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1、SUSTAINABILITY IN TRANSACTIONSCopyright March 2024 by the Association of Chartered Certified Accountants(ACCA)and Association of Chartered Certified Accountants and Chartered Accountants Australia and New Zealand(CA ANZ).All rights reserved.Used with permission of ACCA and CA ANZ.Contact for permiss

2、ion to reproduce,store or transmit,or to make other similar uses of this document.About ACCA We are ACCA(the Association of Chartered Certified Accountants),a globally recognised professional accountancy body providing qualifications and advancing standards in accountancy worldwide.Founded in 1904 t

3、o widen access to the accountancy profession,weve long championed inclusion and today proudly support a diverse community of over 247,000 members and 526,000 future members in 181 countries.Our forward-looking qualifications,continuous learning and insights are respected and valued by employers in e

4、very sector.They equip individuals with the business and finance expertise and ethical judgment to create,protect,and report the sustainable value delivered by organisations and economies.Guided by our purpose and values,our vision is to develop the accountancy profession the world needs.Partnering

5、with policymakers,standard setters,the donor community,educators and other accountancy bodies,were strengthening and building a profession that drives a sustainable future for all.Find out more at About Chartered Accountants Australia and New Zealand Chartered Accountants Australia and New Zealand(C

6、A ANZ)represents more than 136,000 financial professionals,supporting them to build value and make a difference to the businesses,organisations and communities in which they work and live.Around the world,Chartered Accountants are known for their integrity,financial skills,adaptability and the rigou

7、r of their professional education and training.Find out more at About this reportAddressing the issues of sustainability,including environmental,social and economic impacts of the transition to a net-zero economy,represents a key challenge for most organisations.Despite this,business activity contin

8、ues,with the investment and divestment cycle remaining another fundamental part of organisations activities.Corporate acquisition and disposal transactions,including those that are private equity(PE)funded,are a fundamental part of many economies.The interrelationship between these two areas of focu

9、s,mergers and acquisitions/divestment and sustainability-related issues,is the subject of this report.Using the insights of nearly 50 accountancy and finance professionals from across the world,many of whom are members of ACCA or CA ANZ,this report provides a context for this interrelationship betwe

10、en sustainability and these major corporate transactions.The report is not a detailed explanation of the transaction process;rather,it is intended to support chief financial officers(CFOs)and their teams in identifying appropriate sustainability-related considerations during the investment and dives

11、tment workflows.ForewordSustainability criteria are increasingly important considerations in investment and divestment processes.As organisations transform their operating models,often through or as a byproduct of merger and acquisition transactions(M&A),the application of a sustainability lens pres

12、ents opportunities and risks that cannot be ignored.Yet despite this,the application of a sustainability filter to transactions is by no means uniform across organisations,industries,and countries.This presents opportunities for accountancy and finance professionals who continue to upskill their sus

13、tainability knowledge as the accounting profession evolves.They are often at the heart of these transaction processes,including the due diligence phase,bringing specific expertise and an ethical lens that enables them to quantify risks,assess outcomes,and identify deal breakers.The completion,or oth

14、erwise,of a transaction is often influenced by this discovery process.Having the skills to place the transaction-related information in context is essential,regardless of whether the initial assessment relies upon the expertise of others.We encourage our members to draw on the expertise,learning res

15、ources,support,and networks provided by professional membership organisations including ACCA and Chartered Accountants ANZ,and standard setters and trade associations such as the IVSC,Invest Europe and IMAA.Helen Brand OBE chief executive,ACCAAinslie van Onselen Chief Executive Officer,CA ANZ4Conten

16、tsKey teminology 6Executive summary 8 Sustainability-related considerations in the transaction workflow 10 Sustainability-related considerations in the due diligence process 11 Top tips when considering sustainability-related issues in the transaction process 141.Do sustainability-related issues mat

17、ter in the transaction workflow?15 1.1 The sustainability-related context 15 1.1.1 The business context 15 1.1.2 The dimensions of sustainability 16 1.2 Does sustainability matter in the transaction cycle?18 1.2.1 The criticality 18 1.2.2 Four main factors 20 1.2.3 Geographic variations 21 1.2.4 Res

18、ponsible investment 21 1.2.5 Private equity-backed transactions 22 1.3 Impact on the transaction workflow 23 1.4 Role of due diligence 23 1.5 Regulatory and other challenges 25 1.6 Impact on valuations 26 1.7 Developing skills and knowledge 272.The acquirers perspective 28 2.1 Identifying the target

19、 28 2.1.1 Acquisition strategy and risk appetite 28 2.1.2 Investment committees 29 2.1.3 Target screening and acquisition planning 29 2.2 What assurance is sought?30 2.2.1 Valuation analysis and negotiations 30 2.2.2 Due diligence 30 2.3 Contracting 32 2.3.1 Purchase and sale contracts 32 2.3.2 Fina

20、ncing strategy for acquisition 32 2.4 Post-closing integration the first 100 days 333.Selling an organisation 34 3.1 The due diligence process 34 3.2 The data room 35 3.2.1 Preparing for the data room 35 3.2.2 Role of ESG ratings 35 3.2.3 Data collection 35 3.3 Implications for finance leaders 36Con

21、clusion 37Appendix Relevance of sustainability-related issues to other areas of due diligence 39Useful resources 41Acknowledgements 42References 435SUSTAINABILITY IN TRANSACTIONS|KEY TERMINOLOGYKey terminologyMergers and acquisitionsMergers and acquisitions(M&A)are business transactions in which the

22、 ownership of companies,business organisations,or their operating units is transferred to or consolidated with that of another company or business organisation.As an aspect of strategic management,M&A can allow enterprises to grow or downsize,or change the nature of their business or competitive pos

23、ition.A merger is the legal consolidation of two business entities into one,whereas an acquisition occurs when one entity takes ownership of another entitys share capital,equity interests or assets.Business combinations can also be classified as horizontal,vertical and conglomerate mergers(or acquis

24、itions).nA horizontal merger is between two competitors in the same industry.nA vertical merger occurs when two firms combine across the value chain,such as when a firm buys a former supplier(backward integration)or a former customer(forward integration).nA conglomerate merger occurs where there is

25、no strategic relatedness between an acquiring firm and its target.Divestment or divestiture is the reduction of some kind of asset for financial,ethical,or political objectives or sale of an existing business by a firm.A divestment is the opposite of an investment.TransactionThe term transaction is

26、used here to refer to the steps in undertaking either a merger or an acquisition.In the context of this report,the term is used to refer to the activity chain irrespective of the type of business combination involved.Due diligenceDue diligence is a process that involves risk and compliance checks,co

27、nducting an investigation,review or audit to verify facts and information about a particular subject.In simple terms,due diligence means doing your homework and acquiring the necessary knowledge before entering into any agreement or contract with another organisation.Third-party due diligenceThird-p

28、arty due diligence is the process of assessing and evaluating the risks associated with engaging or partnering with third-party entities such as suppliers,vendors,contractors,agents or business partners.A comprehensive investigation and analysis of the third-party due diligence process is conducted

29、to ensure that these third-party entities:ncomply with legal and regulatory requirements nadhere to ethical standards,and npose no significant risks to the acquiring organisation.6SUSTAINABILITY IN TRANSACTIONS|KEY TERMINOLOGYValuationThe assets of a business are pledged to two categories of stakeho

30、lders:equity owners and owners of the business outstanding debt.The core value of a business,which accrues to both categories of stakeholders,is called the enterprise value,whereas the value which accrues just to shareholders is the equity value(also called market capitalisation for publicly listed

31、companies).Enterprise Value reflects a capital structure neutral valuation and is frequently a preferred way of comparing value,as it is not affected by a companys,or managements,strategic decision on whether to fund the business either through debt,equity or a portion of both.Six common ways of tri

32、angulating the enterprise value of a business are:nasset valuation:the price paid is the value of the easily saleable parts;the main approaches to valuing these are book value and liquidation value nhistorical earnings valuation:the price is such that the payment for the business(or return targeted

33、by the investor)would have been supported by the businesss own earnings or cash-flow averaged over the previous three to five years nfuture maintainable earnings valuation:similar to the historic earnings valuation,but forward looking nrelative valuation:the price paid per unit of earnings or revenu

34、e is based on the same multiple for comparable companies and/or recent comparable transactions ndiscounted cash flow valuation:the price equates to the value of all future cash-flows with synergies and tax given special attention;and ncomparison with similar entities.Professionals who value business

35、es generally do not use just one method,but a combination.Valuations implied using these methodologies can prove different from a companys current trading valuation.EarnoutEarnout(or earn-out)refers to a pricing structure in M&A where the sellers must earn a part of the purchase price that is based

36、on the performance of the business following the acquisition.Sustainability and ESGThe terms environmental,social and governance(ESG)and sustainability are often used interchangeably.But while,in broad terms,both are concerned with environmental,social and governance factors,ESG focuses on evaluatin

37、g the performance of organisations based on these factors and the risk they present for investment purposes,whereas sustainability is a broader concept that encompasses responsible and ethical business practices holistically.For this reason,ESG aspects are sometimes considered to be a subset of sust

38、ainability.In the sustainability conversation we are looking towards a longer-term future which balances environmental,economic and social elements in a progression to a sustainable future where nobody is left behind.Achieving sustainability requires a longer-term view than ESG and,according to the

39、Brundtland Commission,which originally defined it,is about meeting the needs of the present generation without compromising the ability of future generations to meet their own needs(United Nations n.d.).7Executive summarySUSTAINABILITY IN TRANSACTIONS|EXECUTIVE SUMMARYSustainability-related due dili

40、gence is still a very much a box-ticking exercise.So,the question for me is,how do we make this front and centre of the conversation and bring other stakeholders along that journey?UK-based chief financial officer(CFO)Three key messages from this report nSustainability-related opportunities and risk

