Ensuring ESG Success After the M&A Transaction
This blog post is co-authored with Amy Wojnarwsky, an attorney at McDonald Hopkins, a Cleveland-based business advisory and advocacy law firm. Amy is a leader in McDonald Hopkins’ Social Corporate Governance & Impact Investing practice and has a strong passion for helping entrepreneurs and businesses on ESG matters.
In our fourth and final installment of this M&A and ESG series, EPOCH Pi and McDonald Hopkins look at how environmental, social and governance (ESG) matters can be solidified during integration and beyond to ensure these considerations survive post-transaction.
While ESG was once an afterthought to M&A deals just a few years ago, there is now little doubt that ESG factors contribute to the creation of value and to the risk management required to preserve value after a deal is finalized.
The past two years have made clear that businesses can’t ignore environmental or social factors, nor the various stakeholders important to a transaction. COVID-19 has sharpened the focus on the importance of ESG considerations, calling attention to how companies are prioritizing the health, safety and wellness of their employees, customers, communities and supply chains.
Instead of looking only at financial statements and growth plans, dealmakers are increasingly integrating ESG issues into consideration. The current disruptions are stress-testing how effectively companies have integrated ESG into their business strategy to drive resilience, adaptability and long-term sustainability. According to recent reports, nearly 90 percent of M&A targets are acquired only after a thorough review of their performance by analyzing ESG factors.
After ESG factors are reviewed during the due diligence process and evaluated when negotiating certain aspects of the deal, there are a few different ways to ensure ESG success after both parties sign on the dotted line.
ESG and M&A Best Practices
By their nature, mergers and acquisitions produce a transition period, and with that can come uncertainty and restructuring, which has the potential to cause a significant threat to ESG programs.
During M&A integration, it is important to keep ESG considerations top of mind when combining resources, systems, processes and more — especially if there are significant differences in company cultures and policies. Failure to do so can cause confusions and risk alienating key stakeholders and employees. The following best practices can help ensure ESG success post-transaction:
Identify best practices. Review each company’s sustainability programs to fully understand potential challenges and help the integrated entity determine ESG goals and priorities. A combined approach can help uncover areas of opportunity to improve or implement ESG practices.
Consider a new organizational structure to head up ESG initiatives. Whether it is a committee, a Chief Sustainability Officer (CSO) or board of directors, having a team in place to provide periodic briefings, solicit feedback and ensure that key elements of the ESG strategy are properly implemented will help generate buy-in from stakeholders.
Conduct regular assessments of the ESG activities post-transaction. Establish a reporting timeline using the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB) guidelines and/or any additional rankings or ratings systems that can help your company identify KPIs and work to implement solutions for data collection, analytics and reporting. While the metrics and reporting process may evolve over time, be sure to track and share relevant data that promotes accuracy and transparency.
ESG and M&A: A New Era
ESG concerns are profoundly changing business strategies, including Mergers & Acquisitions. Companies should no longer operate under “business as usual” pretenses. This change is unmistakably positive; not only will it impact competitiveness and profitability, but it will also influence the attraction of capital. Additionally, ESG emphasis has the power to increase the integrity of a business as, more than ever, consumers, investors, employees and society as a whole, expects companies to do their fair share in creating a more just and sustainable world.
The main takeaway from our M&A and ESG series? That the current ESG emphasis should be considered as a new way of life for businesses, not a passing trend. Beginning with Millennials, subsequent generations want companies to embrace ESG. Economic demand is the driving force behind the change and executive leadership — in M&A and beyond — must toe the line.
At EPOCH Pi, we specialize in M&A and capital raising. As a Certified B Corp investment bank, we use cultural alignment tools and integration planning for all of our financial advisory services in order to maximize value for our purpose-driven clients and find the most values-aligned parties.