February 19, 2020

ESG: The Next Big Thing in M&A?

So far, concerns about ESG issues have generally focused on corporate governance and disclosure. But this Wachtell Lipton memo says that ESG considerations may be about to impact M&A in a very big way. Here’s an excerpt:

ESG factors can be expected to increasingly influence how companies select potential targets and business partners. There is growing recognition of new business opportunities across industries and that partnering with companies with strong ESG profiles, such as businesses focused on renewables or which have a strong record of innovation, can enhance a company’s ability to deliver long-term sustainable value to its stakeholders.

It is expected that Fiat Chrysler’s pending merger with Peugeot will help the company avoid a potential $2 billion in European carbon emissions fines. Meanwhile, Mitsubishi and Japanese utility provider Chubu Electric Power Co., Inc. beat out Royal Dutch Shell to acquire sustainable energy utility company Eneco last year. Similarly, and perhaps as a harbinger for other industries, several mainstream asset managers have acquired ESG funds in recent years in order to expand their scope, capacity and expertise in the field.

As ESG disclosure practices become more ingrained in public company practice, those companies able to showcase their capabilities in this regard stand to gain a competitive advantage and potentially demonstrate attractiveness to acquirers looking to develop or supplement their own capabilities. Similarly, consolidation to achieve or enhance scale can be expected to continue within sustainability-focused industries.

The memo also addresses the increasing importance of ESG considerations in the due diligence process, the impact of differences in acquirer v. target ESG performance on governance & integration, the need to address stakeholder ESG concerns in communications about a transaction, and the relationship between ESG performance and a company’s cost of capital.

John Jenkins