It is no longer marginal. The introduction of sustainability criteria in M&A transactions has become a strategic issue for companies in all sectors worldwide. Companies have overwhelmingly come to the conclusion that adopting corporate sustainability commitments helps to bring the merger or acquisition process to a successful conclusion. And, in the long run, it contributes both to achieving their strategic objectives and to improving compliance with the United Nations Sustainable Development Goals (SDGs).
In today’s challenging regulatory environment, companies with a Corporate Responsibility and Sustainability strategy have a competitive advantage and are less vulnerable to changes in social, environmental or governance regulations.
A challenge for sellers and buyers/inverstors
The integration of sustainability criteria when evaluating a transaction provides greater certainty in estimating the value. However, it is essential that the seller provides a comprehensive assessment and conveys it accurately to the buyer or investor. Fine words are not enough. It is necessary to use mechanisms such as public domain searches or the use of business intelligence tools, which help to verify the required information with certainty.
The potential buyer now also faces a new challenge: to find a target that is not only attractive from a strategic and financial perspective, but also aligned with its own environmental, social and governance criteria.
Sustainability issues are embedded troughout the M&A process
Today, any M&A transaction involves an in-depth analysis of the asset that goes beyond the traditional legal, tax and financial issues. The influence of ESG (Environmental, Social and Governance) criteria is transversal throughout the entire process:
- In the due diligence phase. Analyses should now also include compliance with inclusion, diversity and equity policies. It is also necessary to identify potential legal risks on social and governance issues. Including how the target can provide its stakeholders with continuous monitoring of these issues. In addition, the strengths and weaknesses of the company’s sustainability agenda should be analysed and identified.
- In the structuring, negotiation and closing of the transaction. Corporate Responsibility and Sustainability metrics and objectives should be incorporated into the valuation process. Also consider the impact of environmental, social and governance factors on the market. And foresee the future evolution of regulatory conditions and the different regulatory scenarios that could occur. Because purchase or investment agreements should be adapted to mitigate the risks arising from the level of compliance with the ESG criteria of the target. For example with the inclusion of representation and warranty assurances, closing conditions and post-closing obligations. Aspects that must be maintained before and after completion of the M&A transaction are also increasingly included in contracts. For example, the so-called Harvey Weinstein clause, whereby the seller must indemnify the buyers or investors if any of the target’s management is exposed or involved in sexual harassment and abuse.
An added difficulty
In short, the generalised inclusion of sustainability criteria in M&A transactions is an added complexity factor throughout the negotiation process. The Confianz M&A advisory team is ready to accompany your company throughout this process.