August 6, 2021

Due Diligence: ESG Considerations

This Debevoise publication provides an overview of the various EU & US regulatory factors and other considerations that are helping to make ESG issues front and center in many M&A transactions. This excerpt focuses on ESG metrics and their use in the due diligence process:

When conducting ESG due diligence in an M&A context, it is important to understand how the buyer intends to account for and potentially disclose ESG information. For example, diligence conducted for an impact-focused fund will likely serve as the baseline from which the fund will measure and report ESG changes during its period of ownership. Similarly, a social impact fund aimed at improving financial inclusion will want to know the number of “unbanked” people currently served by a target company so that it can measure the shift in access to financial services during the life of its investment.

As another example, a large public company that reports on ESG matters under the Sustainability Accounts Standards Board (the “SASB”) standard will want to understand the pro forma effect of a potential acquisition on its ESG reporting. This is no different in concept to understanding the accounting framework used by the buyer when conducting accounting and financial due diligence.

As discussed above, some regulators have mandated ESG-related reporting on specific matters, such as supply chain or climate risks. Beyond those legally mandated, various systems of ESG reporting standards have arisen over the last few years. Notable examples are the SASB and the Global Reporting Initiative (the “GRI”). SASB’s set of 77 Industry Standards identifies “the minimal set of financially material sustainability topics and their associated metrics for the typical company by an industry”. The GRI Standards are divided by topic: the three universal Standards are used by every organisation that prepares a sustainability report; and the remainder are chosen by an organisation from topic-specific Standards.

The publication also addresses new ESG diligence requirements in selected EU markets & in the U.S., highlights certain risk management concerns, and addresses the potential benefits for businesses of robust ESG diligence.

John Jenkins