ESG in M&A: From Afterthought to Central Focus

The investment community now views ESG measurement as a core component of effective corporate strategy, Three things to keep in mind for future deal-making.

Three letters have come to dominate the financial communications landscape: ESG. The discussion of environmental, social and governance (ESG) policies and imperatives pervades corporate life. It is reflective of the sweeping change across the corporate world, where investors no longer simply evaluate balance sheets and financial projections, but want to understand the more complex, nuanced factors that influence long-term value creation.

However, while ESG considerations have emerged as a clear priority across investor communications,  from quarterly reporting and analyst days to the production of annual ESG reports, focus on this important topic has been conspicuously absent from deal announcements.

We believe that will change—and rapidly. Investors increasingly expect companies to live up to ESG commitments in every aspect of their business. When pursuing a transformative deal or adding assets to impact strategy, investors want to understand how the move creates value and how that value is preserved and/or enhanced long-term through ESG initiatives. The investment community now views ESG measurement as a core component of effective corporate strategy, and as such the topic deserves significant representation in deal communications to underscore the broader investment story behind the transaction.

The traditional transaction announcement features only a passing mention of ESG, if at all. For the most part, an acknowledgement of “shared values” is intended to capture the ESG-like priorities for the combined company. This approach is often complemented by certain high-level commitments to maintaining headquarters, creating broader career opportunities or upholding a belief in environmental protection.

Simply indicating an overall commitment to employee growth and high standards for sustainability inadequately addresses an issue of such importance to shareholders. Going forward, it is essential that transacting parties more forcefully acknowledge how ESG considerations impacted the deal process while highlighting the new company’s ESG expectations and priorities on Day One.

Actions (or inaction) related to ESG priorities in a deal announcement can set the stage for future challenges, such as employee activism and approval of director nominees. In certain industries, where the attractiveness of investing in the new company is inextricably linked to the company’s vision on ESG issues, expectations are even higher. As money continues to pour into funds with a mandate of investing in responsible companies, overlooking communication around ESG in a deal announcement could threaten shareholder value.

Given the heightened focus on ESG globally, when announcing a transaction, here is what companies need to keep in mind:

• Outline how ESG factored into the deal process. The reality is that ESG considerations can factor into the deal process—from target selection, risk identification, securing financing and preparing for integration. Effective communications must bring to life the robust efforts “behind-the-scenes” to tell a more complete story that showcases how and why ESG was central to the value creation opportunity of the deal. It is likely that one of the merging parties has established a stronger foundation in enacting meaningful policy and reporting. Emphasize how this leadership presents an opportunity to bolster the combined company’s go-forward commitments.

• Affirm new targets or disclose new goals. Although the due diligence process may not provide enough insight to allow executive teams to make groundbreaking commitments (ex. disclosure related to concrete carbon emissions goals, fair labor practices or clear diversity objectives), it is critical that companies at minimum communicate enhancements to ESG disclosure practices in line with SASB and GRI standards. In essence, the parties must emphasize that while they may not have every detail about how the new company will address critical ESG issues, tracking progress and improving in this area will be central to the overall business strategy going forward. For companies that lack a meaningful ESG program, consider positioning the deal as a framework from which to build a best-in-class reporting structure.

• Reinforce how human capital management (HCM) processes are critical to a successful integration. While each business combination is unique, the success of every transaction is tied to thoughtful employee engagement, including ensuring teams are motivated to collaborate through integration. At the same time, redundancies are often inevitable, and potential reductions in the workforce can elevate human capital management as the most prominent ESG focus in M&A. Communicators should carefully review public human capital management disclosures—from corporate culture to diversity and pay equity reports—to integrate these values and goals into filings and internal announcements throughout the transaction process.

Pat Tucker is Managing Director, Head of M&A and Activism for Abernathy MacGregor. He frequently advises public and private companies on all aspects of M&A such as interloping bidders, complex structures, antitrust review, cross-border and foreign ownership review challenges, and special committees. Jake Yanulis is Senior Vice President for Abernathy MacGregor and advises clients on financial public relations, investor relations and strategic communications across a broad range of industries.