As we mentioned in Part I of this article last month, steps in the M&A deal process may be modified for ESG. The due diligence process in particular…
As we mentioned in Part I of this article last month, steps in the M&A deal process may be modified for ESG. The due diligence process in particular must be conducted with an ESG lens, with the process including a detailed look at a target’s ESG approach as demonstrated by existing ESG policies and programmes,
This is over and above what environmental regulation, disclosure requirements, and labour laws require. Depending on the sector, more focus may be placed on pollution, CO2 emissions and energy use for targets with significant environmental footprints, whole for other sectors company values and work culture, particularly towards gender equity and workplace diversity, may be more important.
ESG can be incorporated into valuation through the use of ESG adjusted discount rates, with higher rates for poor ESG rated entities that are seen as being higher risk. Another approach is through ESG adjusted future cashflows (that takes into account the additional expenditure that may be required to bring the target to the correct ESG standards). However, assigning monetary value to ESG factors may prove to be difficult.
ESG considerations are also important after deal closure. During this stage, the “S” and “G” are particularly important. The social factor is important since you’ll effectively be merging two workforces that carry different corporate cultures and values. From a governance perspective, developing an ESG framework for the merged entity that improves on standards and policies that the entities may have had in place before the transaction is important. The opportunity to leverage the ESG best practices of a target can be realised at this stage, and post-merger business plans should incorporate this.
Transaction financing may also gain from incorporating ESG. Over and above a favourable credit rating, a good ESG rating could make the cost of financing transactions cheaper and widen the pool of potential funders. Globally, financial institutions and lenders are dedicating more funds to finance ESG-driven opportunities. Locally, there’s been a rise in sustainability-linked financing and driving ESG in M&A transactions could benefit from this wave, which presents an opportunity for acquirors to access funds at favourable costs.
How can we help?
Tamela Holdings is a Corporate Advisor and Sponsor business with extensive market experience. Tamela has the expertise to assist you in navigating merger and acquisition transactions from cradle to grave. To the extent that you may be interested in exploring your strategic rationale for an M&A deal and require guidance on the process and considerations, Tamela will be at your service.
For more information, please contact Tshepo Radebe, 0117834907 / Tshepo@tamela.co.za.