Mergers and Acquisitions: ESG Due Diligence requires legal expertise

Nowadays, a successful company must have a strategic approach to sustainability work, accounting for the special characteristics of the company’s business. In the coming years, sustainability will permeate the strategy, business practices and value chains of companies, which are required to increase their efforts to mitigate their adverse environmental and human rights impacts.

A failure in sustainable transition or in meeting the stakeholders’ and investors’ expectations can have long-term consequences for the company. This means that sustainability cannot be ignored in mergers and acquisitions either. ESG due diligence reviews have become an increasingly important and critical part of M&A in recent years.

Sustainability is deemed to be one of the factors contributing to the success of modern business operations and ensuring the continuity of operations, and it is therefore strongly linked to the company’s value creation. In its most concrete form, ESG work means that practical tasks are carried out in accordance with the company’s policies and instructions. ESG due diligence reviews (ESGDD) dive into the practical aspects and maturity level of the company’s sustainability work by assessing ESG-related risks and possibilities.

There are different options for carrying out an ESGDD review. At the same time as the European regulatory framework of corporate sustainability is taking shape at a rapid pace, ESGDD reviews are becoming an essential part of the entire legal due diligence.

ESGDD requires legal expertise

In the everyday life of companies, sustainability is strongly connected with compliance, and in M&A situations the parties seek a legal point of view for handling compliance matters. The observations of a ESG due diligence review may become significant for the completion of an M&A transaction and for its terms and conditions, which means that a due diligence review increasingly adds elements to the purchase agreement and M&A insurances.

The risks observed in ESGDD are often legal questions that are related to various areas, such as environmental law, occupational safety or employment law. As the observations are associated with great financial and legal risks, going through them requires considerations by specialists who are familiar with the field and have deep legal expertise. For example, questions related to environmental permits and environmental liability require the perspective of an experienced environmental lawyer.

ESG due diligence and legal due diligence work have clear synergies because both use the same material in many respects. Even though sustainability reporting in accordance with the new directive ensures that companies report their sustainability using figures assured by auditors, ESGDD is much more than just assuring figures to be reported as it delves deeper into the company’s practical sustainability work and risk management.

Successful ESGDD supports the company’s strategy

A word of advice: even an experienced compliance expert carrying out ESG due diligence work must understand the practical sustainability work. In an ideal situation, a high-quality due diligence review strengthens understanding of ESG questions as part of other compliance work. Companies benefit most from DD that finds common points with the company’s sustainability targets and its strategy because, in addition to the usual deal breakers, a due diligence review provides information on what kinds of investments the object of purchase will require in the coming years. That is why companies should choose an ESGDD partner with extensive knowledge of M&A, sustainability as well as compliance work.