41、s cannot be ignored in a transaction:they now form a fundamental part of the strategic intent of the transaction and the valuation of an entity.nThe assessment of these risks and opportunities must be comprehensively considered as part of the due diligence process,both as a specific workflow and as

42、an integral part of other forms of due diligence.nOrganisations need to ensure that they have an appropriate level of expertise across the transaction workflow and in relation to the targets operations,assets and liabilities.The transitioning of organisational models to a more sustainable state pres

43、ents a major challenge for many entities,and in particular a challenge which questions the validity of traditional operating models and requires continuous improvement to achieve desired outcomes.For many organisations,it leads to the creation of specific teams and action plans to achieve the requir

44、ed outcomes,such as a just transition that represents the combination of economic,social and environmental aspects(Figure ES1),around which sits a layer of governance.It is,however,fundamentally an organisational risk and it is important that these specific teams have appropriate knowledge and are e

45、ngaged with it as part of the transaction process.Critical business risks are now arising from sustainability-related issues and these can pose a threat to the outcome of any transaction.There are equally significant opportunities as businesses seek to broaden their offering and acquire sustainabili

46、ty expertise and know-how and integrate these into aspects of their business model.The need to use new technologies,such as battery power in the FIGURE ES1:Dimensions of sustainability SustainabilitySocial equityEnvironmental protectionEconomic viabilityGovernanceautomotive industry,can often be a d

47、river for a transaction,as organisations work towards a more sustainable business model.In such cases,the desire for sustainability itself can be driver for an acquisition,but equally it can be a reason for divestment or demerger,in the case of a sunset industry.Using the insights of nearly 50 finan

48、ce professionals from across the globe,it is possible to explore the extent to which sustainability-related issues are now a factor in the M&A transaction cycle.While for some organisations these are currently an integral consideration in the transactional process(see section 1.2),our research sugge

49、sts that this is not uniform in application.The research has highlighted that the extent to which sustainability is considered varies by location and sector.In some economies and sectors it is still 8SUSTAINABILITY IN TRANSACTIONS|EXECUTIVE SUMMARYbarely a subtle noise,while in others it is a loud d

50、rumbeat so loud that it can be seen as one of the most critical factors in determining whether a deal proceeds or not.In part,this is because of the differing attitudes that investors hold towards the subject.For many financial institutions,the achievement of their own sustainability-related goals c

51、an only be realised through the actions of their clients,making sustainability central to the investment decision.Whether there should be a more substantial consideration of the environmental aspect is open to debate(see section 1.2)but,increasingly,there is a realisation that both the social and ec

52、onomic aspects of a transaction cannot be ignored.The due diligence process plays an important role in the discovery of the potential opportunities and risks in the transaction.Sections 2 and 3 discuss this process from the perspective of the acquirer and acquiree respectively.How sustainability-rel

53、ated issues are incorporated in the due diligence process is considered in section 1.4.This can be done either as a standalone exercise or through integrating the assessment of the risks into other forms of due diligence.To ignore it entirely,however,is to create a risk which may well have changed t

54、he valuation of the transaction(as considered in section 1.6).It can no longer be denied that sustainability-related risks are insignificant in the transaction workflow.The goal of sustainability is both a risk and an opportunity:an opportunity which can be crystallised through the integration(or de

55、merger)of the two organisations after the completion of the deal(section 2.4).Sustainability is a multidimensional issue for organisations and the areas that should be considered in the due diligence process(as considered in Table ES2)are both broad and interconnected.There is a need for expertise a

56、nd experience in many areas,although it is also essential to appreciate the interconnections with other forms of due diligence that may be undertaken(as detailed in the Appendix).Accountancy and finance professionals need to ensure that they are appropriately skilled,in recognising both the implicat

57、ions for the transaction workflow and the substantive opportunities and issues that pursuing sustainability represents.There are several sustainability-related considerations in the transaction workflow,as summarised in Figure ES3.Several further considerations are given in Table ES1 and further det

58、ailed throughout the report,with several actions recommended in Table ES2.At each stage of the transactional workflow sustainability-related issues will have an impact on specific interventions,from the perspective of either the acquirer or the acquiree.These are summarised in Figure ES4.FIGURE ES2:

59、Some areas to consider in sustainability-related due diligenceFIGURE ES3:Sustainability-related considerations in the M&A transaction workflowGOVERNANCE STRATEGICENVIRONMENTALSOCIALECONOMICStrategyRisk assessmentCultureGreenwashingImpactassessmentsBiodiversity plansEmission and transition plansHisto

60、ric liabilitiesLabour practicesEquity,diversity and inclusionSupplychain risksSocial licenceto operateImpact assessmentSensitivityanalysisAccountingpoliciesGeopoliticalrisksAppropriategovernancestructurePolicies andproceduresNon-complianceAppropriate skillsand resourcesIntegrated approachOperational

61、 rigourAgility and flexibilityRelevant expertiseStrategic and risk-based scopeActionable observationsIntegrate sustainability-related issues into all aspects of the due diligence approachRecognise that sustainability is a core part of the operating modelAssume constant change and evolution of sustai

62、nability goalsEnsure that the depth of the sustainability-related risks is addressed by relevant experienceDrive transactions towards strategic goals for sustainability and adopt a risk-based approachEnsure that outputs of any assessment are actionable9SUSTAINABILITY IN TRANSACTIONS|EXECUTIVE SUMMAR

63、YFIGURE ES4:Sustainability-related considerations in the transaction workflowSustainability-related considerations in the transaction workflow10SUSTAINABILITY IN TRANSACTIONS|EXECUTIVE SUMMARYSustainability-related considerations in the due diligence processSTRATEGIC1.Does the target have a sustaina

64、bility(or ESG)strategy or framework?2.To what extent does this align with the acquirers own strategic objectives?3.Does the target have an enterprise risk assessment which incorporates sustainability-related considerations?4.Does the target operate in an industry which is regulated and what is the i

65、mpact of that regulation upon its sustainability objectives?5.Is the target a signatory to any global,regional or national standards relevant to the management and/or reporting of sustainability-related issues,such as the UN Global Compact or Science Based Targets Initiative?6.What sustainability-re

66、lated issues are material to the target business and its stakeholders?7.How has the target embedded the requisite considerations in its organisational culture?8.Have any claims against the target been made in respect of sustainability-related matters,including greenwashing,sexual harassment,environm

67、ental regulation breaches and human rights?9.What are the targets ESG ratings,if applicable,and should access to these be available?10.What are the applicable sustainability reporting standards and regulatory requirements(including the International Sustainability Standards Board(ISSB)standards or t

68、he European Union Corporate Sustainability Reporting Directive(CSRD),and voluntary standards such as the Global Reporting Initiative(GRI)or Taskforce for Nature-related Financial Disclosures(TNFD)?ENVIRONMENTAL1.What resources used by the target may be subject to environmental risks?Have impact asse

69、ssments been conducted?2.Does the target engage in appropriate environmental practices?Are these in compliance with local regulations and are they acceptable in the acquirers jurisdiction?3.How does the target manage the environmental aspects of its business(including energy,land use,pollution,CO2 e

70、missions,materials,water use and waste)?The following tables provide some examples of the questions that may be considered as part of an assessment of sustainability-related issues(and/or environmental,social and governance considerations(ESG)during a due diligence process.The precise questions will

71、 vary according to the circumstances of the transaction and the risk profile of the acquirer and the acquiree.TABLE ES1:Sustainability-related considerations in the due diligence process11SUSTAINABILITY IN TRANSACTIONS|EXECUTIVE SUMMARYENVIRONMENTAL4.Does the target have proactive climate-change ada

72、ptation and greenhouse gas emissions reduction plans?Are these part of broader,organisation-wide transition plans?5.What are the targets physical and transitional climate change risks throughout its operations and assets?6.How does the target interact with environmental stakeholders and work to miti

73、gate its ecological and biodiversity impacts?7.Has the target undertaken any certifications against environmental standards,such as ISO14001,and related standards and disclosures,such as the TNFD?8.To what extent are there any historic liabilities,for example through contaminated soil or on-site res

74、toration,which may require specialist action?9.Are relevant business continuity planning procedures in place and,if so,do they address sustainability-related risks?What were the main lessons learned from the most recent exercise and how were they actioned?10.Does the target have a strategy to move,o

75、r is it in the process of moving,to a more circular or regenerative-based operating model?SOCIAL1.Does the target have human resources policies and procedures for its own workforce?2.Does the target comply with human rights legislation in relevant locations and are these standards acceptable to the

76、acquirer,such as its policies towards unsafe or abusive labour practices?3.Does the target have appropriate whistle-blowing procedures in place and are investigative actions undertaken?4.What is the targets commitment to and action in respect of diversity,equity and inclusion,including the extent of

77、 staff training provided in relevant areas?5.Does the target undertake due diligence exercises in relation to its supply chain?Is it subject to any such procedures itself?6.Does the target have commitments in relation to the living wage,for example through industry associations?7.Does the target con

78、sider its social licence to operate in connection with the communities in which it is based and operates?8.Does the target have overseas operations that involve a heightened transactional risk,for example in relation to indigenous people?9.Does the target take steps to ensure product safety requirem

79、ents are met to protect customers?10.Does the target comply with relevant standards and guidelines such as the International Labour Organization(ILO)standards on forced labour?12SUSTAINABILITY IN TRANSACTIONS|EXECUTIVE SUMMARYWorkforceLiving wageLifestyle choicesLifelong learningECONOMIC1.Has the ta

80、rget conducted an assessment of its geopolitical risks in the context of sustainability-related issues?2.Has the target conducted an economic assessment of the impact of sustainability-related issues on its operating model?3.If such an assessment has been conducted,what level of sensitivity analysis

81、 has been conducted?4.Do the internal reporting and performance-management processes include sustainability-related issues?5.Do the targets accounting policies address relevant sustainability-related issues?6.Have any external and/or internal audit findings identified issues,risks or opportunities a

