With ESG concerns and due diligence becoming an increasing priority for buyers, Andrew Lumsden and Gaynor Tracey, respective partners at Corrs Chambers Westgarth, asserted that “poor ESG can have reputational, financial and sometimes legal consequences for the buyer”.
In a blog post published on InvestorDaily, the pair explained that clients are additionally considering the identification and mitigation of ESG risks when managing their businesses.
“As a result, we are seeing private equity funds and strategic acquirers looking for due diligence to include an ESG focus. That due diligence is designed to both understand the risks and to identify value opportunities,” Mr Lumsden and Ms Tracey continued.
“Conversely M&A deal teams and boards are increasingly looking to identify whether new businesses have the potential to create an ESG-related contagion, undermining hard-won ESG gains.”
They offered that “accidentally ‘introduced’ ESG contagions” can catalyse reputational damage that defines the business for customers and investors.
Namely, buyers may come under fire based on the poor ESG performance of acquired businesses, irrespective of their own performance.
Mr Lumsden and Ms Tracey explained: “A number of recent examples in the listed market have demonstrated the significant impact that poor ESG management can have on a business. These corporate reputation wounds have the potential to place the tenure of the C-suite and the board at risk, and of course, reduce value and liquidity.”
“The consequential losses that can flow from damage to a buyer’s reputation are not usually covered by seller indemnities and so the issues need to be fully understood pre-signing.”
Ultimately, the pair agreed that ESG performance in M&A has the potential to make or break a sale, and noted that target businesses need to be thorough in their ESG-focused diligence to significantly enhance their exit value.
“For the M&A team, the consequences of an ESG misstep can be grave and warrant serious consideration. There needs to be a comprehensive plan to identify, monitor and mitigate all such risks.”
To find out more from Mr Lumsden and Ms Tracey, read the rest here.
