ESG a Key Risk Issue in Disputes Related to Mergers and Acquisitions: Survey

As ESG gets adopted more, disputes related to the ideology are also on the rise. (Deemerwha Studio/Shutterstock)

Environmental, social, and governance (ESG) factors are playing a “more significant role” when it comes to mergers and acquisitions (M&A) disputes, according to a recent study by Berkeley Research Group (BKG) which surveyed a group of M&A lawyers and corporate finance professionals.

From the perspective of M&A lawyers, 6 percent believed that a lack of shared values related to ESG actions was what commonly led to disputes, according to BKG’s third annual M&A Disputes Report. From the corporate finance perspective, this was at 16 percent.

When asked whether the current lack of established requirements and metrics around ESG together with regulators’ focus on ESG will raise the likelihood of M&A disputes over the next 12 months, 35 percent agreed while 43 percent “strongly” agreed. Only 3 percent disagreed and an additional 3 percent “strongly” disagreed.

Experts believe ESG would factor “strongly” in disputes within the energy sector. While 86 percent of respondents agreed that deal activity in the energy sectors will be driven by ESG factors, 78 percent believe disputes will be triggered by a lack of metrics.

“The legislative landscape is hardening around disclosures and targets. As a consequence, I think you will see more clauses in contracts to deal with this,” said law firm Quinn Emanuel’s Hughes-Jennett. “Inevitably, you will then see a rise in ESG disputes.”

The report’s finding is a clear departure from earlier surveys where ESG was almost insignificant. In the United Kingdom and the European Union, 31 percent of respondents cited increasing regulations as being the main factor of disagreement between the parties involved in M&A.

The EU and the UK have been enacting stricter rules on issues like ESG, data privacy, and antitrust.

Break Up of Deals, ESG Downgrades

In an interview with Bloomberg, Andrew Webb, a managing director at BKG, said that there are likely to be “more undisclosed issues” that need to be worked through in due diligence. Deals do not fall apart because of ESG concerns, he insisted.

“My experience has been that the deal falls apart because unpicking the ESG causes the trust to evaporate between buyer and seller,” Webb said. In general, the issue is “a lack of fulsome disclosure that causes the problem during the negotiations.”

Last year, the total transaction volume of M&A deals was $5.9 trillion, propped up by easy access to capital and strong stock markets. But as liquidity is now becoming a major issue, the outlook for M&A deals has dampened.

Meanwhile, ESG investments are also facing intense scrutiny after a spate of downgrades. In Europe, for example, top asset managers have downgraded tens of billions of dollars’ worth of ESG funds.

Firms such as Invesco, Amundi, NN Investment Partners, BlackRock, Deka, Berman, and Robeco have decided to reclassify their Article 9 funds to Article 8. Funds tagged as Article 9 have the highest sustainability designation in the sustainable finance disclosure regulation in Europe.