ESG in M&A transactions

Environmental, social and governance (ESG) factors are increasingly making their way into M&A decision-making worldwide, and that is the case also in the Nordics. Growing ecological alertness and demand for climate action as well as social awareness boosted by the inequalities exposed by the COVID-19 pandemic are making ESG factors even more critical and something no player in the market can afford to disregard. Stakeholders on a broader spectrum are demanding accountability and transparency from companies. Not only changing attitudes but also increasing regulatory pressure have shifted the way risks are perceived – what once was a potential reputational risk might now also be or soon become a compliance risk and destroy value. More companies are also adopting sustainability as a core business strategy, not least because of the financial potential of sustainable opportunities.

The rise of ESG in M&A

Reactions and demands of shareholders and stakeholders have been a key driver in the rise of ESG globally – boards of directors and management are required to be able to demonstrate how ESG factors have been taken into account in the business. In the context of acquisitions and investments, ESG factors are considered in both the risk assessment and the valuation of target companies.

Sustainability and strong ESG performance give a competitive edge – companies with a strong ESG profile can stand out positively from their competitors. In recent years it has become evident that investors and acquirers are many times prepared to pay a premium for target companies with a strong ESG profile. The other side of the coin is not only valuation related – poor ESG performance or identified ESG risks are real deal breakers and many investments and acquisitions have been left undone due to ESG related red flags.

Institutional investors and private equity sponsors have been forerunners and trendsetters by incorporating ESG criteria into their investment decision processes. Nordic private equity players have recently focused on building their ESG expertise in order to keep up with the global development in this field. Another change driver lies in bank financing through the concept of sustainable financing driven both by regulatory initiatives and ESG risk analysis. In the future, a company’s financing costs will be increasingly affected by the environmental and social impact of its business.

ESG due diligence

Conducting an ESG due diligence review in connection with M&A projects is more or less market practice in the Nordics today. However, there is still no standardised way in which the ESG due diligence is done, and we have seen many different ways to handle that workstream. It is fair to say that ESG due diligence in the Nordic market is still taking its form.

That being said, it is also clear that the emphasis on E, S and G is dependent on geography and sector, and the process for ensuring compliance is dependent on the context. When it comes to ESG due diligence, it is important to keep in mind that no one size fits all – it is not a technical ‘tick the box’ exercise, but a case-by-case assessment of various factors and requirements based on, inter alia, relevant regulation and industry-specific sustainability standards. A mere scratch of the surface is not enough to reveal ESG due diligence findings that are truly relevant for the investment decisions.

Significant ESG risk factors, such as regulatory compliance, corporate governance, data protection and privacy, environmental permits and pollution, employment law and diversity are traditionally in the scope of a legal due diligence review. M&A lawyers can provide significant value already in the early stages of the process when defining the scope and focus for the ESG due diligence, as ESG factors require a broad assessment and understanding of the relevant market and the regulatory requirements of the industry in question. Based on our experience, the cooperation between different due diligence advisors, such as commercial, technical and legal, creates synergies and leads to a better, more comprehensive assessment of the relevant ESG factors.


The pressure is on to pave the way for harmonised, clear and easily comparable criteria for sustainability.

Lack of comparability a challenge in ESG due diligence

The lack of a unified reporting framework for ESG matters makes it challenging to evaluate the target company’s ESG performance and in a due diligence context, to identify the red flags, as there is no clear baseline for comparison. Currently, there are multiple reporting frameworks, e.g., the standards by the investor-driven Sustainability Accounting Standards Board (SASB) and the UN based Global Reporting Initiative (GRI).

Similarly, improving companies’ abilities to measure ESG related non-financial information might also prove a challenging task, as reporting systems and structures have historically been developed mainly for financial reporting purposes. These systems do not perform very well for ESG purposes that require more judgement and measurements relying also on subjective assessments.

The entire market and the purpose of the ESG movement would benefit from consistent and efficiency increasing standardised reporting. With a standardised framework and a pinch of simplicity there would be less ambiguity when it comes to expectations for reporting formats and sustainability processes. The pressure is on to pave the way for harmonised, clear and easily comparable criteria for sustainability.

Will regulatory ESG initiatives bring clarity?

Policymakers play an important role in the ESG revolution, and political pressure has led to a global competition on which market will be the leader in the field. The EU is very active, and many regulatory initiatives around ESG are currently pending. The upcoming regulations will affect all companies operating in the EU in one way or another.

Sustainable finance has a key role to play in delivering on the EU’s policy objectives relating to climate and sustainability. The EU taxonomy is at the heart of the sustainable finance regulation making the EU climate targets implementable in practice. For the purposes of implementing the taxonomy regulation, the EU has given the Sustainable Finance Disclosure Regulation (SFDR), first provisions of which came into force in March 2021. Further, the new Corporate Sustainability Reporting Directive (CSRD) will adopt the EU’s sustainability reporting standards, which obliges large companies as well as small and medium-sized listed companies to publish information related to, e.g., principle adverse impacts. The directive will set out the standards for both the format and content of sustainability reporting. Regulatory movement in Europe will further go on through the proposal for a European Directive on Sustainable Corporate Governance aiming to introduce rules on incorporating sustainability in long-term business strategies and including new corporate directors’ duties as well as due diligence rules concerning ESG aspects in corporate supply chains.

The EU initiatives are expected to further develop also ESG due diligence as sustainability reporting will be based on standards that are tailored to reflect EU’s sustainability goals and already applicable EU legislation. This will help ensure compliance and identify gaps in a company’s sustainability processes. Common reporting standards will also enhance the comparability of data.

We believe that the importance of ESG factors in M&A transactions will only continue to grow, and we are excited to be part of building the Nordic way of doing ESG due diligence from a legal perspective. Time will tell how the regulatory initiatives in the EU will contribute to this development.

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