25 Oct 2022

ESG: A New Tool in M&A

Intralinks recently published a report on Environmental, Social and Governance (“ESG “), which looks at ESG and how it gained prominence in European M&A. The main idea of the report is to demonstrate ESG’s impact on the M&A decision-making processes, supported with statistics to depict the impact intensity.

The Intralinks survey shows that only 3% of the survey respondents were not concerned about ESG issues during their latest M&A transaction. In comparison, 41% of respondents said that the ESG drove their last transaction, and the remaining 56% stated that the ESG was not the primary motivator for their latest deal, but they considered the ESG issues.

Based on the statistics from the report, the ESGs’ importance is rapidly increasing and more and more investors consider it, especially during M&A transactions.

The data demonstrate that placing appropriate emphasis on ESG in dealmaking is as crucial as paying attention to the “traditional” M&A issues. Identifying ESG issues is a helpful metric for observing risks in the long run. For example, acquirers are closely paying attention to ESG, which enables them to uncover warning signs early on, thus making them rethink closing the deal.

Moreover, because investors are scrutinizing assets with a fine-toothed comb using ESG metrics, we can expect more deals to be turned down if target companies do not pay more attention to their ESG compliance. Besides, the report has shown that ESG progress positively impacts investors’ decisions. First, it attracts subsidies and government support (55 %) and, second, the benefits of enhancing a business’s brand (52%), which can significantly affect growth and customer retention.

 Since ESG is becoming a crucial topic, regulating ESG has become an essential and indispensable question.

 Last year, the European Commission introduced the Sustainable Finance Disclosure Regulation (“SFDR”) for asset managers. SFDR applies to the Private Equity (“PE”) fund managers, regulated under the AIFM Directive, requiring general partners to publicize the potential adverse ESG impacts their investments make.

Moreover, the EU proposed a Directive on Corporate Sustainability Due Diligence, whose primary goal is to make businesses accountable for identifying, averting, and minimizing harmful effects on human rights and the environment. This Directive will apply to EU-domiciled companies with 500 or more employees and 150 million euros in annual net global revenue, as well as non-European businesses that make upwards of EUR 150 million of their revenues from the region.

 The new reporting obligations are a significant change for the companies, and it will take much effort to adapt compliance procedures and operating standards. However, it seems like this will be necessary for companies to continue attracting investors and the markets.

The report also contains an interview with the ESG Advisory EMEA, sustainable & impact banking head at Barclays Investment Bank, Tanja Gihr, who stated that ESG is a business opportunity. She goes on to explain that if businesses do not comply with the ESG standards, it is inevitable that they will risk falling behind, as the acquirers will continue to reduce the range of investable targets in line with ESG metrics.

Acquirers seek best-in-class investments and are willing to back out of the deal if they believe a target’s ESG score falls short of their baseline expectations. It might be hard for companies to comply with all the ESG rules, but as Ms. Gihr stated: “There is always room for improvement in ESG! It’s so fast-moving that if you stand still, you get left behind.”

Do not sit and wait; if you need any ESG-related advice, feel free to contact our ESG team!


Authors: Milica Novaković, Jasmina Glavšić