Environmental, Social and Governance (ESG) has lately become a fundamental part of doing business. Watching over to long-term gains ESG is more an opportunity than a risk from the periphery of a company’s strategic policies to the core of the most crucial strategic choices.
But how ESG is involved in M&As?
During an M&A the interesting party shall gather and verify all these information about the target company enabling it to make the informed decision of proceeding or not with the transaction.
ESG Due Diligence now involves amongst other the assessment of the target company’s environmental, social, and governance practices.
The main factors to be considered are:
a. Environmental factors: within the context of the company’s impact on the natural environment, including its carbon footprint, waste management practices, and resource consumption. Environmental due diligence might involve examining a company’s compliance with environmental regulations,
b. Social factors: Social factors refer to a company’s impact on society, including its relationships with employees, customers, suppliers, and local communities. Social due diligence might involve examining a company’s human resources policies and procedures and compliance with Labour Law requirements.
c. Governance factors: Governance factors refer to the company’s management structure including policies, procedures and practices followed for decision-making, accountability, and oversight.
The Republic of Cyprus has transposed into the national law the Non-Financial Reporting Directive requirements (Companies Law Cap 113., Articles 151A-B) which lays down the rules on disclosure of non-financial and diversity information by large companies. This Directive provides that large public interest companies with more than 500 employees, have to publish annually a non –financial statement containing information relating to at least:
• Environmental matters;
• Social and employee matters;
• Respect for human rights;
• Anti-corruption and bribery;
At the same time, there is a number of laws and EU regulations that require companies to consider ESG factors in their operations, and that apply to the due diligence process in M&A transactions.
ESG due diligence in mergers and acquisitions involves a comprehensive assessment of the target company’s ESG performance and identification of any risks and opportunities that could impact the transaction.
It is important to note that successful ESG due diligence can be beneficial to both the interested company and the target company, while unsuccessful due diligence can result in the interested company facing penalties and allegations for failing to meet the legal and regulatory requirements captured by the factors analysed above.
As has often been written and said
‘’ If you think compliance is expensive, try non-compliance.’’ former U.S. Deputy Attorney General Paul McNulty.
