
Mona Patel Partner
ESG Issues: Impact on M&A transactions
ESG issues, including human rights, have increasingly become a board level concern as ESG regulation, legislation and shareholder expectation continues to grow. A failure to engage with ESG matters is increasingly being seen as a risk to a company’s long term value from a regulatory, reputational and shareholder perspective. As a result boards and management are paying considerably more attention to ESG factors in M&A transactions. Management and boards are looking closely at the ESG strategy and culture of a target and considering whether it will be in line with its own ESG policies and whether ESG factors will have a positive or negative impact on the valuation of a target.
Whilst ESG has been a focus for investors for some time, ESG is likely to become a key value component for many companies over the coming years. Although it might take time, diligence and commitment on the part of a company to execute a broad company-wide ESG strategy, if implemented well, can prove enormously fruitful.
A good ESG strategy can potentially promote value in the following ways:
These elements will undoubtedly be attractive to buyers and add to the deal value where a buyer is looking to align its own ESG strategy with that of a target and maximise profitability.
Since we have established that ESG factors can play a part in company value and future earnings, a simple review by a buyer of a target’s mission statements, policies and public communications is no longer enough.
Whilst certain ESG issues will generally be addressed as part of customary environmental, employment practices and human rights due diligence, buyers may now also wish to consider more carefully the following (not exhaustive):
Such diligence will be crucial for identifying ESG risks, the protections required in the acquisition agreement and the financial impact of any integration costs/ synergies post-closing.
A buyer might also consider tasking a dedicated ESG officer or ESG team to lead this aspect of due diligence.
Where due diligence highlights ESG risk, the buyer may seek to negotiate in the following ways:
The ESG due diligence outcomes will assist the buyer in considering the impact of the acquisition on its own reputation, culture and the integration of the target into the buyer’s group.
The buyer should plan ahead and consider the strategies and actions it will implement post-closing to:
With the processes already considered the buyer will be better positioned to ensure a more seamless integration of the target.
The consideration and management of ESG factors is increasingly important in M&A transactions.
Sellers whom actively prepare and engage in ESG diligence improve their business valuation and competitive market pricing whilst allowing buyers to better evaluate their targets. ESG need not be perceived as solely risk-based but rather a metric from which both buyers and sellers stand to gain value.
This Q&A does not constitute legal advice. Should you have any queries, or youwould like our assistance in considering the issues raised in this Q&A then please do not hesitate to contact the author of this article or your usual contact at Ince.