82、nd the extent to which recommendations have been actioned?GOVERNANCE1.Does the target have a governance structure for addressing sustainability-related issues with appropriately skilled individuals?2.Does the target have sustainability(or ESG)procedures,policies and processes(such as codes of conduc

83、t covering anti-bribery,anti-corruption,etc.measures)in place?3.Are there any management incentives in place to promote sustainability-related initiatives?How has the board been involved in understanding,developing and implementing the sustainability strategy,including requiring accountability from

84、the targets management?4.Does the target have audit committee,risk functions/departments and internal audit functions that consider and monitor sustainability-related risks?5.Has the target performed a materiality assessment on its sustainability-related risks?If so,is it up to date and are there ap

85、propriate plans to review and maintain it?6.Has the target conducted an assessment of its sustainability-related and/or ESG performance and prepared any relevant reports?7.Have there been any instances of non-compliance and how did the targets management address these situations?8.Does the target ha

86、ve any outstanding litigations related to social or environmental issues?9.Has the target dedicated sufficient operational personnel and other resources to handle sustainability-related and/or ESG matters and how they are deployed in the organisation?10.Does the target proactively monitor developmen

87、ts that might change its sustainability-related risks and opportunities?13SUSTAINABILITY IN TRANSACTIONS|EXECUTIVE SUMMARYTop tips when considering sustainability-related issues in the transaction processTABLE ES2:Top tips when considering sustainability-related issues in the transaction processTIPE

88、XPLORED IN SECTIONOVERALLRecognise that the three interconnected dimensions(social,economic and environmental)of the sustainability-related agenda should be considered equally in a transaction.1.2.1Assess the impact of sustainability-related issues on the cost of capital in the transaction,and the i

89、mplications for any variations in the modelling of future cash flows.1.2.2Assess relationships with,and key risks from,suppliers.Consider their own assessments of sustainability-related risks and action plans.Evaluate any supplier due diligence undertaken.1.2.2Assess the value of the brand and how i

90、t may be changed by any sustainability-related considerations.1.2.2Develop a due diligence strategy to enable an assessment of the sustainability-related opportunities and risks in the transaction.1.4Assess the current and known potential regulatory landscape from a sustainability perspective across

91、 all three social,environmental and economic dimensions.1.5Ensure the valuation approach includes sustainability-related factors as variables and is also included in any sensitivity analysis.1.6Conduct a skills assessment to ensure that the team has an appropriate range and depth of skills,knowledge

92、 and qualifications to address the sustainability-related risks and opportunities appropriately in the relevant aspect of the transaction.1.7ACQUIRERUnderstand how sustainability-related objectives are part of the overall business objectives.Determine criteria for any acquisition necessary for carry

93、ing out a risk assessment to ensure alignment takes place.2.1.1Ensure that investment committees have the requisite skills to assess the sustainability-related opportunities and risks in any transaction.2.1.2Ensure target screening criteria include sustainability-related risks and opportunities alig

94、ned to the acquirers own risk-assessment profile.2.1.3Ensure that sustainability-related opportunities and risks are appropriately addressed in the specification of the due diligence work to be undertaken.2.2.1Ensure that all publicly available sources of information are identified and used.2.2.2Ens

95、ure that sustainability-related opportunities and risks are addressed appropriately in the specification of the due diligence work to be undertaken.2.2.2Consider the inclusion of any warranties or indemnities in the contract that address sustainability-related considerations.2.3.1ACQUIREEDevelop a s

96、ystematic plan to gather data covering sustainability-related opportunities and risks,recognising that some of the data required may not be from traditional sources.3.1In preparing the data room consider using relevant disclosure standards to enable the identification of data sets that might be incl

97、uded.3.2.1Consider external as well as internal data sources to capture a balanced view of the sustainability-related opportunities and risks within the organisation.3.2.1Consider structuring the data room to include a specific categorisation for sustainability-related data.3.2.314SUSTAINABILITY IN

98、TRANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN THE TRANSACTION WORKFLOW?1.Do sustainability-related issues matter in the transaction workflow?We have to be conscious that there are“50 per cent”of organisations,particularly smaller ones,who cannot lose out from transactions or funding beca

99、use they are not yet on their sustainability journey.We have to take them with us.Republic of Ireland accountancy firm partner1.1 The sustainability-related context1.1.1 The business contextThe sustainability transition is multifaceted,embracing economic viability,environmental protection and social

100、 equity dimensions(Figure 1.1).The range of issues that it affects include not only climate and greenhouse gas emissions but also the biodiversity and social aspects1 and how these interplay with each other and with the organisations operating model.FIGURE 1.1:Dimensions of sustainabilitySustainabil

101、itySocial equityEnvironmental protectionEconomic viabilityGovernance1 ACCA 2023a considers the social aspects of a just transition.15SUSTAINABILITY IN TRANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN THE TRANSACTION WORKFLOW?Sustainability-related issues may be considered to be one of the m

102、ost significant organisational risks of the early 21st century.In relation to environmental protection,the dangers to the planet are significant if the temperature rise is not controlled.Although the Paris Agreement in 2015 sought to limit the rise in the mean global temperature to 2C above pre-indu

103、strial levels,and with a preference to limit the increase to 1.5C,the progress by governments and organisations towards this 2030 target has been slow.2 Many organisations have faced a series of complex challenges in recent years,from the global pandemic of 2020 to 2022 and the inflationary pressure

104、s that in turn increased interest rates from 2022 and into 2023.In turn this has,for many,reduced the focus on a sustainable and just transition.The reality is that organisations need to transform their operating models to become more sustainable.In this sense,the transition to a sustainable operati

105、ng model is an organisational transformation which is similar in shape and form to other transformations currently being undertaken.3Modelling the impact of sustainability-related issues on an organisation is a complex task.The technique of proximity analysis can be employed to consider climate and

106、biodiversity considerations at a plant or site level.Asset-level data models4 are often required to assess other impacts.Sustainability-related risks,and a failure to address them,represent one of the most significant challenges that organisations face in the 2020s.Managing and mitigating these comp

107、lex and interconnected risks is difficult and requires considerable effort and commitment,as reflected in both strategic and governance activities that are integral to the overall goal.While in this report much of the discussion is about the impact of the economic,social and environmental components

108、,the strategic and governance activities are also integral to sustainability-related risks.Organisations need to measure and,increasingly,report progress against their sustainability targets.As the investor markets look to relate the long-term viability of an organisation to its future sustainabilit

109、y,so access to capital is increasingly dependent upon the robustness of the plans in place and the tangible progress being made to hit defined targets.Capital markets are increasingly requiring disclosures related to climate and sustainability-related matters to provide decision-useful information f

110、or investors.As stakeholders,including investors,seek information and action from entities on sustainability issues,organisations are setting sustainability-related targets and measuring and reporting their performance.Against this backdrop,organisations continue to be bought,merged and sold.While M

111、&A activity across the business world is inherently cyclical and reflects economic cycles,there is a constant trade in organisations,either through strategic acquisitions or through PE and similar activity.1.1.2 The dimensions of sustainabilityA further consideration is whether each of the aspects o

112、f sustainability,the economic,the environmental and the social,receive appropriate levels of consideration in the M&A process.It is important to remember that these aspects are intrinsically interlinked.In the experience of a CFO from mainland China,in most of the companies that I interact with,ever

113、yone is so focused on economic and environmental aspects of the transaction,and least on social aspects.I think everyone is missing the S,as usual.There can be a tendency to focus on those elements where insight and regulation is most established,but if organisations are to achieve a just transition

114、 to a sustainable future,then all three aspects need to be kept in balance.It should be remembered 2 ACCA/IFAC/PwC 2023 considers the progress in developing emission plans as part of overall transition plans and concludes that there is still work to be done.3 ACCA/CA ANZ/Generation CFO 2021 consider

115、s the process of transformation from an accountancy and finance perspective.4 An asset-level data model can be considered the most granular level of modelling in an organisation.In this context,the risks(and opportunities)from sustainability-related issues can only be assessed at the level at which

116、they have a real impact:the asset level.Hence,modelling sustainability-related considerations(and their financial impact)is often a complex task.WHILE IN THIS REPORT MUCH OF THE DISCUSSION IS ABOUT THE IMPACT OF THE ECONOMIC,SOCIAL AND ENVIRONMENTAL COMPONENTS,THE STRATEGIC AND GOVERNANCE ACTIVITIES

117、 ARE ALSO INTEGRAL TO SUSTAINABILITY-RELATED RISKS.16SUSTAINABILITY IN TRANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN THE TRANSACTION WORKFLOW?that social impact is measured in terms of both the human capital(employees)and human rights(of those in the supply chain,communities and customer

118、s).The culture of the organisation in supporting this activity is essential.A UK CFO placed this discussion in context for an organisation in the service sector.I have got my due diligence checklist to start preparing information for,and its all about the economic.Its not about anything else and it

119、makes me think,“OK,thats fine”.But the business will be very different if they dont embrace the brand.What they are buying is because of the people and what we represent and why we work for the company.Another UK CFO detailed some experiences of dealing with PE houses.Although the name might not be

120、sustainability,they are looking at all those aspects anyway.They will look at environmental risk.Is there anything in your past?Are you doing anything that makes you a risky business?They will look at people risk.Are you doing the right thing for your people?Are you legally compliant?Do you support

121、them in the right way?What are your HR human resources policies like,and can you prove that you do all of those things?And then you go to the genie,the governance.If you do not have good governance as a platform sitting throughout the business,they are not interested anyway because they will find ou

122、t eventually that it is all a pack of lies.It is much easier to be upfront and say these are our governance structures and processes.So,you can actually have a lot of faith before you invest your time and your money into looking into our organisation,that what we say we do is actually what we do.A U

123、K-based accountancy firm partner commented,environmental,social and governance are not mutually exclusive.Theyre mutually inclusive,and the S and the G in business for me is as important as the E because if you do not have effective governance and effective frameworks in your business at a top level

