An assessment of ESG factors has become an integral part of the due diligence review of companies. ESG, an acronym, refers to environmental, social, and governance—three of the major non-financial factors on which responsible investment focuses.
An ESG assessment may provide a potential acquirer with a detailed analysis of a company’s ability to operate successfully in a corporate world with growing environmental awareness. This is especially important for companies looking at merger and acquisition targets and seeking new investments. It is also important for any company for its future planning.
This means that in addition to all other matters, including the financial and anti-corruption reviews that must be conducted, a thorough due diligence review must carefully examine compliance with various ESG issues. These are increasingly posing regulatory risks as governments around the world impose new regulatory requirements to address many of these matters.
Issues considered in an ESG due diligence review:
Environmental
This includes consideration of pollution, emissions, waste, water, natural resource management, land use, energy, climate impact, use of non-renewable resources, and supply-chain management.
Social
Management of reputational risk is increasingly important for the success of a company. These considerations include review of the health and safety of a company’s workers and customers, as well as addressing human rights issues, including modern slavery and child labor and a company’s use of conflict minerals either directly or through its supply chain.
Governance
This is perhaps the most familiar issue and includes not only compliance with financial and corporate reporting, as well as anti-bribery, corruption, and money laundering regulations, but also consideration of a company’s policy and performance related to diversity and inclusion, gender pay gaps, executive pay, data protection, cyber-security, and risk management and oversight.
Qualified legal counsel can assist a company in navigating potential regulatory and risk minefields by providing it with practical advice designed to implement ESG considerations and meet its goals. It can do so by assisting the company in conducting a carefully structured ESG due diligence review and developing ESG policies and practices. This often includes reviewing transactions and lending parameters to identify potential ESG issues, aiding a company in effectively responding to ESG events, and assisting a company in drafting appropriate reports.
Questions to ask when planning a review:
- Has a company’s supply chain been evaluated for potential ESG risks?
- Does a company have appropriate personnel training, whistleblowing rules, and case management?
- Does the company have documentation evidencing appropriate personnel training, whistleblowing rules, and case management?
- Have ESG concepts, goals, and concerns been effectively implemented in the company?
- When considering the acquisition of an international business, is the target company’s data reliable and appropriate? This includes consideration of and compliance with the diverse regulations that impact an international company.
- How well and how quickly can the buyer and the target company integrate their operational models addressing ESG risk and compliance after the deal is closed?
- Given the ever-increasing importance of ESG factors in today’s world, will the post-acquisition organization be able to satisfy the ESG targets and deadlines.
The ESG field seems likely to continue to develop and become a central aspect of the conduct of corporations, as well as an essential consideration in international transactions. Accordingly, commercial corporations must dedicate resources (particularly legal resources) to this subject, both in day-to-day conduct and in transactions.