The Visionaries – ESG’s impact and M&A resilience

Categories:

Environmental, social and governance (“ESG”) issues detected during due diligence were once considered risks which could lead to specific indemnities, remediation measures or even a purchase price decrease. Now, they are recognised as one of the most substantial opportunities for value creation and transformative industry shifts in our era. With sustainability and ESG considerations becoming more influential, Belgian companies are facing greater pressure to align their operations with these principles. This marks a clear shift towards integrating sustainability values into the core of business strategies and decisionmaking processes. Attaining ESG goals can be achieved through M&A activities to further increase customer penetration and accelerate sustainable growth across the value chain.

However, companies also falsely portray ESG commitments. “Greenwashing” includes publishing misleading information about practices or false claims about products. Companies could also associate themselves with environmental issues without taking substantive action, or while continuing environmentally harmful practices.

The EU Directive 2022/2464 on Corporate Sustainability Reporting (the “CSRD”) that came into force on January 5, 2023 represents a significant step in modernising and fortifying environmental reporting regulations. The CSRD aims to promote genuine environmental accountability. The CSRD enhances access to information critical for assessing financial risks and opportunities of sustainability issues, particularly climate change. These rules, effective from the 2024 financial year onwards, underscore the EU’s commitment to sustainability, and align with international standardisation initiatives. Before this directive takes effect in Belgium, it needs to be transposed into Belgian law (by 6 July 2024 at the latest).

According to the 2022 M&A monitor report conducted by Vlerick Business School, only 35% of strategic acquisitions consider ESG. Private equity fares slightly better at 49%, but only 38% of surveyed Belgian private equity investors have a formal ESG investment policy. The implementation of the CSRD may shift companies’ attitudes towards ESG in M&A, with one participant noting that private equity firms are still assessing how to integrate ESG into investments. Although the following edition of the 2023 M&A monitor report of Vlerick Business School did not provide any numbers on this evolving trend, it does indicate a surge in M&A deals targeting firms with robust ESG credentials. Companies that can credibly demonstrate those tend to attract substantial market interest and secure higher valuations from acquirers aiming to enhance their own ESG credentials. As a result, provisions relating to ESG commitments feature more prominently in the companies’ governance documentation, including shareholders’ agreements.

Following an introductory analysis of the opportunities and challenges associated with achieving ESG goals, we explore how the CSRD can help strengthen companies’ resilience in the context of M&A.

Read more in our brand-new publication, The Visionaries