The increasing role of ESG in M&A transactions

ESG is becoming an increasingly important part of doing business. Research show that concerns about business risk (e.g., potential litigation, reputational risk, etc.) drive buyers interest when considering ESG factors.

The Blackroom Team
The Blackroom Team

56% of Private Equity Partners said they refused to enter GP agreement or turned down investments based on ESG grounds, according to a recent PwC survey. The rise of ESG as a corporate priority has been driven in large part by the increased scrutiny from investors and consumers alike. In recent years, many companies have been faced with lawsuits or boycotts due to environmental issues or human rights violations; however, these can be avoided if companies identify potential risks early on and address them head-on before they become a problem.

Environmental, social and governance considerations are becoming an increasingly important part of doing business

ESG considerations are becoming an increasingly important part of doing business. In a recent survey by Mercer, over half of respondents said that they would be less likely to do business with a company if it had poor ESG practices. These results are echoed by many other studies that have found similar results.

As such, the relatively recent practice of incorporating ESG into M&A transactions is now becoming an essential part of due diligence processes and negotiations. In fact, a study by Cerulli Associates found that nearly three-quarters of investors believe ESG due diligence should be formalized within their respective firms' policies and procedures for both inbound and outbound deal-making activities.

Who is responsible for ESG in a merger & acquisition deal?

The deal team is responsible for assessing the ESG factors related to a potential acquisition. This can include ESG due diligence from an internal or external perspective, as well as considering how the acquirer will be affected by its proposed acquisition.

The board of directors is tasked with making sure that the company is performing in line with its stated purpose and values, which often includes questions around environmental stewardship and social responsibility.

Management should consider whether there are opportunities to create shareholder value through ESG initiatives such as reduced energy consumption or waste diversion programs, among other things. The senior leadership team should also be on board with these goals if they're not already included in the company's strategic plan based on this assessment.

What practices can ensure success of ESG in M&A deals?

While the importance of ESG issues may be increasing, this is not to say that they are always understood or implemented well in M&A transactions.

In order to ensure a successful transaction, it’s important to consider ESG early in the process. This will allow you to identify any potential problems before they become more serious and costly. You should also ensure that you have access to reliable data on how your company handles these issues compared with competitors, as well as an understanding of how others perceive these practices.

Your team must also be trained in ESG best practice and have a plan for dealing with any issues that arise during due diligence or post-closing.

What are the challenges in conducting ESG due diligence?

In terms of challenges, there are several key considerations that you should understand when conducting ESG due diligence.

  • ESG data can be unreliable: While the majority of investment funds and companies have an interest in ensuring that their ESG disclosures are as accurate and complete as possible, this is not always the case. Some companies may under-report or misrepresent their environmental or social performance in order to improve their image and attract investors.
  • ESG data is often not available: If a company does not collect meaningful information about its environmental impact, it will be challenging for third parties to assess this impact during a thorough due diligence process. In other words, you need access to relevant information in order to conduct effective analysis on a company’s ESG performance — but if there isn’t any information available at all then what good does it do?

To achieve successful M&A transactions, prospective acquirers must identify potential environmental or social risks and understand their impact on the transaction.

Environmental, social, and governance (ESG) considerations are rapidly becoming an increasingly important part of doing business. This includes the due diligence process for mergers and acquisitions. Prospective acquirers must identify potential environmental or social risks and understand their impact on the transaction.

ESG issues may include:

  • Environmental damage claims arising from the operation of a target company's facilities or operations (e.g., pollution).
  • Worker safety concerns that arise from a company's working conditions (e.g., poor safety standards).
  • Human rights abuses committed by employees or contractors at a target company's facilities or operations (e.g., child labor).

Conclusion

M&A transactions have come a long way since the early days of the corporate world. It is no longer just about making money for shareholders, but also about social responsibility. The increasing emphasis on ESG has led to a growing role for sustainability professionals in mergers and acquisitions. These professionals need to ensure that their companies make ethical choices when pursuing deals and avoid becoming unwitting accomplices in unethical practices.

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