Even though environmental, social and governance (ESG) factors are not, in any way, new in M&A transactions, whereas in previous years they could only be a minor element, their importance over the last few years has been on the rise, becoming key factors for the involved parties for a successful transaction.
Proper due diligence may benefit both, seller and buyer, it allows the former to have certainty of its expectations and benefits of the transaction and provides the latter with a fair market value that actually considers intangibles.
Initially, from the selection of the targets in mergers and acquisitions, ESG will help the buyer to make well-informed strategic decisions to determine those that, thinking long-term, will increase their value by bringing more shareholders and customers engagement and loyalty, new investors, and less regulatory interference from the government.
Furthermore, ESG factors are the ones that are going to reflect a company’s daily life, culture, and values, having an enormous impact in the viability of the transaction, its long-term success, and the ability of the parties to continue their operations.
Some of the aspects that are usually considered to determine compliance with ESG considerations, or the ones analyzed to choose a target company, include environmental protection and energy use, anti-bribery and corruption, labor rights and supply chains, governance framework, community engagement, culture and diversity, and risk management and mitigation. Nonetheless, due diligence will largely depend on the type of transaction that is being conducted, noting that the importance of ESG considerations has not become important in just some kind of sectors or industries but in all of them.
Finally, once ESG risks or red flags are identified another highly important step will be to determine whether they can be mitigated through strategies, programs, contracts and/or warranties, or if, on the contrary, the non-compliance will result in detriment, either in the short or long term.