M&A in the Age of ESG: Prioritizing Sustainable Investments
By Nidhi Pandit
Environmental, Social, and Governance (ESG) criteria has become a central pillar in evaluating any new M&A targets for many companies. As per M&A barometer 2023, dealmaking in the ESG space is increasing even in this volatile environment with a cumulative of US$ 15 billion invested in 2022. The integration of ESG measures into investment decisions determines the long-term shareholder’s value. This article explores how ESG factors impacts the M&A decisions and eventually long term impact.
For a M&A evaluation of environmental factors, it is necessary to determine how the target’s get impacted by the value chain. If not verified, it can yield to post transaction litigation risk and may impact brand value and the share price. A case in point is the acquisition of Pacific Gas & Electric (PG&E) assets. PG&E's failure to maintain infrastructure led to California wildfires, resulting in bankruptcy and a M&A transaction fraught with complications.
Conducting due diligence in the social practices for an M&A transaction is critical as it address the relationship of the Target with its employees, suppliers, contractors which further reveals if it is fitting to the standards set by international organization such as ILO. Failing to identify, may result in low staff retention and impact the brand image.
Governance, involves a set of standards for a company's leadership, audits, internal controls, and shareholder rights. Strong governance could affect merger payoffs and possibly the attractiveness of the target to financiers, which could in turn ease the terms of financing.
While ESG needs to be considered in due diligence, there is no standard checklist available rather it’s an evolving process. The EU directive on Corporate Sustainability Due Diligence Directive (CSDDD) and Sustainable Finance Disclosure Regulations (SFDR), attempts to drive the M&A ESG due diligence process which has resulted in 28% increase in organizations’ focus on ESG while building M&A strategy.
In conclusion, ESG factors are critical in the M&A process. They carry significant weight in due diligence, deal valuation, and negotiation, directly affecting the financial outcomes of transactions. As the business world grows increasingly conscious of sustainability and ethical operations, ESG considerations become essential in ensuring the success and value enhancement of M&A activities.
Sources:
https://ideas.repec.org/p/fip/fedkrw/rwp07-13.html
https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/us-road-to-next-q4-2022.pdf
https://commission.europa.eu/business-economy-euro/doing-business-eu/corporate-sustainability-due-diligence_en
file:///Users/nidhipandit/Downloads/2023-m-and-a-barometer-deal-trends-and-issues.pdf
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