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Investors, regulators, customers, and employees are demanding that companies improve their Environmental, Social, and Governance (ESG) practices and address problems like climate change and diversity, equity, and inclusion. The geopolitical risk associated with doing business in countries that lack respect for the rule of law and human rights is more apparent than ever before. And companies are recognizing that ESG factors impact their financial performance.

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These changing business dynamics are causing ESG factors to become increasingly important in mergers and acquisitions (M&A). If the parties to a transaction are not aligned on ESG — integration will be more challenging, the buyer may incur the ESG equivalent of “tech debt” to level out the target’s practices, and in some cases, buyers could find themselves with substantial unexpected liabilities.

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As in-house counsel, there are a few practical steps you should take to address the changing risks and expectations related to ESG in the M&A context.

ESG Plus M&A For Seller’s In-House Counsel

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As in-house counsel for a seller, you will likely know about the prospective transaction months in advance and be involved in helping the company prepare for sale. Identify ESG considerations early. The goal is to ensure that your ESG practices are a selling point — not a trigger for price discounts.

Here are a few to focus on:

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• Climate: Buyers are likely to ask for your carbon footprint and trajectory. You will not be able to produce this information quickly in response to a diligence request. Start measuring your carbon footprint at least a few months in advance and include the information in your pitch deck. Maintain a credible data trail.
• DEI: Buyers may ask for information related to the diversity of your workforce, pay equity, your approach to inclusiveness, and other DEI-related topics. Know the benchmarks for your industry. You either need to meet this standard or show how you are progressing. Be ready to disclose your processes. Also, work with your privacy counsel to define the limits of the information you can provide.
• Geopolitical Risks: The crises in the Ukraine has sharply raised awareness of geopolitical risks. If your company has an extended supply chain, you will need to show how you are mitigating this risk.

ESG Plus M&A For Buyer’s In-House Counsel

As in-house counsel for a prospective buyer, you may not have a ton of advance notice about the transaction. Your challenge is to collect enough diligence on ESG to inform decision-making and valuation and manage risks through the deal documents. Think about this in stages:

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• Pre-Deal (like now): Educate yourself on the key ESG risks in your industry. Find out what regulations are being proposed. Prepare yourself to issue spot-on ESG subjects.
• Identification: As soon as a target is identified, research all public information with respect to the target’s ESG performance. You can find out a lot just by reading the target’s website, news reports, and social media.
• Due Diligence: Include ESG information in your first request for diligence. Ensure that your outside counsel is well-versed in this area. Hammer until you get answers.
• Negotiations: Proactively discuss ESG considerations with the leadership and valuation teams early. This will help ensure that your team identifies potential cultural mismatches and builds risks into the pricing model.
• Integration: Flag areas where ESG practices need to be improved so that they are incorporated into the integration plan.

Lastly, for both sides, remember that ESG is not all about the risks. There are opportunities to capture in this area. Valuations for companies that are addressing climate change have skyrocketed. The Inflation Reduction Act will enable some industries to substantially reduce costs through the implementation of carbon-reduction technologies.

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Acquisitions are also an opportunity to positively impact the culture and values of the buyer by importing good ESG practices from of the acquired company. Integrations are more successful when they go both directions.

Now is the perfect time to ask yourself, what are you doing today to prepare yourself for the mergers and acquisitions of tomorrow?

Christine Uri is the Chief Legal and Sustainability Officer at ENGIE Impact – a company that enables global corporations to accelerate their net-zero carbon journey. Christine began her career as a business attorney 20 years ago, providing legal counsel to businesses ranging from local start-ups to international Fortune 500s. She is a general counsel, sustainability leader, public speaker, and content creator. Christine believes that improving corporate performance on ESG measures is critical to building a more sustainable world. She is passionate about inspiring and empowering in-house legal teams to provide ESG leadership. You can follow Christine on LinkedIn. This article reflects Christine’s personal opinions and not the opinions of her employer.

Topics

Christine Uri, Corporate ESG, ESG, In-House Counsel, Mergers and Acquisitions