ESG & Merger Due Diligence
The corporate landscape continues to shift from its traditional focus on immediate shareholder value to a system in which corporations are oriented to serve the interests of all their stakeholders. Among the key stakeholders are customers, suppliers, employees, shareholders and local communities. Under this system, a company’s purpose is to create long-term value and not to maximize profits and enhance shareholder value at the cost of other stakeholder groups.
Failing to account for environmental, social, and governance (ESG) factors, especially in an M&A context, can have significant repercussions for all parties. Many people are concerned about the environmental impact and ethical principles of organizations from which they purchase goods and services. Just like shareholder activists, consumers are leveraging their collective influence, which can have a determinative impact on profitability.
Knowing that that traditional legal due diligence does not always account for certain risk factors, such as the political exposure of transactional counterparties, whether a company’s owners hold political influence or if a company is considered a state-owned enterprise, more and more companies conduct investigative due diligence, to understand who or what is behind an acquisition target.
SEC: Enforcement Task Force Focused on Climate and ESG Issues
The U.S. Securities and Exchange Commission (SEC) launched the Climate and ESG Task Force within the Division of Enforcement to develop initiatives to proactively identify ESG-related misconduct consistent with increased investor reliance on climate and ESG-related disclosure and investment.
The Climate and ESG Task Force is coordinating the effective use of Division resources, including through the use of sophisticated data analysis to mine and assess information across registrants, to identify potential violations including material gaps or misstatements in issuers’ disclosure of climate risks under existing rules, and disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.
Examples of Enforcement Actions Related to ESG Issues or Statements
- Adviser charged for failing to follow its policies and procedures involving ESG investments / Goldman Sachs Asset Management (2022)
- International mining company charged with misleading investors / Compass Minerals International (2022)
- Health insurance distributor and former CEO charged with making false statements to investors / Health Insurance Innovations (2022)
- Investment adviser charged for misstatements and omissions concerning ESG considerations / BNY Mellon (2022)
- Brazilian mining company charged with misleading investors / Vale S.A. (2022)
- Robo-adviser charged with misleading clients / Wahed Advisers (2022)
- Fraud involving alternative fuel vehicles /Nikola (2021)
- Sham environmentally-friendly bottling company / ECO Manufacturing (2021)
- Auto company made misleading statements regarding emissions / Fiat/Chrysler (2020)
- Offering fraud re: water desalination process / Bounty of the Ocean (2020)
- EB-5 scheme involving environmentally friendly agriculture and cleaning products
- production facility / PDC Capital (2018)
- Sham investment in recycled building panel company / EnviroBoard (2018)
- EB-5 and offering scheme involving recycling process / Green Box (2017)
- Pump-and-dump scheme involving revolutionizing O&G production / Chimera Energy (2014)
- Oil company charged with fraud during Deepwater Horizon spill / BP (2012)
- Mutual fund manager violated socially responsible investing restrictions / Pax World Management (2008)
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