124、,aligning to societal licensing and environmental concerns and theres a lot of potential external risk around societal licensing.Although there may be more emphasis on the environmental aspects in the minds of some who are initiating transactions,it is important to recognise the interdependence betw

125、een the three aspects of sustainability.Environmental change has to come in tandem with social equity and economic progress.Whether the transaction is strategic,or PE driven,those pursuing it have to focus upon all three dimensions.17SUSTAINABILITY IN TRANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES

126、MATTER IN THE TRANSACTION WORKFLOW?1.2 Does sustainability matter in the transaction cycle?1.2.1 The criticalityThe short answer to this question is yes.As with any other organisational risk,sustainability is something that the acquirer and the acquiree need to consider in the transaction process.Wh

127、y does it matter?This is perhaps a more complex question to answer.The answer is heavily dependent upon the location,sector and size of the organisation involved.This effects the extent to which sustainability-related issues may be a critical factor in the final decision about whether to proceed wit

128、h the transaction.The exact nature of this effect is dependent upon the type of deal that is involved.As a consultant operating in the UK commented,in a strategic deal,the view of the future looks up to about 25 years ahead,while a PE backed deal might have a perspective of about five years.This dif

129、ference is substantial and changes the view of the transaction and its benefits,but raises different questions about sustainability-related issues.These issues typically have a longer time horizon and the balance between the shorter-term transaction-based perspective and the longer-term time horizon

130、 can create a tension.A roundtable participant who consults in M&A commented,I just can see how the world is changing,especially during the last five years,I would say that it has changed dramatically.The perception of the companys business has changed.If you look back five years ago,people were not

131、 concentrated on their social aspect;it was the financial aspect of the company.What earnings before interest,taxes,depreciation and amortisation commonly known as EBIDA will there be?How its calculated?What impact might there be in the next three to five years if one acquires a given business?They

132、were looking at what kind of risks might mitigate the cost of the company that was actually paid out.Whether there is going to be a tax issue afterwards or any other impacts coming out of the operational part of the business.Right now,it is not only that part,but also,I can see that the part related

133、 to sustainability is how clients are going to behave in the future and they can see rate of the market there.There are some issues coming into place when the company does not behave ethically what kind of consequences will it face.Looking ahead,a CFO based in the UK commented,the growth in sustaina

134、bility as a topic is exponential.I think in the next three to five years it will be embedded in those organisations where it is not at present.It will not be the box-ticking afterthought.It will be part of everyday life and everyday decision making.Rather than it just being seen as something that,if

135、 I am doing a transaction,I need to make sure I have not got a liability that I am buying into,it is something that is a true value generator going forward.It is a way that my business will be more successful because I have grasped the sustainability agenda in all facets,economic,environmental,socia

136、l,and I have grasped all of that and therefore I am a more valuable asset.Another UK-based CFO explained that,I think it really actually does make a difference in terms of all sorts of things:in terms of the viability of a transaction and the different lenses that the different stakeholders put onto

137、 both you as a business,if you are the purchaser,and you as a vendor because there has been a huge change in expectations and that comes from investors,it comes from employees,it comes from customers,suppliers this whole drive towards demonstrating that you are a responsible corporate citizen,whatev

138、er that means.I think it is now at the point where this can add value to the transaction.An accountancy firm partner in the Republic of Ireland sounded a note of caution.Looking at transactions and acquisitions from the side of small and medium sized enterprises,I dont think acquirers have high expe

139、ctations of what they are going to find.This participant added,however,that the future depends on it.For the company that is being acquired,if they are actually on that journey and they are taking the steps that are necessary,then it is really going to be a massive value add for them in a potential

140、sale.!Recognise that the three interconnected dimensions(social,economic and environmental)of the sustainability-related agenda should be considered equally in a transaction.18SUSTAINABILITY IN TRANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN THE TRANSACTION WORKFLOW?Commentary by Prof.Dr C

141、hristopher Kummer,President,Institute of Mergers,Acquisitions and Alliances(IMAA),AustriaHow important an aspect of the M&A process do you consider sustainability-related considerations to be?Is this an important consideration for your members?EXPANDING THE FOCUS ON SOCIAL ASPECTS TO THE ENTIRE VALU

142、E CHAIN IS DRIVEN BY THE REALISATION THAT A COMPANYS SOCIAL PERFORMANCE CAN HAVE BROADER IMPLICATIONS,SUCH AS REPUTATIONAL RISKS,SUPPLY CHAIN DISRUPTIONS,AND REGULATORY COMPLIANCE ISSUES.Sustainability in a wider sense has always been an important aspect when pursuing transactions.In the financial d

143、imension,the quality of earnings,in the governance and organisation structure,how robust management teams are.Depending on the industry,environmental issues have always been taken into account.There are two aspects that have become more important recently.Firstly,using ESG criteria to exit current i

144、nvestments and applying them to making new ones.Many companies have started incorporating ESG criteria into their exit strategies.This entails that when these companies contemplate divesting or selling their assets,they carefully assess how well these assets adhere to ESG principles.A company may de

145、cide to part ways with a business unit that falls short of its sustainability-related objectives or presents substantial ESG-related risks.On the other hand,in the context of evaluating new investments or acquisition opportunities,organisations are now employing ESG criteria to gauge the extent to w

146、hich the prospective target aligns with their sustainability-related objectives.This entails a comprehensive assessment of how the target company handles environmental concerns,engages with social issues,and upholds governance standards.Investments in companies that demonstrate alignment with ESG go

147、als are perceived as more appealing and desirable.Secondly,an aspect that is rather more important to consider in the M&A setting is the social aspects that may have been addressed only in an HR context so far and need to be addressed in a wider context;for example,also with regards to the entire va

148、lue chain upstream and downstream.In traditional business settings,the social dimension has typically revolved around HR matters,encompassing aspects like employee wellbeing,diversity,and workplace conditions.Nevertheless,there is an increasingly prevalent acknowledgment that social considerations o

149、ught to be tackled in a more complete manner,extending beyond the confines of the organisation and encompassing a broader spectrum of societal concerns.In the M&A setting,this means considering social factors not only within the acquiring and target companies but also throughout the entire value cha

150、in.This includes assessing how suppliers,distributors,and other business partners in the value chain manage social issues.For instance,a company acquiring a supplier may need to evaluate the suppliers labour practices,ethical sourcing of materials,and community engagement.Expanding the focus on soci

151、al aspects to the entire value chain is driven by the realisation that a companys social performance can have broader implications,such as reputational risks,supply chain disruptions,and regulatory compliance issues.19SUSTAINABILITY IN TRANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN THE TR

152、ANSACTION WORKFLOW?1.2.2 Four main factorsThere are four main reasons why sustainability matters in a transaction(Figure 1.2).The extent to which these factors apply in different sectors,such as sunset or sunrise industries,and locations is,however,variable.The first factor is the impact of the fina

153、ncial institutions and investors.Many of these have committed to their own sustainability-related goals which in turn can only be achieved through the investments that they make.A CFO commented that,there are so many investment houses trying to increase their overall sustainability credentials.In se

154、veral,but not all,locations this is a significant factor in determining the access to finance.A fund manager in Africa explained that in his experience the financial institutions there paid little attention to sustainability-related issues.The investor perspective is also linked to the second factor

155、,supply chains,which in turn is linked to the third factor,the regulators.Supply chains can be a weak point for many aspects of due diligence.While an organisation might proclaim sustainable credentials,such as control over suppliers,for example in the garment industry,this may create risks that can

156、 have a material impact on brand value.There is a risk of greenwashing where the information in prospectuses can potentially be misstated(as discussed later in this section).A member based in mainland China commented that,there are more and more governing bodies that are increasing the requirements

157、around ESG compliance.The year 2023 saw an increasing requirement for organisations to prepare disclosures on their progress on achieving their sustainability goals and targets,such as through the European Unions CSRD and the ISSB first and second reporting standards(ISSB S1 and S2),which are effect

158、ive,or are intended to be effective,in many jurisdictions from 2024.5 These standards require organisations to assess not only their own activities but those in their supply chains,including the use of supply chain codes of conduct and mandatory HR Due Diligence.6The last factor is the role of the c

159、ustomers/clients.The extent to which they are influenced by the ethical behaviour of an organisation may be variable but brand value can be diminished by the highlighting of inappropriate activities.In the M&A process,it is important to consider whether the acquired,or disposed of,entity enhances or

160、 reduces brand value.Together with the attractiveness of an organisation to current and potential employees,the social aspects can form a significant risk or opportunity.FIGURE 1.2:Four main factors as to why sustainability-related issues matter in a transaction!Assess the impact of sustainability-r

161、elated issues on the cost of capital in the transaction,and the implications for any variations in the modelling of future cash flows.!Assess relationships with,and key risks from,suppliers.Consider their own assessments of sustainability-related risks and action plans.Evaluate any supplier due dili

162、gence undertaken.!Assess the value of the brand and how it may be changed by any sustainability-related considerations.5 The regulatory reporting framework and how organisations can prepare for it are considered in ACCA 2023c.6 The relevance of sustainability-related issues in supply chains and the

163、impact of regulation are considered in ACCA/Institute of Management Accountants/Chartered Institute of Procurement and Supply 2022.Financial institutions and investorsSupply chainsRegulatorsCustomers,clients and employeesTHE EXTENT TO WHICH THESE FACTORS APPLY IN DIFFERENT SECTORS,SUCH AS SUNSET OR

164、SUNRISE INDUSTRIES,AND LOCATIONS IS,HOWEVER,VARIABLE.20SUSTAINABILITY IN TRANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN THE TRANSACTION WORKFLOW?1.2.3 Geographic variationsThe roundtable participants highlighted that the consideration of sustainability-related issues as a risk(or opportun

165、ity)in a transaction was by no means universal.A partner in a New Zealand accountancy firm noted that,If I look at some of my peers and what theyre doing in larger offices like the UK,across Oceania and into India,ESG considerations are prevalent on most transactions,and we are not seeing that here

