consider: due diligence, background checks and database screening
Every industry and jurisdiction has its own inherent risks. It’s highly advisable to conduct a detailed risk assessment to understand your risk exposure then take appropriate remedial action. The risks that are found in renewable energy projects can be identified by conducting a combination of deep dive risk-based due diligence, extensive background checks and constantly screening existing and prospective stakeholders against a daily updated database containing over five million records from across all industries in over 194 countries.
Depending on your risk tolerance, low level or enhanced due diligence will help you to assess and better understand your stakeholders’ integrity profile and its compliance culture. Routine database screening helps to ascertain which partners are sanctioned, backlisted or listed on international watchlists like Office of Foreign Asset Control List issued by the U.S. Government), United Nations list, Her Majesty’s Treasury Sanctions List issued by the United Kingdom Government, European Union List issued by the European Union Authorities and Department of Foreign Affairs and Trade List issued by the Australian Authorities.
A blend of different approaches ensures that you get a comprehensive view of your partners’ integrity, reputational and compliance profile. The risk landscape is constantly changing. Hence you need to have services and solutions that can effectively and timely help you to meet your due diligence obligations no matter what industry or region you are doing business in.
With cash investments in renewable energy expected to reach US$ 2.6 trillion by the end of 2019, there is so much going that needs a critical assessment before engaging or doing business in clean energy. That assessment starts with screening, which is more of a database check and due diligence, which is a deep dive background check.
Failing to perform proper screening and due diligence may lead to financial losses, reputational damage and poorly executed business decisions.