Environmental, social, and governance (ESG) issues have come under increased focus among corporations around the world. Roughly one-third of G20 corporations recently surveyed said they are under “extreme” pressure to improve performance on this front. More, 30% indicated they expect to conduct M&A in the next 12 months to boost ESG credentials and capabilities. In parallel, scrutiny in merger clearance review has become more intense and complex.
At the intersection of an increased focus on ESG and ramping regulatory oversight, two potential impacts to M&A are emerging: the addition of another layer of complexity in merger clearance, and new risk considerations in deal-making decisions.
ESG in Merger Clearance
What repercussions will the increased prioritization of ESG initiatives bring to merger clearance reviews? While surveys and industry commentary indicate ESG will be a continuing priority, it should still be viewed as a potential risk in merger clearance, not one that has yet solidified in real world matters to date.
That said, as organizations extend the factors by which they measure success to include ESG performance, regulators may follow suit and take ESG-related cooperation into consideration when assessing the likely effects of proposed transactions.
For example, an article published on the Harvard Law School Forum on Corporate Governance by Damian G. Didden and Christina C. Ma, suggested that in an “era in which corporations measure performance by factors other than profit could change” how regulators analyze whether and how a transaction will impact “incentives to raise price or reduce output, innovation, or quality in a way that is harmful to consumers.”
By extension, this trend may affect the scope of merger clearance document requests, which by nature are intense, high-stakes exercises that carry significant business implications. These matters often require legal teams to review and produce millions of documents from a wide range of data sources within compressed timelines.
Adding ESG variables—which may include partner contracts, sustainability agreements, benchmarking records, internal and external communications and policy documentation—to the scope of evidence to be reviewed and produced to regulators may introduce more pressure and costs into an already challenging exercise.
Implications in Deal-Making
Corporations must also consider whether and how ESG factors influence deal risk, valuation, and completion.
Global Investor Insights research also found that “82% of institutional investors believed a company’s value increased 20% or more when it had a positive ESG rating.” While ESG activities may generate value, however, efforts that involve collaboration with competitors may in themselves present the risk of improper collusion. Thus, any organization looking to acquire another entity for its ESG efforts must include as part of due diligence careful evaluation of how the target is carrying out its ESG efforts and whether they raise potential competition concerns.
Corporate ESG activity is positioned to increasingly affect M&A. In the months and years ahead, investors, acquiring companies, and regulators may be paying much closer attention to these variables—and as this trend develops, closer evaluation of potential targets, ESG value, and risk and deal viability will be necessary during due diligence and regulatory review.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Andrea Levine is a managing director within the Technology practice of FTI Consulting in New York. She advises clients on the use of advanced analytics technology and methodologies to expedite fact-finding and case development for investigations and complex discovery matters. She previously practiced law with Simpson Thacher & Bartlett LLP.
David Meadows is a senior managing director in FTI Technology’s E-discovery Consulting & Services and Digital Forensics & Investigations practices. He assists clients with technology and its use for e-discovery and forensic analytics in compliance, investigations, and litigation.