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The importance – and expansion – of ESG

Environmental, social and governance (ESG) issues have been key considerations in M&A transactions for a number of years. And we have charted the evolution of ESG issues on M&A in previous reports, including the development of a forward-looking approach to ESG due diligence, the impact of increasing regulation of ESG issues and the role of ESG as a driving force in transactions.

It is an area that continues to evolve – and drive change. The growing reporting requirements around the globe mean that scrutiny of a company's performance in this area as part of the deal due diligence is becoming easier and more commonplace. However, as well as navigating these reporting requirements, companies are having to engage with a wide variety of stakeholders including their own shareholders, clients, employees, financiers and activist groups – and the approaches of these various stakeholder groups do not necessarily align, and may also vary within a particular stakeholder group from jurisdiction to jurisdiction.

At the same time, the factors which contribute to a business being considered a good corporate citizen are constantly evolving. Treating stakeholders such as employees, contractors and customers fairly and with respect is a baseline expectation but businesses also need to consider how they interact with, and their impact on, the communities in which they operate. Such concerns do not just relate to companies in the same corporate group; there is a growing focus on a business's wider supply chain and, in a number of jurisdictions, businesses have suffered reputational damage from the acts or omissions of entities in their supply chain, for example dangerous working conditions or underpayment of staff.

Similarly, while environmental factors have long been in the spotlight, there is a growing expectation on businesses to understand and manage biodiversity-related risks coupled with a steep rise in biodiversity-related laws and policies globally. We can expect to see more adverse publicity and claims in this area in certain jurisdictions.

Businesses are having to address issues that have traditionally fallen solely to politicians; we have seen an increased expectation from customers and employees that companies will take a stance on key social and political issues. However, as a number of businesses have found, it can be difficult to "read the mood" and navigate the minefield of responding to world events while taking account of the differing views of various groups of stakeholders.

Mike Flockhart
London

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According to a survey conducted by Deloitte, two-thirds of the 250 C-suite executives and senior and mid-level leaders at corporations that reported at least US$500 million in revenue consider ESG to be of high or very high importance in M&A activity.

Deloitte's ESG in M&A pulse survey: ESG’s evolving role in corporate M&A decisions

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We are seeing private capital investors ramp up their emphasis on ESG for reasons beyond pure compliance, with a shift of focus away from risk management to monetisation and making themselves more attractive to both investors and potential investee/ target companies.

Nanda Lau
Shanghai

Taking account of the growing range of ESG and corporate responsibility issues in the planning and execution of M&A deals will be a key factor in successful deals.

Heike Schmitz
Germany

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