166、in New Zealand at the moment.It is fair to say we are still doing quite a bit of education to the market and certain clients as to why this is important.A similar point was raised by a partner in a different accountancy firm based in Canada,and,as mentioned above,a roundtable participant questioned

167、the level of acceptance in parts of Africa as well.An M&A adviser working mainly in the mid-market in Singapore commented that,it is not an emphasis for now,at least,continuing with the view that this would be the case until reporting requirements became mandatory for mid-market entities.1.2.4 Respo

168、nsible investmentRegulatory scrutiny of the sustainability-related credentials of investment funds has been increasing during 2022 and 2023.As mentioned in section 1.2.2 above,several funds are perceived as linking their own ambitions to investments that may or may not be sustainable in nature.This

169、affects the investment and divestment cycle for investment funds and PE-backed transactions.If an investment fund is a signatory of the United Nations Principles for Responsible Investment(PRI)and seeks to honour its first two principles,incorporating ESG issues into investment analysis and decision

170、-making and ownership policies,this is a key driver for undertaking routine ESG due diligence(ESG DD).It is the combination of the increasing rigour of the PRIs annual reporting process,increased demands from their investors,and now the specific requirements of EU regulations,that is now driving gre

171、ater uptake of ESG DD as a standard requirement.If a fund is Article 8-or 9-aligned under the EUs SFDR,7 then it is obligated to incorporate ESG issues into its investment decision making.Secondly,and perhaps more importantly,there is a need to evaluate whether the target could sit comfortably withi

172、n such a fund.This may partly relate to whether it could be considered to be a Sustainable Investment,aligning with the requirements of the EU Taxonomy for sustainable activities(often known as the EU Taxonomy),and definitely whether it would be able to show continued improvement against the suite o

173、f Principal Adverse Impact key performance indicators(KPIs)and demonstrate it has strong social and governance controls in place.8Commentary from Professor Dr Christopher Kummer,IMAAProfessor Dr Christopher Kummer of IMAA commented that there is definitely a variation in how important these aspects

174、are,for example,between players from developed markets vs.emerging and developing markets.But even within the field of companies from mature markets there is a wide variation on how seriously this is considered.The extent to which sustainability-related factors are integrated into the regulatory fra

175、mework can vary widely.Some countries and regions have more stringent regulations related to ESG disclosure and reporting,which can influence how companies approach sustainability in M&A.For example,the European Union has implemented comprehensive ESG disclosure requirements through its Sustainable

176、Finance Disclosure Regulation(SFDR),while other regions may have less prescriptive regulations.Cultural and societal norms play a significant role in how sustainability is perceived and prioritised.In some economies,there may be a strong cultural emphasis on environmental and social responsibility,l

177、eading companies to prioritise sustainability in M&A as a way to align with societal values and meet stakeholder expectations.In contrast,in economies where short-term financial gains are prioritised,sustainability may have a lower profile.7 Although both the EU Taxonomy and the SFDR share a similar

178、 goal,they play distinct roles in shaping the sustainable finance landscape,each with its own unique purpose and contribution.They serve complementary purposes within the sustainable finance framework,but the distinction between them is important.The EU Taxonomy focuses on classifying economic activ

179、ities as sustainable,or not,on the basis of environmental objectives.It guides investment decisions and promotes capital flows towards sustainable activities.SFDR addresses transparency and disclosure requirements for financial products and prevents greenwashing by providing accurate and standardise

180、d sustainability-related information.It also enables investors to make informed decisions,based on sustainability-related characteristics.8 In December 2022,EU Commissioner Mairead McGuinness announced a comprehensive assessment of the framework to assess potential shortcomings focusing on legal cer

181、tainty,the usability of the regulation and its ability to play its part in tackling greenwashing.The open and targeted public consultations are an important part of this assessment.They will be complemented by workshops and roundtables,enabling stakeholders to submit further input.AN M&A ADVISER WOR

182、KING MAINLY IN THE MID-MARKET IN SINGAPORE COMMENTED THAT,IT IS NOT AN EMPHASIS FOR NOW,AT LEAST,CONTINUING WITH THE VIEW THAT THIS WOULD BE THE CASE UNTIL REPORTING REQUIREMENTS BECAME MANDATORY FOR MID-MARKET ENTITIES.21SUSTAINABILITY IN TRANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN TH

183、E TRANSACTION WORKFLOW?The role of the SFDR and Taxonomy is to redirect capital to genuinely sustainable enterprises.Both create opportunities to invest in new solutions and,conversely,the risk of finding oneself invested in stranded assets,together with the risk of being accused of greenwashing.Bot

184、h regulations drive the necessity to undertake a new type of due diligence that considers where an enterprise sits within a sustainable future.The most sustainable businesses will be providing solutions to such problems;for all,there is a need to show that they will be good corporate citizens and ab

185、le to stand the impacts of a changing world.In the EU,the CSRD and forthcoming Corporate Sustainability Due Diligence Directive(known as alternatively CSDDD or CS3D)will also drive obligations and transparency on the level of performance in these areas.9In 2023 the UK Financial Conduct Authority(FCA

186、)consulted on and published similar regulations(FCA 2023a),while the United States Securities and Exchange Commissions taxonomy of Integration and ESG-Focused funds is somewhat comparable to the SFDRs Article 8 and Article 9 categorisation of funds.In November 2023 the CFA Institute(representing cha

187、rtered financial analysts),the Global Sustainable Investment Alliance(GSIA),and the Principles for Responsible Investment(PRI)10 published a set of Definitions for Responsible Investment Approaches,which include guidance on several areas,including screening from a sustainability perspective.The CFA

188、Institute commented that,the growing global interest in responsible investment approaches has spawned new ideas and practices,as well as new terminology that may or may not be initially clear or widely understood.Increased interest in responsible investment has prompted a need for standardized termi

189、nology to enhance communication among institutional investors,regulators,policymakers,and market participants(CFA Institute 2023).1.2.5 Private equity-backed transactionsSustainability-related investments are substantial.Writing in January 2023,Brendan Cooper of Investment Metrics noted that,investi

190、ng in investments that have sustainability criteria has accelerated in the past decade theres now more than US$4trn in total global assets(Cooper 2023).For PE-backed organisations there are additional influencing factors.A CFO based in the UK commented,once you start with your one transaction and th

191、en you move on to your next because as soon as PE buys you,they are building value in and they want you to build value within your organisation to get you to that next transaction.You dont stay still.They dont buy,they dont invest and thats it.Off you go again.What tends to happen is that the ESG ag

192、enda tends to rise higher in priority.Several of the roundtable participants who were either in PE-backed enterprises or were involved with PE houses noted the emerging impact of sustainability-related issues on the target multiplier that the was being sought at the end of the initial investment.The

193、y commented that there was an emerging recognition that value includes creating a sustainable organisation with a long-term future.It was also noted that this was just one factor that needed to be considered.A UK-based CFO commented that,a PE business might either say“no”,we love your product,but we

194、re going to reduce the multiple or were going to take a hit on the valuation as a result,because theres work to be done there that will impact the profitability of the business.What I am not seeing is,when we are looking at companies or when we might be exiting at some stage,that the first thing tha

195、t people are talking about is“we need to understand your sustainability”.Another UK-based roundtable participant who works with PE organisations commented that,lots of PE houses,where they invest within the portfolio companies,have multiple case studies where they can show that the premium that othe

196、rs have paid is higher when the original PE houses have come to exit the position as a result of the effort and the changes that have occurred through the ownership by pushing to include more sustainable practices.An Australian accountancy firm roundtable participant commented that,we see it in term

197、s of funds,particularly PE,but also from the point of view of the investment managers,who have an ESG framework in place for their own portfolio,their own organisation and it is part of their actual investment decision-making process.We tend to see there is an examination of where there are potentia

198、l additional cost considerations resulting from a lack of an ESG response or value-uplift opportunities as a result of investing in building out their ESG response.9 Agreement was reached between the EU Council and the EU Parliament on the due diligence directive in December 2023 for enactment in 20

199、24(European Council 2023).The extent to which financial services should be covered by the CSDDD Directive has been a key point of contention from the outset.While the Commission originally proposed no special treatment for financial services firms,the Council proposed leaving member states to decide

200、 for themselves whether to include downstream financial services(a worst-case scenario for those active in multiple member states),and the Parliament proposed their inclusion with some loosely worded exceptions for asset managements and institutional investors.Compromises have been made in the text,

201、with the Parliament accepting the exclusion of the financial sectors investment and lending activities from the scope of the due diligence obligations.This has been conceded on the basis that it will be subject to review in several years time(Denton and McBean 2024).10 A link to this and several oth

202、er relevant resources is given in the Useful Resources section.SEVERAL OF THE ROUNDTABLE PARTICIPANTS WHO WERE EITHER IN PE-BACKED ENTERPRISES OR WERE INVOLVED WITH PE HOUSES NOTED THE EMERGING IMPACT OF SUSTAINABILITY-RELATED ISSUES ON THE TARGET MULTIPLIER THAT THE WAS BEING SOUGHT AT THE END OF T

203、HE INITIAL INVESTMENT.22SUSTAINABILITY IN TRANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN THE TRANSACTION WORKFLOW?1.3 Impact on the transaction workflowGiven the clear case in the minds of those who contributed to the roundtables that sustainability is an important aspect of the M&A proce

204、ss,it follows that it is a consideration throughout the transaction workflow.Figure ES4 in the Executive summary provides an overview of the transaction workflow and highlights some of the sustainability-related considerations that occur during each phase.Sustainability acts as an overlay to the tra

205、nsaction workflow.It is implied in each stage,often with multiple considerations.Whether you are an acquirer or an acquiree,the impact cannot be ignored.A roundtable participant from mainland China noted that,in due diligence,the focus has been on maximising shareholder value.However,ESG demands ext

