ESG has become an increasingly prevalent topic in recent years: from initially being relatively non-existent to now becoming a significant measure toward fundamental corporate practices.

It is noticeable that many corporations are now experiencing a shift in focus from exclusive profit-seeking objectives to more sustainable, ethical and trustworthy actions.

To some 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.

Importance and benefits of ESG adoption

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 also necessary to assess stakeholder reactions to the potential M&A transaction. Investors, in particular, can enhance their decision-making as a means to favourably align their portfolios with relevant ESG-related organisations.

The initial screening should be followed by consistent due diligence 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, post-closing.

Practice throughout recent years

Based on research, it is evident that ESG practices have lasting effects not only toward profit-maximising and efficiency objectives, 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 greater capital and interest, whilst avoidance has resulted in being negatively perceived by stakeholders and wider community.

In this way, organisations can utilise knowledge in ESG to create and develop opportunities. On the other hand, a lack of appropriate awareness and action could present challenges for organisations who fail to adopt ESG measures.

Various high-profile incidents have arisen from organisations who have failed to adopt ESG strategies.
For example, the 2001, Enron Corporation accounting fraud, the 2015 Volkswagen emissions test cheating and the 2018 Facebook data privacy scandal. All of these instances could have been prevented if appropriate ESG measures and preventions took place.

Advantages in ESG implementation

There are many benefits supporting 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 corporate actions on different stakeholders. In doing so organisations are able to actively evaluate and maintain accountability.

ESG also helps to ensure overall 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. ESG also enables organisations to appropriately assess current relations with all stakeholders, including investors, employees, suppliers, etc.

Organisations can then develop a long-term plan to successfully achieve ESG objectives whilst ensuring all parties are onboard with this plan. Such due diligence is integral toward the successful implementation of ESG practices throughout the organisation. ESG expectations can be discussed and agreed with stakeholders and further validated in contract.

Differing regulatory approaches taken by countries

Many countries have now introduced ESG regulation measures to organisations in order to positively increase and foster the widespread adoption of more sustainable practices. The approach to ESG is different across different countries.

For example, in the United Kingdom and the EU, ESG reporting has been made mandatory for large companies which includes those listed with over 500 employees or over £500 million annual turnover.

In 2022, the British Companies Act of 2006 was revised and further expanded to incorporate ESG and sustainability facets: this required organisations to discuss the strategy, processes, and due diligence regarding issues such as social matters, the environment and anti-corruption.

In June 2021, the G7 Finance Ministers announced their support for mandatory ESG disclosures. Overall Europe is leading in its endeavours toward promoting sustainable corporate practices.

Although ESG disclosure is not mandatory in the US the prospects of adoption are promising as global ESG reporting and documenting standards are expanding rapidly. Such standards are changing the dynamics of existing reporting frameworks as they act as significant drivers of ESG practices, encouraging corporations to do more.

However, the rate of this adoption is much more stagnant and varied across developing countries such as Columbia, Nigeria and Bangladesh.

Due to the low-income generated by the organisations in these countries, compared to more developed countries, it becomes difficult for developing countries to attain high-level ESG standards. In this way the global array of ESG practices remains somewhat disconnected.

Potential challenges

Some critics do, however, take on a more sceptical approach and question the corporate benefit of ESG. Given the fact that the fundamental motive of most corporations is profit-seeking, there are concerns over the extent to which these corporations can “be good” and “do good” at the same time.

ESG, itself, requires considerable investment with no guaranteed long-term intrinsic value. There also remains concern over the extent of responsibility that should be taken by the government as opposed to that taken by corporations.

Final thoughts

Overall, the concept of ESG continues to remain an increasingly important factor in M&A transactions and corporate decisions.

The guidelines and regulations that govern ESG responses are becoming more acute, however, it is necessary for organisations to continually adopt such considerations throughout the transaction process in order to maintain benefits. It is evident that the failure to adopt ESG can prove damaging for organisations in the long-term.

Developing countries, in particular, should aim to increase their long-term commitment to ESG in order to improve ethical and environmental standards. Thereby, improving overall country development. Aside from this, current ESG pioneers such as the UK and the EU should continually seek to develop and integrate ESG into corporate frameworks.