ESG Considerations in Corporate Transactions

Published 3 March 2022

Paul Ellaby, Corporate Partner at international law firm DAC Beachcroft, considers the impact of ESG on M&A activity

ESG is about how businesses conduct themselves in respect of environmental, social and governance issues with regard to their impact on the planet and its people. Previously the component parts were frequently dealt with separately. Individual actions of course made a positive difference, in the areas of community activity, internal D&I initiatives, reduced travel and paper use for example. However single activities rarely went far enough in tackling fundamental inequalities in society or the climate crisis. In bringing all the elements together ESG becomes more powerful, encouraging companies to see ESG as fundamental to everything they do, a route map to becoming better corporate citizens and something that is integral to doing business.

ESG has gone from being important to being an imperative and stakeholders – customers, investors, government and regulators for example, are exerting more pressure about improving ESG performance. ESG is informing the choices people make, whether as employees or consumers for example. A minority of customers have always based their purchasing decisions on ethical considerations, but the numbers who buy through an ESG lens is becoming a majority. And growing numbers of investors are making ESG a central component of their lending criteria growing and re-shaping finance as they do so. The UK Government has made legally binding commitments to reducing net zero carbon by 2050, with a resulting impact on the significant progress that needs to be made by 2030. Reporting on energy use is already mandated for listed companies and further climate related disclosures are on their way in next year.

ESG is a macro economic risk and will become an increasingly important consideration in transactional activity, on reputational as well as financial aspects, as investors demand greater transparency. It could even be a driving factor in the transaction itself. FT Big Deals, “83% of business leaders say that ESG factors will be increasingly critical to M&A decision making.” ESG negatives and positives could make or break a deal and DAC Beachcroft can help you explore the legal risks and liabilities, either in preparation as a seller, as part of the due diligence associated with an acquisition or as part of a defence strategy in a hostile takeover bid. While there are different types of exposure for different types of businesses, the information below provides a general guide to what areas of potential exposure to ESG risk should be considered in the due diligence process:

• An analysis of each party’s ESG strategy to establish cultural fit
• Level of compliance with national and international regulations
• Quality of data
• Management of production – water, materials, energy and waste
• Carbon emissions management of property/ies owned
• Supply chain
• Human rights
• Labour standards
• Health and safety
• Diversity and inclusion strategy, statistics and performance
• Corporate codes of conduct – money laundering, anti-bribery and corruption or example
• Tax strategy
• Quality/quantity of community initiatives
• Employee engagement