Climate change has become a high profile issue that is expected to have significant implications for M&A transactions going forward. As public awareness and scientific understanding of climate change continues to evolve, we are more informed about the climate change-related risks that businesses must grapple with and get ahead of. As a result, businesses need to be especially diligent in their assessment of a range of factors that may be impacted by the changing climate when completing M&A transactions. While the risks that should be considered will, of course, vary between transactions, the following is a list of climate-related factors that will likely be relevant to the majority M&A transactions.

The Sustainability of Assets in a Changing Climate

The sustainability of assets and operations, also termed “physical risk”, is always a crucial consideration when evaluating M&A opportunities. Changing weather patterns will further complicate this analysis going forward. For example, the risk of supply chain disruptions may increase as severe weather events become more frequent, while the possibility of changing sea levels may effect industries ranging from agriculture to tourism. Similarly, businesses that require significant infrastructure to operate may face the difficult decision between investing in assets that can withstand increasingly severe weather and risking the costly damage that may or may not occur if more affordable options are chosen. The vulnerability of certain regions to natural disasters – for example, forest fires – has already had a major impact on electricity providers in California as they proactively shut down service in an effort to prevent devastation.

The sustainability of assets should especially be considered in the due diligence and valuation phases of a transaction. Buyers and parties to a merger should consider, among other factors: the location of assets, how vulnerable the location and assets themselves are to severe weather events, the impact that severe weather events may have on assets, the local labour force, and supply chains, overall. Although speculative, the consideration of physical risks to a business should not be ignored.

In short, climate change has the potential to impact an exceptionally wide range of businesses, and failure to assess these risks when evaluating M&A opportunities may result in costly mistakes.


As both awareness and concern about climate change have grown rapidly among members of the public, environmental responsibility has become a central component of many companies’ branding strategies. Research has shown that consumers prefer to support brands that align with their values, and experience has shown that becoming the subject of environmental scrutiny can have drastic negative consequences for businesses. Accordingly, a brand’s reputation for environmental responsibility, good or bad, may be an important determinant of their value going forward. Transactions that move a business in an environmentally responsible or sustainable direction may magnify the value gained as a result of the merger or acquisition.

Transactions that facilitate eco-friendly branding may bring significant advantages, while transactions that reflect negatively on a brand’s environmental responsibility may risk leaving a company behind the eight-ball. Therefore, the values espoused by a brand are an important consideration in evaluating a transaction, particularly where environmental responsibility is an existing component of a company’s branding strategy.

Legislative changes

A third factor which warrants consideration when evaluating an M&A transaction is regulatory risk. The new federal carbon tax now in effect in much of Canada has been met with a wide range of responses. Some have argued that the tax will reduce the competitive edge of Canadian businesses and result in increased costs for consumers. Indeed, recent research suggests that the tax will cause a short-term increase in production cost of more than 5% in some industries. On the other hand, some have suggested that the tax may actually increase profits for some firms by encouraging investment in sustainable sources of energy and thereby reducing reliance on fossil fuels. While the business implications of the carbon tax are not yet clear, it is clear that the ability of businesses to adapt to legislative changes aimed at protecting the environment may be an important determinant of the profitability of a business going forward.

It is expected that further pro-environment legislative changes will follow as uncertainties related to climate change risk become increasingly mainstream and dire. Businesses considering transactions in carbon- or water-intensive industries such as, inter alia, energy, transportation, and agriculture, should pay special attention to the legislature and regulatory trends, globally. This way, buyers and sellers can be proactive about company policies, due diligence, transactional terms, and deal valuation. It goes without saying, then, that attention to the possibility of legislative changes is now a critical component of evaluating M&A transactions.

Parties to a transaction, regardless of the industry, should be diligent in their consideration of climate change-related risks. Although physical and regulatory risks may be specific to businesses operating in particular industries, branding and company values are relevant across all industries. Consideration of climate change-related risks may increase costs in the short term but attention to these risks is likely to pay off in the long term by way of: decreased risk associated with the sustainability of assets, increased value related to branding, and greater preparedness for predicted legislative change.

The author would like to thank Brandon Schupp and Kiri Buchanan, articling students, for their assistance in preparing this blog post.

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