The ESG Due Diligence in a M&A transaction

The ESG due diligence phase in an M&A transaction become more and more relevant: assessing a company’s ESG performance and identifying possible risks are a necessary step for well informates strategic investment decisions.

Investment fund and lending banks are very attentive to ESG issues and often condition the investment or loan on careful and complete ESG due diligence. As a result, demonstrating that the company is compliant with Environmental or  Administrative Laws is no more sufficient.

ESG factors have a leading role in sustainability dealmarketing: there are risks associated – as an example – with ESG issues such as reputational damage in the event of non compliance. ESG due diligence helps investors and target companies assess the nature of a deal and its potential risks.

With ESG DD investors and banks will be able to understand the risk and exposure profile of the target company and the associated ESG risks. In this way it’s possible to indentify the possible red flags relating to the issues that emerged during the DD and also find the measures to improve ESG company’s profile in order to reduce the risk. Though among the three ESG factor, environment seems to be the more relevant, also social and governance aspects are taking more and more importance.

A ESG DD gives investors and bank numerous advantanges in terms of protection mechanism to be introduced in the preliminary contract such as warranies, special indemnity and suspension clauses and impacts also on the price or terms for payment. Furthermore, the development of an ESG policy will facilitate the exit policies of the target companies that have implemented it: they will be put on the market with less risk and become more attractive.

Avv. Giulia Perri