Preparing for Climate Change's Impact on M&A
By Rusty Wiley, CEO of Datasite
When government leaders meet next month at the 26th UN Climate Change Conference of the Parties (COP26), there are high expectations that it will be a turning point in the fight to reverse the climate crisis. The meeting comes after a UN report was published earlier this year which shows that though there is still an opportunity to prevent the planet from getting even hotter, a climate emergency is now likely unavoidable.
Climate Change is Everyone’s Business
The urgency to restrain greenhouse gas emissions, including reaching net zero emissions by 2050, has become palpable and not just by governments. Businesses are also feeling the heat of climate change, facing questions from customers, employees, and stakeholders – especially investors – on how they plan to tackle the issue. In fact, recent research shows that not only have environmental, social and governance (ESG) issues moved up the board priority list, but environmental factors are now registering as the highest priority. Furthermore, most business leaders are preparing for climate-change related activist intervention, so their companies don’t end up with a situation one multinational faced, where activist shareholders suggested and secured several independent climate-focused candidates on the company’s board, despite management resistance.
To be sure, some business groups and governments are already tackling the challenge. For example, the European Union’s Sustainable Finance Disclosure Regulation (SFDR) requires European Union financial market financial advisers and participants to disclose sustainability-related information, while the Taskforce on Climate-Related Financial Disclosures (TCFD), a group of G-20 business leaders, has recommended a requirement that climate change’s impact on an organization's businesses, strategy, and financial planning be disclosed by 2025. Later this year, the Securities and Exchange Commission is expected to announce its own ESG disclosure rules for listed companies.
Post-Transaction Value Destruction
The regulations and recommendations are meant to transform how companies invest and integrate ESG risk factors into their activities, but also help provide some transparency on how organizations are deploying capital into sustainable activities. Obviously, the rules could also affect share prices and any potential transaction activity, such as a merger or acquisition (M&A), that a company makes. Indeed, climate-change concerns are viewed as the greatest emerging risk to completing M&A in the next 12 months, ahead of concerns over COVID-19, which has been a consistent concern for businesses since the pandemic hit in March 2020, inflation, regulation, and geopolitics.
That’s why evaluating and assessing the risks of acquisitions will require greater care and even deeper diligence. Otherwise, companies could end up purchasing an asset with increased ESG exposure and face significant post-transaction value destruction. Increased diligence levels are already showing up on Datasite’s platform, which facilitates about 12,000 deals a year. Thanks to soaring deal volumes, new diligence projects are up 40% year-over-year through September 2021, and the amount of content stored in those projects is up over 50% year-over-year, in part due to increased diligence focus around content areas like ESG.
As investors continue to see that companies with higher ESG scores perform better than their peers, this will also be of growing importance to an organization’s ability to attract and retain talent. Additional research shows that 82% of dealmakers say a company's ESG policies, including those related to climate change, are important when evaluating a job opportunity. Ultimately, more people want to work for employers that are inclusive, diverse, sustainable, and purpose-driven. At a time of the Great Resignation, this is especially relevant to talent-retention strategies.
Stepping Up to the Plate
To meet the moment, businesses may need to reposition services, products, and investment strategies, as well as reporting methods. They’ll also need to closely evaluate disclosure requirements and how they conduct their due diligence. Here, technology can help. While there are no standard operating procedures to follow when assessing climate-change diligence risks, there are tools within diligence data rooms that include robust optical character recognition (OCR) search functionality that help dealmakers and advisers hunt for key words, such as ESG, climate change, emissions, and so on. And with search alerts, users need to search only once for a term and set an alert for when any new documents with that term are added to the data room. This way, no ESG-related documents or assets can be missed.
Dealmakers and advisers should also add deal-specific ESG risks to due diligence checklists, routinely. Being able to fully understand how climate change impacts specific industries and target companies (and their valuations) will help ensure a smoother, more comprehensive diligence process and fewer surprises for everyone involved in the process.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.