206、end beyond this,aiming to create public benefits without harming others.The implications and several detailed actions are considered in more detail in Chapters 2 and 3,for the acquirer and acquiree,respectively.1.4 Role of due diligenceA roundtable participant who works in the M&A sector gave one pe

207、rspective on the role of due diligence.During the due diligence process you find out so many interesting things and everything comes to the surface.Then you cannot hide the real intentions of the management strategy.An Australian roundtable participant also commented,ultimately,the reason you do thi

208、s is to uncover the risks that you are comfortable to take and those that you are not comfortable to take,and/or those that you need to manage differently.The diligence is a process of discovery about the new business,so that you know what you are buying and what youve got to deal with and whatoppor

209、tunities and risks are coming out of it.There are several forms of due diligence that an acquirer may choose to undertake,as shown in Figure 1.3.The choice will depend upon the assessment of the respective transactional risks in each area.Whether or not the decision is made to undertake a specific s

210、ustainability due diligence exercise as part of the transaction process,it is important to recognise that sustainability is a factor in most aspects of due diligence that are undertaken.This was highlighted by several contributors to the research who commented that sustainability was clearly a facto

211、r in commercial due diligence as it affects the customer viability of the organisation,for example.Further examples of the relevance of sustainability to each form of due diligence are given in the Appendix.More detailed considerations at an industry level can be developed by reference to tools such

212、 as the Sustainability Accounting Standards Boards Materiality Map(SSAB 2021).A roundtable participant from mainland China commented that,the essence of sustainability,whether environmental or across all ESG aspects,is vital.In M&A and financial due diligence,pinpointing sustainable enterprises is a

213、 key focus and an area for skill enhancement.“Unsustainability”often stems from poor economic assessments of industry trends,competitive landscapes,or core competencies,leading to unsustainable business models.In practice,identifying these factors in financial due diligence is crucial.A roundtable p

214、articipant from Canada explained that,sometimes the challenge is in adequately integrating sustainabilityfrom the starting point of identifying the material factors.It could look very different in different transactions and that is why,unlike more traditional models where you can apply some specific

215、 things across all transactions,here it is different,as is the context of where that target is.When considering the factors relevant to the scope of the due diligence,the extent to which the target has conducted third-party accreditations and certifications may well need to be considered.Such progra

216、mmes may offer certifications for policies and procedures and themselves have an element of third-party verification associated with them.A New Zealand-based roundtable participant commented that,I think if we pose the question to investors or buyers in a transaction and ask“are you making investmen

217、t decision that is environmentally and socially sustainable?”,the answer would inevitably be“yes”.I think,you need to peel the onion and ask why they think that and on what basis they have formed that opinion.The experience in New Zealand is slightly more do-it-yourself.The investors or the principa

218、ls are comfortable that they have identified the main sources of risk and have not commissioned the due diligence to address those risks.Instead,they have captured it,for example,within legal or technical or environmental due diligence work streams,rather than using sustainability due diligence to i

219、dentify those key risks.An Australian transaction partner in a large accountancy firm commented,I think weve seen a lot of focus,recently,on green washing and legal cases being launched around green washing.Companies will want to be able to prove that their ESG programmes,their environmental program

220、mes,are robust.FIGURE 1.3:Forms of due diligence that can be undertaken in a transactionLegal and riskSpecialisedConfirmatorySustainabilityOperationalIntellectual PropertyCommercialForms of due diligence that can be undertaken in a transactionFinancialTaxHRRegulatoryIT23SUSTAINABILITY IN TRANSACTION

221、S|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN THE TRANSACTION WORKFLOW?A roundtable participant highlighted some of the practical steps needed when undertaking due diligence,especially in respect of the social dimension of sustainability.When I act as a consultant,welook at the substance that sits

222、behind the assertion being made.We always comment,“OK,thats your glossy,thats your brochure.Thats wonderful”.Where is the substance?And you really dig through and find what youre looking for.For example,you have told me your staff are happy:put six employees in front of me today.Do not prepare them.

223、Let me talk to them because I want to know how much they tell me about whether everyone buys into your sustainability practices and everyone has had ESG training,etc.Show me that the receptionist knows it.Show me that such and such.So,if you are paying a premium for that cultural knowledge,that cult

224、ural support and assume it is a services company,how far is it true?I think you can get a gut feel for that and I learnt from a conversation I had with a PE house that they walk away from deals if they find that the substance is not there,no matter how attractive the deal is.Several roundtable parti

225、cipants highlighted the potential of greenwashing,or bluewashing,in the assertions that organisations make.One roundtable participant highlighted the link between greenwashing and the overall confidence one can have in the assertions that the acquiree makes.After all,if they are prepared to paint a

226、false glossy picture on their sustainability activities,what else are they window dressing?The role of due diligence is to identify potential risks and their impacts should they materialise.One of the most significant challenges that organisations will face to the late 2020s and beyond is reconfigur

227、ing their business models to be sustainable.A failure to include sustainability assessment as a core part of the transaction process,whether as a discrete exercise or embedded into other elements,is potentially to fail to recognise the nature of that risk.Sustainability is a complex issue,and assess

228、ing the risks inherent in its failure requires expertise,as several of the contributors highlighted.It cannot be ignored,but how can you scope the necessary work?Dr Max Tuchler and colleagues from Deloitte Germany have reported that,It is of note that the approach to ESG due diligence is not a“one s

229、ize fits all”approach for all industries.Each industry presents its own array of environmental impacts and stakeholder interactions that must be considered.For example,a target in the chemical industry would have a particular emphasis on the environmental factors,such as disposal of hazardous waste,

230、whereas for a target in the textile industry the focus may lay sic on the social factors such as child labour or poverty wages.Hence,ESG criteria need to be selected from a bouquet of KPIs,taking industry-specific and target-specific factors into account(Tuchler et al.2021).It should not be forgotte

231、n that due diligence can often have positive benefits.A UK roundtable participant who works in transactions commented,there are lots of cases out there where,as a result of the due diligence,it was identified that the way the business was operating was not the most efficient.For example,I know of on

232、e example of a tiling company where they changed the products and utilised the wastage to develop new tiles.They were able to change the operating model and increase the value of the business as well as making it more environmentally friendly.The EU issued a Competition Merger Brief in September 202

233、3 which outlined its view,with examples,of how sustainability-related to EU merger control and may be a beneficial factor(European Commission 2023).!Develop a due diligence strategy to enable an assessment of the sustainability-related opportunities and risks in the transaction.24SUSTAINABILITY IN T

234、RANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN THE TRANSACTION WORKFLOW?1.5 Regulatory and other challengesThe process of conducting a specific form of due diligence related solely to sustainability was discussed by several of the contributors and roundtable participants.The first challeng

235、e raised was the absence of a unified or framework standard in relation to sustainability.There are several standards that cover components and there are more in development,but these tend to focus more on disclosure when,usually,broader issues are concerned.The due diligence process has long involv

236、ed expertise outside the traditional scope of an accountancy practice,even with specialist transaction expertise.In addressing the sustainability risks faced by a potential acquirer,the use of specific expertise may be required,but bringing sustainability expertise into an accountancy firms transact

237、ion team is also an important step.Another challenge is the quality of data available to those conducting the due diligence.As a roundtable participant from Brazil noted,there is a problem within the due diligence because the information about sustainability is not as good as the financial informati

238、on.A roundtable participant from Canada considered the impact of sustainability regulation in a different way.The premise of the growth of sustainability assessment in the first place,was that you cannot manage what you do not measure.A lot of the emphasis has been on disclosures driving companies t

239、o the initial starting point and to really begin to think about what this really means for myself as a business.As we begin to see that flowing into mandatory disclosure regimes,a lot more countries are coming up with a stronger implementation framework.If I talk about an environment outside Canada

240、on the commitments that they are making,they are nationally determined commitments around becoming net zero and the implementation of that.As you begin to see policy and regulation growing,then that becomes a key driver.If I am going to acquire or be acquired,first stop is:what will impact me,my lic

241、ence to practise or a key regulatory fine?So that for me becomes a very key driver.Example of some of the complexities of incorporating sustainability into the due diligence processWhen considering ESG in the due diligence process,our firm encounters different challenges and difficulties,which can b

242、e categorised into two areas based on client needs:professional technical fields and non-technical fields.Professional technical fieldsFor instance,if the client needs soil analysis or data on emission reduction and metal content,our financial institution lacks the expertise to conduct such assessme

243、nts.In these cases,we collaborate with other environmental departments.This collaboration is essential because these technical areas require specialised knowledge and capabilities that our financial team may not possess.Non-technical fieldsIn contrast,there are aspects we can handle within the non-t

244、echnical domain.This process involves several steps.First,during discussions with our clients about the scope of work,we understand their demands and assess whether we have the relevant experience.If we decide to proceed,we contemplate from which angles to approach the task.After reaching an agreeme

245、nt with the client,we then advance the corresponding work.Practical implementationIn practice,our main clients for ESG-related issues are fund companies and investment firms;our work is assisting them with non-purely technical matters.For purely technical aspects,such as carbon emission measurement

246、and calculation or soil contamination,they independently seek services from environmental assessment companies to produce reports.These reports help determine if the pollution levels meet investment standards.ONE PARTNER SUGGESTED THAT ABSENCE OF CONSISTENT STANDARDS MEANT THAT SOME FIRMS LOOKED TO

247、PROVIDE ASSESSMENTS OF SUSTAINABILITY-RELATED RISKS RATHER THAN A COMPREHENSIVE DUE DILIGENCE REPORT.This presents a challenge in defining the scope of any due diligence undertaken.One partner suggested that absence of consistent standards meant that some firms looked to provide assessments of susta

248、inability-related risks rather than a comprehensive due diligence report.A European-based transaction professional foresaw a change in appetite for including sustainability considerations in the due diligence process.I love it that it is now part of the accounting standards and legislation is now co

