In the dynamic world of mergers and acquisitions, there is an increasing focus on sustainability. ESG (environmental, social and governance) criteria, driven in part by regulations in this area, are playing an increasingly important role in the decision-making process.
For this reason, Baker Tilly has expanded its transaction services to include ESG due diligence. This new service is designed specifically for SMEs that are striving to conduct transactions that are not only financially, but also socially and environmentally responsible.
What is ESG?
For those who don't already know, ESG stands for Environmental, Social, and Governance. However, the use of the term ESG varies worldwide. For example, in the U.S. it is mainly used in the context of ratings for exchange traded funds, while within the EU it is more about regulation. But to keep it simple: in essence, ESG is nothing but a framework that helps businesses assess and manage risk and opportunities related to non-financial (such as ethical, environmental and social) factors.
Increasing importance of ESG
That ESG is increasingly important in M&A is also highlighted in our Global Deal Makers report. This report shows that a significant majority of M&A specialists and investors are now considering ESG aspects during due diligence processes. A striking 83% of respondents said they conduct some form of ESG DD on potential targets, and 60% say they have withdrawn from a deal on occasion due to disappointing ESG performance. This trend underscores the growing importance of ESG factors in both strategic and financial decision-making.
In particular, we see increasing interest among private equity parties. Under the European SFDR regulation, private equity funds are obliged to report on their sustainability ambitions. Due to the trend of pension funds towards sustainable investment policies, we also see an increase in so-called 'Article 8' or 'Article 9' funds. These are funds with more specific sustainability targets and reporting requirements.
ESG due diligence
Most ESG due diligence services currently on the market are focused on multinationals and are more similar in scope to a full ESG audit. Also, the questions being asked do not match the business operations in SMEs. Transactions within SMEs require a more pragmatic approach.
For this reason, we have developed an ESG due diligence approach for SMEs, focused on the assessment of material ESG risks within an SME transaction context. Founded on ISO 27000 and the Responsible Business Alliance, the method begins the assessment by identifying potential ESG risk areas, taking into account a business's size and operations. This is followed by a more extensive interview with the target's management.
The result is a red flag analysis that highlights key risks and indicates how the target or acquired party(ies) could mitigate these risks.
In conclusion
In addition to our financial, tax, HR and legal due diligence capabilities, Baker Tilly Corporate Finance now offers ESG due diligence. We believe that as ESG becomes increasingly important, it will play a crucial role in our transaction services offering.
