Globally, Environmental, Social, and Governance (ESG) considerations have shown an incremental presence in the M&A process.
It has become an increasingly prevalent subject of discussion in recent years & from being relatively non-existent a few decades ago to now becoming a significant indicator toward fundamental corporate practices to address any acquisition process.
It is noticeable that many global businesses are now experiencing a shift in focus from exclusive profit-seeking objectives to more sustainable, ethical actions, and to a huge extent this focus applies to all sectors and industries.
It is, therefore, necessary for organisations to continue establishing and integrating such ESG measures and practices.
Based on research, it is evident that practicing ESG has impactful effects not only toward profit-maximising and operational efficiency , but also toward wider societal interest.
Such considerations have in turn become influential on many organisations’ success or failure as investment in ESG practices has been proven to attract interest, whilst avoidance has resulted in being negatively perceived by stakeholders and wider community.
In some or the other ways, organisations are utilizing knowledge of ESG to create and develop opportunities and sustainable practices.
On the other hand, a lack of appropriate awareness and action could present challenges for organisations who fail to adopt the needful measures.
We have come across various instances and incidents from reputed organizations who didn’t practice ESG strategies and have faced dreadful consequences.
Corporate failures without ESG
- 2001 – Enron Corporation accounting fraud
- 2015 – Volkswagen emissions test cheating
- 2018 – Facebook data privacy scandal
ESG adoption benefits
ESG considerations should be factored into all stages throughout the M&A transaction process. Firstly, initial screening measures are required before the transaction takes place by preparing relevant ESG information and evaluations at the early stages of the deal: this is particularly important for decision-making purposes as a means to assess attractiveness.
ESG screening is necessary to assess stakeholder inputs to the potential M&A transaction. Investors, in particular, can enhance their decision-making as a means to favourably align their portfolios with relevant organizations.
The screening should be followed by consistent due diligence periodic audits during the transaction, by ensuring that a definitive agreement is successful. Finally, post-transaction ESG assessments should consist of developing a long-term plan and roadmap .
There are numerous benefits in accepting the adoption of ESG practices by organisations.
Firstly, it is evident that the focus on ESG helps mitigate the potential threats of lawsuits, fines and other liabilities.
Organisations are able to anticipate the impacts of actions on stakeholders. In doing so organisations are able to actively evaluate and maintain accountability and financials on checks.
ESG also helps to ensure addressing compliance with principal mandates and regulations whilst also considering and further acting as a prevention against litigation risk. As a result, organisations become more responsive to ESG issues. It also enables organisations to appropriately assess relations with all stakeholders, including investors, employees, suppliers, etc.
Organisations can then develop a long-term plan to successfully achieve objectives whilst ensuring all parties are onboard and into an agreement to overall strategy. Such due diligence is integral toward the successful implementation of ESG practices throughout the organisation.
However, it also presents potential challenges, including:
ESG, requires considerable strategic investment with no returns on long-term intrinsic value. There also remains concern over the extent of responsibility on the overall move. There are challenges especially in terms of settling on the correct rate adjustment and potentially double-counting risks or opportunities that may already be reflected in a company’s financials while periodic audits
Four realistic ways to integrate ESG into the M&A process: Reviewing a potential target’s capacity to help deliver long-term value to stakeholders to advising on ESG best practices during the post-merger integration period:
- Target selection
- Due diligence
- Business valuation
- Post-merger integration
Collectively, the concept of ESG continues to remain an increasingly important factor in M&A transactions and the corporate decision making process.
The governance body of ESG responses are becoming more acute, however, it is necessary for organisations to continually adopt such considerations throughout the transaction process in order to develop sustainability.
It is evident that the failure to adopt ESG can prove dreadful in organizational objectives. An aim to increase their long-term commitment to ESG is needed to improve ethical and environmental standards.