CAPE TOWN - Environmental, social and governance (ESG) matters rapidly rose up the global corporate agenda in 2019 and have become mainstream in all areas of corporate activity, including in mergers and acquisitions (M&A).
A new report by international law firm Herbert Smith Freehills titled M&A in 2020 also found that many governments were tightening controls on foreign direct investment (FDI).
The report said legislations tightening FDI regimes were expected to come into effect in the US, Japan, European Union and the UK, in 2020, as governments try to preserve their country’s position in global value chains, as well as protect their own, widening definitions of national security.
Last year also saw a return, both through increase volume and in size of transactions, of private equity and infrastructure funds teaming up in consortium or club deals, to boost their financial firepower, while sharing potential upside and risks.
There was also a return of financial buyers to the public arena, this after several years where M&A in this type of transaction had reduced steadily.
Increased awareness of climate change, unease with globalisation, and pressure from activists and consumers are some of the other ESG risk and reputational issues that dealmakers need to be mindful of, in any buy or sell situation.
“ESG matters demand heightened attention on M&A transactions, across all sectors. Thorough ESG due diligence and post-transaction risk management should now be part of the M&A practitioner’s toolkit,” law firm Herbert Smith Freehills' head of Global M&A, Gavin Davies, said in a statement.
For sellers, a trend towards increased due diligence by sellers, and sometimes in post-completion undertakings is also manifesting, because sellers that have embraced ESG no longer want just “a good price” and “clean break”, they also want to assure themselves that the asset will continue to be managed responsibly, post completion of the sale.
A number of deals were disrupted in 2019, and disruptions can include challenges from shareholders, from competing buyers, from interventionist governments and from antitrust regulators.
“The market continues to adopt ever-greater care around deal execution against the ‘new normal’ backdrop of potential deal disruption,” said Herbert Smith Freehills M&A partner Caroline Rae.