Environmental, Social and Governance (ESG) lately has become a fundamental part of doing business. Looking at the long-term gains ESG is more of 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 is ESG involved in Mergers and Acquisitions (“M&A”)?
During an M&A the interesting party shall gather and verify all these information about the target company enabling it to make an informed decision of whether to proceed with the transaction or not.
ESG Due Diligence now involves, among other things, 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,
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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 entail 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, inter alia, the policies, procedures and practices followed for decision-making, accountability, and oversight.
The Republic of Cyprus has transposed into national law the Non-Financial Reporting Directive requirements (Companies Law Cap 113., Articles 151A-B) which lay down the rules on disclosure of non-financial and diversity information by large companies. This Directive imposes an obligation on large public interest companies, namely companies with more than 500 employees, to publish an annual 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 are numerous laws and EU regulations that require companies to consider ESG factors in their operations, that also apply to the due diligence process in M&A transactions.
ESG due diligence in M&A 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, whereas a non-thorough 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.)
This article was created by Maria Mastrogiannopoulou, Senior Associate at Pyrgou Vakis Law Firm .
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