February 4, 2021

ESG: Have We Reached an Inflection Point for M&A?

Demands from investors and other stakeholders for companies increase to increase their focus on ESG issues have grown exponentially in recent years.  While most of the attention has been focused on various ESG metrics and disclosures, a recent Wachtell memo on M&A in 2021 devotes a section to ESG – and suggests we’ve reached an inflection point when it comes to ESG & M&A.  Here’s an excerpt:

ESG has reached an inflection point, with boards of directors, investors and other market participants and observers focusing on questions regarding corporate purpose and recognizing the critical  importance of environmental, social and governance factors in the sustainability and long-term
value creation potential of the corporation and, ultimately, broader economic prosperity. As ESG is increasingly incorporated into strategic and operational decision-making, it will likely become increasingly salient in the context of mergers and acquisitions.

For example, as investor focus, and corporate accountability, around ESG metrics continue to increase, those metrics are likely to play a more important role in pre-signing due diligence and the assessment of the pro forma impact of a potential M&A transaction. With growing attention to the importance of human
capital to the success of the firm (including the SEC’s amendment to Regulation SK requiring companies to describe their human capital resources), deal-related synergies that are tied to workforce changes may face increased scrutiny, particularly for companies that have received government assistance during the pandemic.

Meanwhile, companies seeking to enhance the sustainability of their businesses, for example by switching to cleaner technologies or improving product safety, may find that ESG factors drive their acquisition or disposition strategies. In addition, ESG-related elements of the deal story may feature more prominently in transaction announcements and roll-outs, alongside traditional talking points like economic synergies, in the years to come.

As an example of a deal’s ESG elements featuring more prominently in announcements & rollouts, the memo cites the way that ConocoPhillips & Concho highlighted the combined entity’s status as the first U.S. based oil & gas company to adopt a Paris-aligned climate risk strategy.

John Jenkins