Dealmakers are placing more emphasis on sustainability in the context of their investment practices. This is occurring despite a lack of US federal regulation on companies' sustainability reporting.
For decades, those who acquire, sell, finance or operate facilities have considered how environmental issues can impact their businesses. However, the evaluation of sustainability in the context of an M&A transaction differs from how environmental issues have historically been considered in deals.
A sustainability assessment not only looks at tangible and quantifiable risks, such as subsurface contamination or compliance with laws related to air and water pollution. Instead, it also goes further and looks at harder-to-quantify risks and opportunities, such as whether a business involved in an M&A deal is managing the environmental impacts of its operations and products to both achieve compliance with laws and deliver value, and how climate change will affect a business due to extreme weather events, water scarcity, or vulnerability of the supply chain.
Buyers and sellers should be aware of the range of Environmental, Social and Governance (ESG) reporting regimes that can guide the external presentation of sustainability risks and opportunities in the context of a deal. The Sustainability Accounting Standards Board (SASB) and Task Force on Climate-related Financial Disclosures (TCFD) are prominent regimes, particularly in light of BlackRock's recent letter to portfolio companies that focused on the importance of climate change and sustainability in BlackRock's investments. It asked companies in which it invests to provide sustainability disclosure in line with SASB guidelines, as well as climate-related disclosure in line with TCFD's recommendations.
The evaluation of sustainability in the context of an M&A transaction differs from how environmental issues have historically been considered in deals
Other voluntary reporting and sustainability evaluation frameworks include the Global Reporting Initiative Standards and Guide on Climate Change for Private Equity Investors. There are also third-party raters like the Dow Jones Sustainability Index and Bloomberg ESG Data that analyze company sustainability data, provide ESG ratings, and summarize businesses' relevant risks and opportunities.
Buyers and sellers, in environmentally sensitive industries in particular, can also work with outside advisors to prepare sustainability reports for the purpose of an M&A transaction much like environmental engineers have been utilized for decades to prepare phase I reports to identify hazardous substances at properties involved in M&A transactions.
Despite the increased focus in the private sector on sustainability, the Securities and Exchange Commission (SEC) has avoided the topic since issuing guidance on climate-related risk disclosure in 2010. Nevertheless, information disclosed in voluntary sustainability reports must be accurate and consistent, as the SEC and other regulators may compare information voluntarily provided with information disclosed in SEC filings or other public documents. Going forward, public and private companies should consider whether a company's sustainability practices can be presented externally, or whether existing disclosure can be enhanced, in a manner that is consistent with what investors are looking for, considering sustainability as a means of improving a company's profile in the event of an M&A deal.
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