Questions concerning the environmental sustainability of acquisition targets are increasingly important in M&A transactions. Buyers are scrutinizing everything from an acquisition target's projected greenhouse gas (GHG) emissions to ways in which a deal may impact their own climate mitigation strategies. In this regard, reliable and verifiable reporting of climate performance is set to become an essential tool for improving transparency.

Meanwhile, the government is increasingly focused on efforts to mandate extensive environmental, social and governance (ESG) disclosure. For example, in March 2022, the Securities and Exchange Commission (SEC) proposed rules¹ that would require public companies to disclose information about their direct GHG emissions and certain indirect emissions from their supply chains and customers. Another proposed regulatory regime in the works is the Federal Supplier Climate Risks and Resilience Rule, announced by the Biden administration in November 2022. This proposed rule would require large federal government contractors to "disclose their greenhouse gas emissions and climate-related financial risks and set science-based emissions reduction targets."

Supply chain risk is another area of increasing scrutiny in M&A due diligence, and the government is once again placing this under the ESG spotlight. Buyers often assess reputational and litigation risks associated with potential human rights concerns in the supply chains of acquisition targets. For example, the supply of critical minerals will need to expand to support growing renewable energy production in the US. To mitigate supply chain risk, US regulations and laws, including the Inflation Reduction Act that was signed into law in August 2022, encourage investment in the domestic production of these materials and reliance on "friendly" foreign trade partners, with processes in place to avoid human rights abuses. For the time being, however, many renewables developers are heavily reliant on foreign sources of critical minerals, particularly China and the Democratic Republic of the Congo. Between the risk of enforcement under the Uyghur Forced Labor Prevention Act—signed into law in December 2021—and the potential for other regulatory scrutiny, these considerations can be important in M&A transactions and will become increasingly significant as the energy transition builds momentum and investment into renewable energy assets continues to rise.

Greenwashing claims

While climate reporting can be fundamental for M&A decision-making, a lack of defined standards and the marketing of ESG claims without support remain a concern. Allegations of greenwashing continue to run rife. In December, the House Committee on Oversight and Reform issued a follow-up memorandum to a report originally published in September 2022 entitled Investigation of Fossil Fuel Industry Disinformation.

The new memo focuses on inconsistencies between energy companies' public support for GHG emissions mitigation and internal statements indicating long-term commitments to fossil fuels. The Committee says that new internal documents show that energy companies' public support for carbon-capture technology and methane regulations are part of a larger effort to entrench fossil fuel use, specifically natural gas, rather than pursue emissions reductions.

While the Committee is unlikely to release significant additional documents or conduct further investigations into alleged greenwashing in the next two years, the attention of US lawmakers on these alleged misrepresentations means it is important for businesses to substantiate their environmental claims with objective data and analysis to mitigate greenwashing risk. The Federal Trade Commission recently began considering updates to federal guidance, commonly referred to as Green Guides, designed to prevent companies from making deceptive environmental benefit claims, as consumers increasingly demand environmentally friendly products.

These Green Guides have not been updated since 2012, before the current spotlight on ESG-focused investment. Clear guidance from the government on how companies can accurately describe the environmental benefits of their products and carbon credits generated from activities that sustainably manage natural ecosystems would be a helpful area for the Green Guides to update. The deadline for public feedback is February 21, 2023. This will be one of several forthcoming steps aimed at improving ESG transparency among companies across the country, with more expected to come.

_{1 https://www.whitecase.com/insight-alert/sec-proposes-long-awaited-climate-change-disclosure-rules}

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