A survey carried out by KPMG US has shown that 66% of survey participants from the Europe, the Middle East and Africa (EMA) region said that material findings from Environmental, Social and Governance Due Diligence (ESG-DD) had led to cancellations of deals, while 62% said that they had resulted in reductions in the purchasing price. These statistics emphasise the significant value which ESG due diligence can bring, and the risks of not doing it. Carrying out ESG DD makes the dealmaker far better informed as to the potential ESG risks and benefits of a planned transaction.
A well-developed and defined ESG (Environmental, Social and Governance) strategy is increasingly becoming a pre-requisite for a successful business and is no longer merely a “nice to have”. Regulation on ESG issues is strengthening in many parts of the world, and so is media attention to cases of non-compliance with ESG principles. Today, a company’s clients, employees and other stakeholders are much more likely to expect it to have strong ESG policies.
Private equity is an area where ESG is a particularly important consideration, because more and more Investors want to know that the funding they provide will be used in accordance with ESG principles. So there is a growing realisation among the management of Private Equity firms that they need to conduct detailed ESD Due Diligence (ESG DD) on their investments, and not just the traditional due diligences which they have carried out in the past.
An ESG due diligence will bring many benefits to a Private Equity firm. Not only will it provide safeguards against the reputational damage of investments in targets which do not respect ESG principles, but also can have a positive effect, because, conversely, if the Private Equity firm is seen to be ensuring that its targets respect ESG principles, it will be more likely to attract investors.
An ESG due diligence can have a number of effects on potential deals. If a major material issue is discovered, it might lead to the cancellation of the deal. Alternatively, a plan might be made with the target to tackle the problem and this might have an impact on the selling price. Moreover an ESG due diligence might also help the Private Equity investor to identify opportunity as well as risk, which might contribute to the attractiveness of the deal. The Private Equity investor will be in a much stronger position than if ESG due diligence had not been carried out.
The US survey reveals how important ESG is becoming in companies’ strategic planning. The survey covered debt providers to M&A transactions, corporate investors and financial investors. A total of 74% of respondents had ESG considerations currently on their M&A agenda, while 54% planned to work with an external provider to carry out ESG due diligence. The survey showed that an even higher proportion (82%) of M&A investors in Europe, the Middle East and Asia (EMA) have integrated ESG into their M&A agendas.
In Romania, ESG is still quite a new area. Nevertheless, it is growing in importance for companies and their stakeholders. For Private Equity companies, ESG DD will be especially beneficial, as their investments are coming more and more under scrutiny. An ESG due diligence is a detailed procedure with well defined steps which will help Private Equity companies not only to identify and mitigate risk, but also to see opportunity and hence potentially enhance their revenue.