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With sustainability becoming the buzzword these days, how can one incorporate this subject during the DD process?
Reading annual reports of various blue-chip companies, there are many ways that due diligence could be affected by this new focus on sustainability. One, we can consider it when considering senior management compensation. Companies such as Coca Cola and PepsiCo have all included ESG factors and milestones as one of the determinants to gauge compensation and bonus packages, and DD on such companies would thus follow in considering these factors. Additionally, ESG and sustainability factors would be important in environmental DD and legal DD, particularly if the businesses are huge polluters/have huge carbon footprints like oil/gas firms. Carbon pricing and ITS could also be included in costs and financial reports, as well as in compliance, which are also part of the DD process.
Hello RongFang, indeed ESG has become increasingly important and large companies started to pay more attention when considering M&A. For instance, when my company intends to buy some other company, we assess how the target generally deals with ESG, e.g. how their product portfolio can contribute to our from ESG perspective, whether the target product design reflects mandatory ESG requirements, whether target production assembly is sustainable, what is the portion of male/female in the management etc. In fact, this first assessment should be done even at the early stage of exchange with the target, before entering into deep DD, to see whether both companies “match”.
@Lucia, Thank you for your insightful input.
Very helpful and insightful points. I am looking at the feasibility of undertaking an ESG DD at the moment. Thank you
The ESG strategy of a company is very important nowadays. So, prior to acquire a company, I would say that some companies are looking at which benefits they can have using the ESG or/and reputation of the target.
I have seen sustainability worked into the Strategic Plan for some smaller to mid-sized organizations in the healthcare space. This largely involves the disposal of materials, use of technology over paper, and making small steps toward being environmentally conscious.
We can review the materiality assessments of companies in relation to their sustainability efforts and compare it against the peers to see if they are in line or beyond their peers. We should look at different ways we can measure sustainability effort be it via quantitative measures or qualitative measures as valuation in sustainability is difficult. Moreover, verifying the efforts may be quite tricky e.g. carbon emissions.
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