January 31, 2019

Due Diligence: Don’t Overlook ESG Performance

Private equity buyers don’t often focus on ESG issues as part of the due diligence process, but this Norton Rose Fulbright blog says they probably ought to take the target’s performance on key ESG issues into account.  Here’s an excerpt:

In private equity, environmental, social and governance (ESG) factors are often overlooked and undervalued. Due diligence is usually more focused on the financial and quantitative aspects of the target. However, in recent years, ESG has proven to be a powerful underlying factor for business successes and failures.

As evidenced by the #MeToo movement, and the various human resource scandals that have made headlines in recent months, an unhealthy corporate culture can have serious consequences for even the biggest of enterprises. A study that looked at 231 mergers and acquisitions between 2001 and 2016 found that ESG compatible deals performed better than those with disparate positions on ESG, by an average of 21%.

This figure should be considered alongside the fact that in 2016, more than 15,000 deals were terminated or withdrawn. The face value of these terminated deals totals $3 trillion. One can appreciate the time, effort, and costs incurred in relation to these proposed transactions, which is why investors need to look beyond the bottom line, and see how a target is achieving its results early on in the evaluation process.

The blog acknowledges that a target’s ESG performance can be a tough thing for a buyer to get its arms around, but notes that the application of emerging “big data” tools to the assessment can provide insights into risks and opportunities in the ESG area.

John Jenkins