October 31, 2022

ESG Considerations in M&A

Mintz recently issued a client memo addressing ESG considerations for M&A transactions.  The memo reviews valuation & risk mitigation issues that need to be addressed during the due diligence and negotiation process, the impact of investor expectations, and post-closing governance and integration considerations.  This excerpt discusses potential ESG-related risks and ways to mitigate them:

ESG issues from both a financial and reputational perspective can be quantified in several forms. Financial issues may leave investors exposed to sanctions or fines, but this risk can be mitigated through the due diligence process. Reputation issues may include negative press or social media commentary, which can lead to revenue loss and a drop in consumer confidence. Reputation-related post-merger liabilities can be mitigated if there is a greater understanding of the target’s culture and workforce, and this can be developed through social media, reports from third-party providers, and desktop news searches. If an ESG issue has been identified during the due diligence process, the investor can request protection via the purchase agreement in the form of representations and warranties or Material Adverse Effect (MAE) clauses.

Acquisition safeguards for public companies should also include adherence to the proposed SEC Climate Disclosure Rules, along with awareness of any additional SEC requirements for ESG disclosure. The buyer and target should have respective reporting structures in place to address the proposed requirements for disclosures in registration statements and annual reports. For example, a company will need to disclose the greenhouse gas emissions they are directly responsible for, in addition to emissions from their supply chains and products.

Companies without these reporting structures in place may create a barrier in the acquisition process or a reason for a price discount because the structures may prove cumbersome to set up. The due diligence process in M&A transactions should include a buyer and target’s data management, audits, and standard reporting methods or templates in order to ensure both accuracy and efficiency in their climate-related disclosures.

John Jenkins