ESG in dealmaking: Information for advisors
Everything you need to know about
ESG in deals - like M&A, capital raising and more.
The increased presence of ESG in dealmaking
Environmental, social, and governance (ESG) factors are becoming increasingly important in dealmaking, as investors, lenders, and other stakeholders are looking to support companies that are committed to ESG best practices.
Investors
Investors are recognising the importance of ESG factors for long-term financial performance. Some studies have shown that companies with strong ESG performance outperform their peers financially.
Lenders
Lenders are taking ESG factors into account when making lending decisions, as they’re becoming more concerned about the ESG risks associated with certain industries and sectors.
Consumers and employees
ESG is becoming a more important factor for consumers and employees. Consumers are increasingly choosing to buy products and services from companies with strong ESG performance. And employees are increasingly looking to work for companies that are committed to ESG best practices.
​
The result of this shift towards ESG-focused companies for investors, lenders, consumers and employees, is a need to put ESG at the heart of dealmaking.
The role of ESG criteria in deal assessment
The movement towards ESG in dealmaking is critical for deal advisors.
​
Advisors need to be able to assess the ESG risks and opportunities of a deal. This includes considering the ESG performance of the target company, the ESG performance of the acquirer, and the ESG impacts of the deal.​
​
Deal advisors also need to be able to help their clients mitigate ESG risks and capitalise on ESG opportunities. A first step here would be to advise that clients develop and implement ESG policies and procedures, and start working with suppliers and other stakeholders to improve ESG performance.
​
Deal advisors should also consider for their clients the creation of new ESG products and services, and entering new markets that are driven by ESG considerations.
The impact of ESG due diligence in dealmaking
ESG due diligence is the process of assessing the environmental, social, and governance risks and opportunities of a deal.
ESG due diligence can have a significant impact on dealmaking by helping to:
Identify and mitigate ESG risks
ESG due diligence can help to identify ESG risks that could have a negative impact on the value of a company, such as environmental liabilities, social unrest, or governance scandals. By identifying these risks early on, dealmakers can take steps to mitigate them or to walk away from the deal altogether.
Identify ESG opportunities
ESG due diligence can also help to identify ESG opportunities that could create value for the combined company. For example, a dealmaker may identify opportunities to reduce costs by improving energy efficiency or to increase revenue by developing new ESG-friendly products and services.
Build the reputation of the combined company
​By demonstrating a commitment to ESG, the combined company can improve its reputation and attract new customers, employees, and investors.
ESG dealmaking and regulatory compliance
The EU has a number of regulations in place that require companies to disclose ESG information and to comply with certain ESG standards. These regulations are having a significant impact on dealmaking in the EU.
Sustainable Finance Disclosure Regulation (SFDR)
One of the most important EU regulations for ESG dealmaking is the Sustainable Finance Disclosure Regulation (SFDR). The SFDR requires financial institutions and asset managers to disclose information about their ESG integration and management practices. The SFDR also requires financial products to be classified as either Article 8 or Article 9 products, depending on their ESG characteristics.
Non-Financial Reporting Directive (NFRD)
Corporate Sustainability Reporting Directive (CSRD)
The EU is also developing new regulations that will have an impact on ESG dealmaking. The EU is developing a Corporate Sustainability Reporting Directive (CSRD), which will expand the scope of mandatory ESG reporting to include all large companies and listed SMEs. The first companies to apply the new rules will be reporting on FY2024 (reports published in 2025).
Taxonomy Regulation
The EU has also introduced a Taxonomy Regulation, which will create a common classification system for sustainable economic activities. A classification system that defines criteria for economic activities aligned with a net zero trajectory by 2050, the Taxonomy Regulation will have a significant impact on ESG dealmaking in the EU.
Another important EU regulation for ESG dealmaking is the Non-Financial Reporting Directive (NFRD). The NFRD requires large listed companies and certain other types of companies to disclose information about their environmental, social, and governance (ESG) performance.
​
These mandates are having a significant impact on ESG dealmaking in the EU. Dealmakers are increasingly using ESG information disclosed under the NFRD and SFDR to assess the ESG risks and opportunities of deals.
The role of the advisor in ESG dealmaking
As a deal advisor, it’s important to have ESG front of mind. Here are some tips for deal advisors helping their clients to navigate ESG in dealmaking:
1. ESG-specific due diligence
Deal advisors can conduct ESG due diligence on target companies to identify ESG risks and opportunities. This can include reviewing the target company's ESG policies and procedures, assessing its ESG performance, and interviewing key stakeholders.
Deal advisors can help their clients to structure deals in a way that mitigates ESG risks and capitalises on ESG opportunities. For example, a deal advisor may recommend that the acquirer make certain commitments to maintain the target company's ESG policies and procedures after the acquisition is complete.
2. ESG-focused deal structuring
3. ESG alignment in
post-merger integration
Deal advisors can help their clients to integrate the target company's ESG policies and procedures into the acquirer's existing ESG framework. This can help to ensure that the combined company has a strong ESG performance.