ESG continues to be a key driver in corporate decision making. According to the Global M&A Dealmakers 2022 North American M&A Outlook report, prepared in association with Mergermarket, “73% of North American dealmakers feel that ESG scrutiny will increase over the next three years.” But what will that scrutiny look like in a practical sense? Here are a few things to consider.
What ESG commitments have been made and to who, are they currently being met and are they capable of being met in the future?
Public companies have had limited ESG disclosure obligations for some time, but it has become quite common for companies without disclosure obligations to issue “sustainability reports” covering a wide range of topics, typically loosely aligned with an international set of reporting standards. Many companies have contractual environmental sustainability obligations with banks and project finance partners. Other companies may have a culture in which employees and other stakeholders feel they have a say in corporate decisions that may impact individuals. Expect to see detailed ESG audits conducted by specialists in the field as part of standard diligence.
What do the financial statements say?
Sustainability reports and aspirational marketing campaigns may say one thing, but do the financial statements prove that ESG initiatives are profitable? This will continue to be a tension point in deal making because we don’t yet have the sustainability financial reporting standards necessary for full transparency. Expect closer scrutiny of the financial value of sustainability initiatives and pay attention to what IFRS is doing globally and what Canadian standards setters are proposing.
The race to secure ESG-friendly assets.
Corporations with significant carbon reduction or carbon neutral obligations are already purchasing assets that will help them achieve those goals. Expect to see increased competition for assets that offer carbon offsets or new technology capable of more efficiently capturing and storing carbon.
Business human rights, supply chains and forced labour.
Regulatory initiatives in both Canada and the United States are likely to put a much greater focus on modern slavery and child labour in the supply chain. Once largely the concern of the shipping, fashion and extractive sectors, supply chain and human rights diligence is likely to become standard in the next few years.
The ESG landscape has been evolving quickly but it is starting to mature. What were once theoretical considerations and disclosure issues are becoming concrete deal concerns that successful deal makers will need to navigate and factor into their decisions.