249、ming top down because the difference is that,up to now,the Paris Agreement ultimately was voluntary,a gentlemans agreement,and now that it is obviously coming top down,it is just beautiful because we as leaders in this area are literally all pushing an open door.A transaction partner based in mainla

250、nd China gave the following example of some of the complexities of incorporating sustainability into the due diligence process.THE DUE DILIGENCE PROCESS HAS LONG INVOLVED EXPERTISE OUTSIDE THE TRADITIONAL SCOPE OF AN ACCOUNTANCY PRACTICE,EVEN WITH SPECIALIST TRANSACTION EXPERTISE.25SUSTAINABILITY IN

251、 TRANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN THE TRANSACTION WORKFLOW?The second challenge raised by several roundtable participants was the limitations of the skill sets of those who perform the work.More than one participant used contaminated soil as an example of a factor which had

252、arisen in their transactions.Assessing the impact of such a risk requires detailed expertise,albeit expertise which must be integrated into the overall assessment.The roundtable participants highlighted the need for those accountancy and finance professionals who might lead,or coordinate,the overall

253、 approach,to become more literate in detailed sustainability objectives:perhaps not to the extent of gaining all the necessary expertise themselves,but being able to contextualise and interpret the experts work.A roundtable participant commented,the starting point of thinking about risk in sustainab

254、ility-related issues is identifying those most significant impacts because they affect the natural resources and relationships on which the organisation depends,and the cumulative impact of many organisations over time also brings risks.One area of expertise is in the valuation of a potential acquis

255、ition in which sustainability concerns also affect the transaction process.As we know,that is the biggest issue at the moment because we do not have reliable data and we do not have comparable data.In addition,it may be that,potentially,there is reliable data only on certain aspects of the environme

256、nt,as,for example,data on biodiversity and water scarcity are equally difficult to ascertain.The International Valuation Standards Council(IVSC)which publishes global standards on the valuation of organisations,has integrated ESG into the revision of its standards which are effective from 31 January

257、 2025 but available for early adoption.Standard IVS 104 considers data and inputs and has been revised to address the broader range of data which is available to the valuer and the variability of the data.A valuer must consider the accuracy,completeness,timeliness and transparency of the data that t

258、hey include.An appendix to IVS 104 provides more detailed guidance on ESG issues and requires that the factors taken into account in developing the valuation are measurable and are reasonable in the application of professional judgement.There is a requirement that the valuer needs to clear in the sc

259、ope of the applicability of each of the E,S and G components and be clear on how this is reported in the valuation which they prepare.The IVS acknowledged in their briefing sessions which were conducted as part of the launch of the revised standards in February 2024 that there would need to be addit

260、ional work undertaken in this area(IVSC 2024).In addition to the standards the IVSC are also releasing a series of sector specific papers which include ESG considerations in valuations.1.6 Impact on valuationsThe complexity of placing a value on a potential acquisition increases when considering sus

261、tainability aspects.A roundtable participant in mainland China commented that,assessing past economic performance is easier than projecting future sustainability.The goal of financial due diligence is not just to produce a favourable report or judge past performance,but to predict future development

262、.This involves considering economic sustainability,potential major environmental impacts,and social factors that could lead to a sudden decline in performance.The uncertain effect of sustainability-related issues and of the investment needed to address specific risks should be considered.Transaction

263、s are often based upon the concept that the synergy created when two organisations unite can create more value for the stakeholders than the two entities can create separately,and have long-term benefits.The sustainability overlay to this is key,as it can either create or destroy value as the organi

264、sation seek to make the necessary changes to their operating models to achieve the required goals.Having a clear view of how sustainability-related issues interplay(through investments,changes in supply chains,wages and conditions of employees,for example)must influence the valuation of the entity b

265、eing acquired.An Australian roundtable participant commented in relation to the impact of sustainability-related concerns on the valuation that,all Ive heard people talk about is that it is the cost that matters.I like the approach from one of the Big Four accountancy firms because I think if you st

266、art with thinking that it is only the cost that matters,you miss out things that ultimately should affect the price.Another challenge that affects valuation considerations is the quality of the data available.As a European roundtable participant commented,it is much easier to do the valuation on the

267、 E than the S and the G because it is again back to unfortunately the reliability of the data.!Assess the current and known potential regulatory landscape from a sustainability perspective across all three social,environmental and economic dimensions.THE ROUNDTABLE PARTICIPANTS HIGHLIGHTED THE NEED

268、FOR THOSE ACCOUNTANCY AND FINANCE PROFESSIONALS WHO MIGHT LEAD,OR COORDINATE,THE OVERALL APPROACH,TO BECOME MORE LITERATE IN DETAILED SUSTAINABILITY OBJECTIVES.THERE IS A REQUIREMENT THAT THE VALUER NEEDS TO CLEAR IN THE SCOPE OF THE APPLICABILITY OF EACH OF THE E,S AND G COMPONENTS AND BE CLEAR ON

269、HOW THIS IS REPORTED IN THE VALUATION WHICH THEY PREPARE.26SUSTAINABILITY IN TRANSACTIONS|1.DO SUSTAINABILITY-RELATED ISSUES MATTER IN THE TRANSACTION WORKFLOW?Some of the traditional approaches need to be critically appraised as the variable nature of the impact of this agenda can range from additi

270、onal commitments to rectifying environmental issues to impacts on interest and discount rates that may be applied.Incorporating these considerations requires thought and a deep appreciation of the complexity of the issues.The absence of quantitative financial data to include in the models,especially

271、 for private entities,creates uncertainty,as one of the roundtable participants highlighted.The final effect on the valuation of an organisation comes from the stress testing of the valuation model and its assumptions.As one roundtable participant commented,we always looked at this stress testing fr

272、om a financial services perspective and you must highlight your top 10 risks.To me,climate risk is just one now that it is in top 10.So,from that point of view,in terms of your methodology and how you apply the evaluation.its just tweaking the variables and your risk capital.This participant continu

273、ed by commenting that there are also opportunities.If you look at your full supply chain,your labour issues,your gender gap as an opportunity,then all those things can be lifted up in terms of the valuation.Anyone leading either an acquisition or undertaking due diligence activities should perform a

274、 skills assessment against the potential risks and opportunities to ensure that the team contains the appropriate balance of skills and knowledge.By its nature,those in the team involved in a transaction,from investment committees(as discussed in section 2.1.2)through to those involved in the post-c

275、losure integration(as discussed in section 2.4),possess a range of deep skills and expertise.Few have an end-to-end role in the transaction process.Sustainability-related risks and opportunities add another dimension to this.Intersecting transactional and sustainability-related skill sets is vital i

276、n addressing the risks and opportunities effectively.A level of professional scepticism is also required.In section 1.4,the risks of greenwashing and bluewashing were highlighted.It is important for those undertaking work in this area to consider these risks and treat assertions made by organisation

277、s with the necessary level of scepticism.They should look to identify and corroborate evidence throughout the activities in the value chain.1.7 Developing skills and knowledgeAs for many other technical areas,it is important to develop an appropriate level of skills and knowledge about the subject.D

278、etermining the impact of sustainability-related issues in the transaction process in general,but in valuations especially,is an area where technical knowledge is particularly required.A roundtable participant working in the transaction sector commented,we find that there are several industry associa

279、tions in the investment community that have ESG due diligence questionnaires that general partners and limited partners11 are encouraged to use when they are having conversations.Fully assessing the impact of sustainability-related risks and opportunities requires a significant familiarity in the ra

280、nge of considerations across each of the social,economic and environmental areas,together with the strategic and governance considerations that wrap around them.As noted in section 1.5,the development of various strands of regulation and guidance across the whole area means that for any assessment t

281、o be sufficient there needs to be a range of expertise within the team.Each of these individuals needs to be aware of the current trends and developments,many of which may be nuanced by sector and location.Continual education is especially important in this area.Industry associations and professiona

282、l bodies,some of which are listed in the useful resources section,provide appropriate development opportunities.!Ensure the valuation approach includes sustainability-related factors as variables and is also included in any sensitivity analysis.11 A PE firm is called a general partner(GP)and its inv

283、estors that commit capital are called limited partners(LPs).Limited partners generally consist of pension funds,institutional accounts and wealthy individuals.!Conduct a skills assessment to ensure that the team has an appropriate range and depth of skills,knowledge and qualifications to address the

284、 sustainability-related risks and opportunities appropriately in the relevant aspect of the transaction.27SUSTAINABILITY IN TRANSACTIONS|2.THE ACQUIRERS PERSPECTIVEI think it is great that accountancy and finance professionals are involved in this because we bring a rigour and a focus on evidence fr

285、om our training.That is important,but we do need to be thinking beyond what we can easily do in financial terms.Australian roundtable participant2.1 Identifying the targetThe first phase of the acquirers activities focuses on identifying the target.In this phase,sustainability is an important consid

286、eration.An overview of the activities in this phase are shown in Figure 2.1,together with some key activities related to sustainability.2.The acquirers perspectiveFIGURE 2.1:Identification phase2.1.1 Acquisition strategy and risk appetiteThe first step for any organisation that is looking to underta

287、ke either a strategic or a tactical acquisition is to determine the overall strategy for such activities,and how this aligns with the organisations overall strategic objectives and hence with its acquisition strategy.The organisation will have its own sustainability strategy and may well be undertak

288、ing and reporting its own activities.For many roundtable participants,correctly 28SUSTAINABILITY IN TRANSACTIONS|2.THE ACQUIRERS PERSPECTIVEidentifying the strategic goals and risk appetite were fundamental steps steps that were sometimes missed.A dilution in the acquirers strategic goals and an inc

289、rease in risk can have an adverse effect on the organisation,not only because of the diversion of resources to address sustainability-related issues,but also because of its impact on the overall assessment of the quality of acquirers own activities.A key question is whether the expertise exists in t

290、he acquirer to manage the sustainability-related risks of the acquiree,especially if this is not a horizontal integration,or is one that involves different regulatory regimes.A roundtable participant from Canada commented,as an acquirer,you have to think“if I am to invest,if I want to buy this parti

