ISSUE 1 | 2022
04
ESG DUE DILIGENCE NOW INTEGRAL PART OF M&A
ESG CREDENTIALS In today’s market, to remain competitive and maintain access to capital and service providers, companies need to develop and communicate a clear ESG strategy. The development of an ESG strategy requires a company to: 1. Understand their impacts (outside-in and inside-out) 2. Capture and collate data on material impacts 3. Create and implement effective strategic and tactical actions to avoid, reduce, manage, and offset their impacts 4. Routinely and transparently disclose progress to the market. A well-executed ESG strategy can generate value in a myriad of ways, including access to new avenues of capital, improved productivity and reduced operating costs, access to new markets, improved stakeholder engagement, and access to and retention of high-quality talent. “Developing and executing an ESG strategy is extremely valuable when it comes to M&A today. ESG credentials either increase transaction probability and/or increases price. It’s a win- win for the planet and for business.” TODD GROVER, PARTNER – Corporate Finance, Mergers & Acquisitions at BDO Perth
As acquirers become increasingly aware of the impact that underperformance on ESG factors can have on long-term business performance, ESG credentials have become a significant deal execution risk. Consequently, ESG due diligence is quickly becoming an integral part of the M&A due diligence process. Formulating a clear understanding of the material ESG risks for a target and evaluating the target’s ESG performance against its disclosure is key. ESG due diligence can identify potential technical issues (such as exceptionally high baseline greenhouse gas emissions), product health-related side effects, or operational errors with potentially long-lasting impacts (such as facilities constructed on inappropriately acquired land). This information can potentially impact the target valuation and deal structure. Sufficient due diligence on ESG-related opportunities is also needed to qualify current and future value projections. ESG due diligence is changing from a risk- focused ‘do’s’ and ‘don’ts’ tick-box exercise to a detailed benchmarking analysis of performance identifying areas of value growth potential. As ESG considerations continue to further embed in corporate decision making, the value of strong ESG credentials will continue to increase and so will the demand for acquisition targets leading in ESG performance.
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