Environmental, social, and governance (ESG) factors are gaining importance in merger and acquisition (M&A) activity globally, as dealmakers on both sides of the table have come to recognize the growing relevance of each component in the success or failure of a deal.
Why ESG Matters
From target selection and screening to post-merger integration, ESG considerations are driving investment decisions to help companies meet their own sustainability ambitions and capitalize on the opportunities of a net-zero economy. Buyers are increasingly scrutinizing whether the target company is acting in a socially responsible manner.
According to Aon’s M&A Risk in Review, 96 percent of corporate and private equity investors say they expect ESG scrutiny in deals to increase over the next three years, with 48 percent expecting it to increase significantly.
Whether the transaction is public or private, ESG issues increasingly require the same level of due diligence that is typical for other workstreams, including financial, legal and human capital. Dealmakers recognize that any acquisition also brings with it a series of ESG risks that can be highly material, hard to find, and subject to shifting goalposts.
“Regulators are demanding disclosures at much greater granularity, investors are demanding greater transparency, and employees also want to see commitments matched by actions,” says Luise O’Gorman, Aon’s Global Head of Transaction Advisory Services.
Globally, overseas buyers are expanding requests for ESG-focused due diligence when purchasing companies, and governments around the world are stepping up reporting requirements. Specifically:
- In India, three of four Chief Experience Officers said they were assessed on ESG performance before finalizing a deal.1
- As part of its green transformation project, Germany is working to meet its environmental targets, accelerating the legal and social transition from corporates and individuals.
- China is also making a push for ESG and is said to be planning to make ESG disclosures mandatory for firms listed on domestic markets.2