ESG – Corporate citizenship in the deal

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.