Environmental, Social, and Governance (ESG) compliance has become a dominant factor in the business world in recent years – and that includes M&A.
With the evidence of climate change becoming worryingly obvious, these days stakeholders – including investors, consumers, and regulatory bodies – are very conscious of sustainability and ethical practices. As a result, ESG compliance is no longer a minor concern but a key consideration for buyers assessing potential acquisition targets.
In this in-depth guide, we’ll be exploring the significance of ESG compliance in UK acquisitions and how it’s shaping the future of M&A investment. We’ll also offer tips for both buyers and sellers on how they can ensure ESG compliance before and after an acquisition.
What does ESG compliance entail?
ESG compliance involves adhering to a set of environmental, social, and governance standards. These criteria have been carefully designed to promote sustainable business operations, ethical practices, and effective governance.
The environmental element
The environmental element of ESG focuses on the ways in which a company is working to minimise its ecological footprint. For example, what steps is it taking to reduce its carbon emissions, manage its waste responsibly, and use its resources more efficiently?
The social aspect
As the name suggests, the social aspect of ESG examines how a company manages relationships with its employees, suppliers, customers, and even its local community.
To improve their ESG profile, businesses must strive to ensure fair labour practices, promote diversity and inclusion, and invest in community development. Corporate social responsibility (also known as CSR) is crucial for businesses who want to maintain a positive brand reputation and attract investors.
Ethical governance
The governance standards of ESG relate to the way in which a company is managed – for example, its leadership structure, shareholder rights, and transparency. In short, a business that is governed in an ethical and transparent way is more likely to have a positive ESG profile.
How ESG is impacting acquisitions
As we mentioned above, investors and companies are increasingly focusing on ESG criteria when they assess potential targets – with companies that have strong ESG compliance unsurprisingly being perceived as lower-risk investments.
That’s because these businesses are viewed as being more capable of meeting regulatory requirements, avoiding any damaging environmental or social legal issues, and maintaining a loyal customer base long-term. They’re also more likely to achieve sustainable growth in coming years, providing a solid ROI for the acquirer.
So, if you are a business actively seeking investment, what can you do to boost your ESG compliance and become more attractive to potential acquirers? Here are some top tips.
1. Assess your current ESG standards
The first thing you should do is conduct a self-assessment of your company’s current practices to highlight any areas that could be improved upon.
For example, perhaps there are more steps you could take to further reduce your carbon emissions and speed up your journey to being a net zero business. This will be a legal requirement from 2050, so becoming carbon neutral should be a prime focus for your company. On the other hand, perhaps you could do more for your local community to strengthen your CSR profile and boost your reputation, such as donating products to a local charity or investing in local infrastructure.
Evaluating and highlighting areas of ESG compliance that your business is struggling with allows you to come up with tailored strategies that will help you address those shortcomings. This, in turn, will make your business more compliant – and, therefore, more attractive to investors!
2. Set clear targets
Once your assessment has been completed and you know which areas of ESG you need to work on, you should set targets for each of those areas, to be achieved in the coming months and years.
Having clear, focused goals to work toward will help you build up a comprehensive ESG strategy. You can then demonstrate your objectives, and your progress so far, to any interested acquirers.
3. Be transparent
It’s vitally important to be upfront and transparent about your ESG accomplishments (and failings) by keeping detailed records of the relevant data.
After all, if an acquirer decides to proceed with a deal and discovers during due diligence that you’re not as compliant as you purported to be, the whole acquisition could fall through. Would-be investors will be on the lookout for evidence of greenwashing and other ESG failings.
Having tangible proof of your ESG accomplishments to date will help to make your business a more appealing prospect. Besides which, transparency is one of the cornerstones of ESG!
Advice for acquirers
If you are keen to buy an existing business, it’s important that you evaluate your targets’ ESG profiles before you consider a purchase. Why? Because buying a business that is failing to adhere to ESG criteria could put you at risk of serious legal, financial and reputational problems down the line.
To prevent these kinds of pitfalls, here are some top tips for what you should look for when you are considering acquisition options.
1. Don’t rush your due diligence
If you want to make sure that you purchase a business that abides by ESG criteria then you need to do your homework. In other words, you need to embark on some rigorous due diligence to make sure your potential target has the facts and figures to back up any environmental or CSR claims they make.
The uncomfortable truth is that some companies may try and hide less-than-satisfactory data or practices and if you try and rush a deal through, you could find yourself taking on their liabilities.
By taking time to thoroughly check every aspect of your target’s operations – from their waste management to whether they ensure fair working practices – you can make a confident decision about whether you wish to proceed with the acquisition.
2. Consider the supply chain
A crucial factor to consider as you approach the acquisition of a particular business is that, if you buy it, you are also buying into its supply chain. As a result, you will need to pay attention to the ESG profiles of the companies within that chain as well as your acquisition target.
Just because the business you want to buy abides by ESG criteria, it doesn’t necessarily mean that the companies in its supply chain are squeaky clean – particularly if that supply chain is lengthy and complex, potentially spanning multiple countries.
It’s worth keeping in mind that, if any serious issues are discovered with one of the businesses supplying your new acquisition, your company’s reputation – and value – could plummet.
How a business broker can help
If you are feeling a little daunted at the prospect of finding an acquisition target that meets your ESG expectations, don’t worry. You can engage the services of an experienced and reliable business broker to take on the task and sift through potential targets to find the companies with the best ESG profiles.
Not only that, a tried-and-trusted business broker can also handle every step of the acquisition process on your behalf, including that all-important due diligence phase.
With their help, you can proceed with your acquisition with greater confidence and find the ideal targets that share your long-term ESG goals and objectives.
Harris Acquire, at your service
Here at Harris Acquire, we have a thorough understanding of the importance of synergy between two companies. We also understand how important it is to find a buyer or a seller with a strong ESG profile.
If you need any help with the M&A process, we would be happy to help you find the ideal business to acquire. Not only that, but we will oversee the whole transaction on your behalf, removing all any stress from your shoulders and leaving you free to focus on maximising the value of your deal.
Keen to find out more about how we can help? Don’t hesitate to get in touch, by giving us a ring on 01926 757100 or sending an email to Hello@harrisacquire.com. We look forward to assisting you meet your ESG compliance objectives with your next acquisition.
