Merger due diligence considerations amid rising ESG focus

February 11, 2021
buildings and green

The mergers and acquisitions (M&A) space continues to march on despite the economic challenges presented by the pandemic. Merging firms, however, have a new set of challenges as the corporate landscape continues to shift from its traditional focus on immediate shareholder value to a more holistic paradigm of “stakeholder capitalism.” Failing to account for environmental, social, and governance (ESG) factors, especially in an M&A context, can have significant repercussions for all parties.

Large classes of consumers are concerned about the environmental impact and ethical principles of organizations from which they purchase goods and services. Like shareholder activists, consumers are leveraging their collective influence, which can have a determinative impact on profitability, in what some are now deeming “M&A activism.”

Conducting investigative due diligence to understand who or what is behind an acquisition target is not always standard practice. Traditional legal due diligence does not always account for certain risk factors, such as the political exposure of transactional counterparties. Whether a company’s owners hold political influence or if a company is considered a state-owned enterprise can impact the success of a potential transaction.

In this article published in Law360, the authors discuss the changing nature of due diligence and how ESG is an important aspect of conducting business—especially M&A—and indicative of an active consumer class. The authors provide examples of how a better understanding of operations and material supply chain partners can help identify potential labor and human rights issues.