Sustainability has become an increasingly important part of M&A transactions. On the one hand, acquisitions can contribute to a company’s strategy and its sustainability goals and on the other hand, taking sustainability into account can have an impact on the completion of a transaction irrespective of its objectives. In addition, sustainability is becoming legally binding and the regulatory pressure for sustainability is increasing. Further, sustainable M&A transactions have become profitable investments.
As more investors, shareholders and other stakeholders become aware of the significance of sustainability, boards of directors and management are required to be able to demonstrate their knowledge on ESG factors. This increased focus on sustainability has led to a growing number of ESG-related M&A transactions. ESG-related transactions can be beneficial in the transformation into a more sustainable business model that focuses, for example, on the circular economy or energy efficiency.
Sustainability frames the entire cycle of M&A transactions from choosing a target company to potential exit. Sustainability factors have, therefore, emerged as criteria for evaluating the target company alongside financial figures. Investors and acquirers want to ensure that their money is invested in responsible and sustainable activities to comply with the new sustainability related regulations and to avoid the potential reputational and economic damage caused by non-sustainability. However, sustainability is no longer viewed one-sidedly as a risk management tool but also as a business opportunity.
Sustainable M&A transactions have become profitable investments.
Conducting an ESG due diligence review in connection with M&A projects is more or less market practice today. An ESG due diligence covers the ESG risks and opportunities of the target company in addition to legal and economic risks. It is recommended that the target company’s sustainability strategy, objectives and performance indicators are assessed in order to analyse the target’s ability to create long term value. If material sustainability risks are identified, the buyer may consider seeking contractual protection in the sale and purchase agreement. Therefore, it is recommended that standard ESG clauses be drafted beforehand. Additionally, according to market practise, it is possible to have corruption and money laundering related seller’s insurance clauses added to the scope of M&A insurance on terms similar to those of fundamental insurance policies.
If the buyer has identified ESG risks or opportunities for value creation as part of the due diligence review, the buyer should develop an action plan to address them as a part of the post-transaction integration process. For example, sustainability incentives, such as the inclusion of ESG metrics in the executive remuneration model as well as stakeholder engagement, can contribute to increasing sustainability value. Additionally, it is important to monitor the impact of the selected measures on the performance of the target company in order to further improve the measures.
Appropriate tax management is also a key element of corporate sustainability. When the cycle of an M&A transaction has reached its end point, a comprehensive management of ESG can help to create an advantage in the exit and demonstrate the investment value of the company.
Read also: Sustainability – an Integral Part of M&A
The full guide on sustainability in M&A transactions is published in Finnish by Dittmar & Indrenius and the FIBS (Finnish Business & Society) corporate responsibility network.
|Vastuullisuus yrityskaupoissa (pdf)