Environmental DD
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How much weight would an environmental DD carry in a deal where a Buyer is acquiring interest in a company in a jurisdiction with new or no Environmental laws or no commitment to the Paris Agreement?
I think some of that will depend on the sector of the target business and the size of the business and whether it is captured by some of the EU directives. Also, is the buyer doing a lot in the environmental space will also need to be considered. For a buyer that is, I would imagine that buying a business that is miles behind where the buyer is, would have some impact of value as they consider how to bring the target business in line with their environmental standards.
Even if the target company is located in a country with no or low environmental laws, an environmental DD is useful for the following reasons:
In the EU, the EU Taxonomy Regulation applies, which obliges companies to report the proportion of green activities (turnover, investments, opex) in their financial report as a percentage and in nominal values as from 2024 onwards. For groups of companies, this also includes the activities of all fully consolidated subsidiaries. If the activities of the target company are not EU taxonomy-eligible, this can reduce the proportion of green activities of the acquiring company and consequently have an impact on achieving their strategic ESG objectives and increase financing costs or capital costs.
Large companies are also obliged to audit the entire supply chain (eg. under the Supply Chain Act in Germany). Environmental violations by the target company must then be reported by the acquiring company.
Irrespective of this, depending on the size of the company and the economic sector involved, environmental violations can damage the company’s image and reputation and subsequently lead to financial risks (e.g. loss of sales, delisting of products, loss of customers, etc.).
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