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 Related to ESG Investing Likely to Increase in 2022

The U.S. Securities and Exchange Commission (SEC) created a Climate and Environmental, Social, and Governance (ESG) Task Force (ESG Task Force) last year within the Division of Enforcement, the purpose of which is to identify and investigate ESG-related violations. During 2021, demand for ESG investment opportunities skyrocketed and ESG-related concerns captivated boardrooms across the nation all while the regulatory scheme has stagnated, creating fertile ground for enforcement activity in the climate and ESG-investing space.

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