The Growing Importance of Environmental, Social, and Governance (ESG) Factors in Mergers & Acquisitions

A profound shift is underway in the metrics used to evaluate mergers and acquisitions. Once considered secondary, environmental, social, and governance are now indispensable markers of a company's resilience, long-term viability, and value.

Here's everything you need to know about environmental, social, and governance factors in mergers and acquisitions and how they're growing in importance.

ESG: A Quick Review

ESG factors cover a broad spectrum of criteria that evaluate a company's impact on the environment, society, and its governance structure.

Environmental

These considerations focus on a company's carbon footprint, resource utilization, energy efficiency, and commitment to sustainability.

Social

Social factors explore diversity and inclusion, community engagement, and labor practices and may even include product safety.

Governance

Everything from the structure of a board and compliance with regulations to the integrity of those leading the company falls under governance. The aim here is to bring to light how transparent a company is, as well as their level of accountability.

Why This Shift?

Why have ESG factors becoming more important than ever? For starters, there's a growing belief that the responsibilities of a company extend beyond maximizing their profit.

We've also become more aware of our carbon footprint, and there's a renewed focus on environmental awareness and social activism. It's no longer a preference but an expectation that companies actively demonstrate not only their commitment to ethical conduct but also their sustainability.

Additionally, ESG considerations in a merger and acquisition aren't just a public relations matter; they've become a strategic necessity. Businesses that excel in all three metrics typically have lower risk profiles, better brand reputations, and access to a broader investor base. By focusing on ESG factors during a merger and acquisition, it's possible to unlock more value than what was initially anticipated.

Lastly, regulatory bodies worldwide are enacting measures that compel companies to disclose their ESG performance. Such actions clearly demonstrate this shift towards greater transparency and accountability. Failure to comply may even lead to legal liabilities, making it imperative to focus on ESG factors sooner rather than later.

Getting Started

ESG factors are important considerations whether you plan to sell a business, have it valued, or acquire one. An excellent place to start is by evaluating a business's current ESG standings. That means scrutinizing:

• Performance metrics
• Current, if any, ESG policies & practices
• Potential risks
• Opportunities for improvement

Collaborating with subject matter experts may also be beneficial, as environmental consultants, human rights advocates, and governance specialists can provide helpful insights.

By placing more importance on ESG factors during mergers and acquisitions, the total value of a transaction is more readily apparent. This focus can also help companies meet their sustainability ambitions.

Navigate the Mergers and Acquisitions Process With Confidence

As ESG principles become more deeply embedded in regulatory frameworks, they will continue to profoundly influence mergers and acquisitions strategies.

With help from Erica Gilson, our True North Mergers & Acquisitions COO and Managing Director, you can secure comprehensive assistance that accounts for environmental, social, and governance factors. Connect with Erica to get started today.