What does ESG due diligence involve?

ESG due diligence primarily involves the assessment of environmental, social, and governance risks prior to making an investment. This process ensures that investors understand the potential ESG-related impacts on the investment's performance and long-term sustainability. By evaluating these risks, investors can make informed decisions that align with their values and investment goals, as well as mitigate potential negative outcomes.

This approach recognizes that ESG factors can significantly influence financial performance. For example, companies with strong environmental practices may avoid potential regulatory fines and gain favor with consumers. Similarly, sound governance practices can reduce the likelihood of scandals that could harm a company's reputation and financial standing. Thus, determining ESG risks is crucial for assessing the viability of an investment.

The other options do not align with the concept of ESG due diligence. Focusing exclusively on financial returns ignores the broader implications of ESG risks. Evaluating last year’s budget pertains more to financial analysis rather than the broader scope of ESG assessments. Reviewing employee performance metrics, while important for internal company assessments, does not directly reflect the comprehensive evaluation of ESG risks in the context of investment decisions.