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Why an ESG and Sustainability due-diligence is more important than ever in M&A
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Why an ESG and Sustainability due-diligence is more important than ever in M&A
Why an ESG and Sustainability due-diligence is more important than ever in M&A

 

Environmental, Social, and Governance (ESG) and sustainability due diligence is becoming increasingly important in mergers and acquisitions (M&A) operations. In this article, we will explore the reasons why conducting a thorough ESG and sustainability due diligence is crucial for successful M&A transactions.

First, it is important to understand the concept of ESG and sustainability due diligence. ESG refers to the three key areas of a company’s performance that are often considered to be the most important indicators of its long-term sustainability: environmental, social, and governance. Sustainability due diligence, on the other hand, is the process of evaluating a company’s environmental and social impacts, as well as its governance practices.

The main reason why conducting a thorough ESG and sustainability due diligence is important in M&A operations is that it can help identify potential risks and opportunities. For example, a company that has poor environmental practices may face significant fines and penalties in the future, which can negatively impact its financial performance. On the other hand, a company that has strong environmental practices may be well-positioned to benefit from government incentives and regulations. Similarly, a company that has poor labor practices may face reputational damage and increased costs, while a company with strong labor practices may be able to attract and retain top talent.

 

Identify risks and opportunities

 

Another important reason why ESG and sustainability due diligence is important in M&A operations is that it can help identify and address any potential negative impacts on stakeholders. For example, a company that is planning to acquire another company may have to consider the potential impacts on the local community, employees, and customers. By conducting a thorough ESG and sustainability due diligence, the acquiring company can identify any potential negative impacts and take steps to mitigate them.

In addition to identifying risks and opportunities, ESG and sustainability due diligence can also help companies to identify areas where they can improve their performance. For example, a company may discover that it has a significant environmental impact that it was not aware of, and it may then decide to invest in new technologies or processes to reduce this impact.

There is also increasing evidence that companies that have strong ESG and sustainability practices are more likely to be successful in the long-term. A 2020 report from the Boston Consulting Group found that companies in the top quartile for ESG performance had a return on assets that was 12% higher than companies in the bottom quartile. Similarly, a 2020 report from Morgan Stanley found that companies with strong ESG practices had a return on equity that was 2.7% higher than companies with weak ESG practices.

 

It is a market demand

 

Furthermore, investors are increasingly demanding companies to have strong ESG and sustainability practices. A 2021 report from BlackRock found that 82% of investors consider ESG factors when making investment decisions. Similarly, a 2021 report from the Global Sustainable Investment Alliance found that sustainable investment assets under management reached $17.1 trillion globally in 2020, an increase of 34% from 2018.

However, conducting a thorough ESG and sustainability due diligence can be challenging. One of the main challenges is that companies may not have all the necessary data and information to conduct a comprehensive analysis. Additionally, companies may not have the expertise to evaluate the information that they do have. To address these challenges, companies may need to invest in new technologies and processes.

In conclusion, conducting a thorough ESG and sustainability due diligence is crucial for successful M&A transactions. By identifying potential risks and opportunities, addressing any potential negative impacts on stakeholders, and improving performance, companies can increase the chances of a successful transaction and position themselves for long-term success.

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