291、cular company,what is the impact on the potential reputational risk that I could be exposed to,if they have severe environmental or social issues that are not adequately mitigated”.The participant continued,That is the challenge and the interesting part of it,to see how that impacts the priceandfrom

292、 a vendor point of view,how does that impact your ability to bargain for a better price and that is really what you are seeing now.How much is that?I guess that is the theory and the framework,but how much are we seeing thathappening in practice?I would say it depends on where you are located.This p

293、articipant contended that it might be making a difference in Europe but less so in Canada,where it may well be being ignored.A roundtable participant in mainland China had encountered,a case in the tyre industry,where wastewater treatment and waste management were critical issues.The project stalled

294、 owing to these environmental concerns,highlighting the significant challenges in dealing with hazardous waste.A UK-based roundtable participant from the transaction sector commented,from my risk perspective,it is quite crucial to make sure sustainability is certainly considered within every single

295、transaction,regardless of your lens,your sector or your geography.Sustainability-related risks are contextual to an industry and location.Undertaking the risk appetite exercise fully,with sustainability in mind,requires lateral thinking and the application of industry expertise.There are often many

296、secondary considerations,especially for the social agenda,which need to be fully encapsulated.A roundtable participant in mainland China commented,ESG is often considered in the pre-investment phase,but it is not actively brought up.Clients usually mention legal issues related to the environment or

297、social welfare,such as environmental assessments and compliance with social security contributions.Financial sustainability is more about profit forecasts and valuations,and less about ESG considerations.If the entity is a PRI Signatory or is a fund manager with a fund that falls within a labelling

298、regime12 and is targeting an acquisition,the thoroughness of the activities of the investment committee is crucial.The target/acquiree needs to meet the investment objective.!Understand how sustainability-related objectives are part of the overall business objectives.Determine criteria for any acqui

299、sition necessary for carrying out a risk assessment to ensure alignment takes place.2.1.2 Investment committeesInvestment committees,typically but not exclusively in PE or private investment houses,establish a prudent process for managing investment strategy,and are primarily responsible for strateg

300、ic oversight as well as monitoring the performance of the investment portfolio.They often appraise potential transactions and hold a governance role to ensure that the potential investments that an organisation wishes to make do not have an inappropriate level of risk.Given that sustainability-relat

301、ed issues present a significant business risk for many organisations,investment committees need access to an appropriate level of skills to assess this risk and opportunity(as discussed in more general terms in section 1.7).In setting their investment criteria,they need to be clear on the level of r

302、isk(and,indeed,opportunity)that they are willing to take,given the investment profile of the organisation.A UK-based CFO commented during a roundtable session,if you think about the people who are on the investment committees,they arelike all of us.We are having a conversation about ESG now because

303、we are all still getting our heads around it.So,I think we all need to be open eyed about this and accept that you have got to make it really easy for people.!Ensure that investment committees have the requisite skills to assess the sustainability-related opportunities and risks in any transaction.2

304、.1.3 Target screening and acquisition planningIn the target screening process of assessing potential acquisitions and determining which are worth developing further,sustainability should be a significant consideration.Earlier in the process,the acquirer will have determined its own risk appetite,inc

305、luding the impact of sustainability-related considerations.In typical target screening,the acquirer may consider areas such as size,scalability,market share,earnings and geographic footprint.To this it is important to add sustainability considerations stemming from the economic,social and environmen

306、tal agendas.At this stage it is important to consider regulatory implications,including current,expected and potentially foreseeable ones.These stem not only from reporting requirements(such as those from CSRD,or ISSB S2,for example see section 1.2.2)but also requirements that 12 In a labelling regi

307、me,investors in the fund must be told what their money is being used for,based on clear sustainability-related goals and criteria(FCA 2023b)29SUSTAINABILITY IN TRANSACTIONS|2.THE ACQUIRERS PERSPECTIVEare specific to a particular industry,for example wastewater treatment.This can be especially import

308、ant when overseas where the regulatory regime may be different.As an example,a forthcoming obligation to manage wastewater discharges may require significant investment and changes in the operating model,both of which need to be included in the financial forecasts.There might also be public relation

309、s considerations:even if investing in an area where regulation on wastewater is lax and expected to remain so,news that the company was polluting abroad might not play well in home markets.A final consideration in this area is the relative weightings of factors in the assessment criteria.Several of

310、the roundtable participants explained that sustainability-related issues had typically not factored heavily in the assessments.A review of the risk appetite should help to define the relative importance of this issue.As one roundtable participant commented,it might not be the most significant factor

311、,but it should be towards the top because the risks are significant.2.2 What assurance is sought?In the second phase of the M&A workflow,the activities of the acquirer(as shown in Figure 2.2)focus on valuation analysis,negotiations and investigation through performing relevant due diligence.The natu

312、re of that due diligence,as explored in section 1.4,can vary between a formal level of assurance or a level of comfort,according to the scope of the work specified.This phase also embraces the negotiation,which represents the first interaction between the acquirer and the potential acquiree.2.2.1 Va

313、luation analysis and negotiationsSection 1.6 considered how the valuation process may be influenced by sustainability-related issues.At this phase of the transaction,the acquirer is looking to place a value on the target and the considerations discussed in that section should be applied.In a PE-back

314、ed deal it may be appropriate to consider how sustainability issues may change the potential earnout multiplier.Several roundtable participants discussed whether the multipliers were being adjusted for relevant risks.The view was that in some cases adjustments were being made,however,the overall obj

315、ective of the PE house was to ensure that the organisation was sustainable when the period of its investment was drawing to a close.Therefore,the necessary expenditure(both capital and operational)was being factored into the calculations.!Ensure target screening criteria include sustainability-relat

316、ed risks and opportunities aligned to the acquirers own risk-assessment profile.Having identified the target and made the approach,the acquirer will now move on to the detailed assessment of the deal.FIGURE 2.2:Assurance phase!Ensure that sustainability is factored into any valuation,either through

317、an adjustment to a required rate of return or through necessary outlays.Negotiations will,inevitably,include sustainability considerations as contractual clauses are finalised and warranties agreed.2.2.2 Due diligenceThe nature of the sustainability due diligence that may be undertaken and how it in

318、terrelates with other due diligence activities that may be undertaken at the same time has been discussed in section 1.4(see Figure 1.3).It is important to be comprehensive in the activities undertaken and for the acquirer to refer to its own risk appetite and ensure that all the areas that have bee

319、n identified are included within the scope.The following two examples from roundtable participants highlight some of the thought processes that the acquirer needs to have to ensure that a comprehensive set of risks are addressed.30SUSTAINABILITY IN TRANSACTIONS|2.THE ACQUIRERS PERSPECTIVEAn Australi

320、an roundtable participant commented that,whats happening in the supply chain is particularly important and external assurance is fundamental.I am really a strong advocate for expanding the scope of external assurance,and particularly assurance over that process of determining the most significant im

321、pacts.Because if it is not externally assured,you do not know whether an organisation is giving you a complete picture of those most significant impacts.In undertaking due diligence,you are looking at potential risks and opportunities.A Europe-based roundtable participant commented,one of the key ri

322、sks is your reputational risk.Imagine you are an acquirer,and you want to have a big press release to say you acquired a certain business and then you realise that the sustainability claims are false.That is a significant issue.An indicative list of questions or considerations from a sustainability

323、perspective are given in Table ES1.Having obtained the due diligence outputs,it is important to assess the outcomes against the acquirers risk appetite.In this sense,sustainability-related issues are no different from those of other risk elements.It is at this point that some sustainability-related

324、issues may become deal breakers.Indeed,a KPMG US survey in 2023 as quoted by ESG Today concluded that more than half of respondents indicated that red flags on ESG could be a deal stopper(51%)or result in additional closing conditions(52%),and 44%said it could result in a valuation reduction.53%of r

325、espondents said that material ESG due diligence findings have resulted in deal cancellations,and 42%said that they have resulted in purchase price reductions(Segal 2023).As with the implications of any risk that is identified,there are several options if an issue is discovered and quantified during

326、the due diligence process(Figure 2.3).It is important that each risk is assessed appropriately and on its own merits.Not all non-mitigated risks should lead to the aborting of the transaction.Likewise,not all mitigated risks should be left to be managed in post-closing integration(see section 2.4).I

327、ndeed,planning for the post-closing integration needs to have commenced by this phase.!Ensure that all publicly available sources of information are identified and used.!Ensure that sustainability-related opportunities and risks are appropriately addressed in the specification of the due diligence w

328、ork to be undertaken.FIGURE 2.3:Options upon identification of an issue in the due diligence process31SUSTAINABILITY IN TRANSACTIONS|2.THE ACQUIRERS PERSPECTIVE2.3 ContractingThe third phase of the M&A workflow includes the completion of the transaction(see Figure 2.4).FIGURE 2.4:Contracting phasede

329、terioration in ESG indicators,or press and social media coverage.Such terms may present challenges as there may not be established standards to cover them,which itself may give rise to disputes.It may also be appropriate to seek warranties in certain areas as discussed in section 2.2.1.Ellrott notes

330、 that it is worth keeping in mind,however,that warranties are not only about damages claims,but also about disclosure.So,even if a buyer ultimately cannot claim damages,the disclosure may still prove to be helpful in the buyers quest to understand the ESG profile of its purchase.Also,the mere fact t

331、hat the topics were addressed in the due diligence and the SPA demonstrates to the outside world that ESG was front and centre when the deal was done(Ellrott 2022).In addition,warranty and indemnity insurance may be available.An example of such a clause,related to the social element of sustainabilit

332、y,is the so-called Weinstein clause that is being inserted in contracts in some jurisdictions.A Weinstein clause,also known as a#MeToo Representation and Warranty,requires target companies to warrant that:nthe companys senior executives directors,officers or senior managers are not and have not been

333、 involved in any sexual harassment claims;and nno settlement agreement has been entered into over any such allegations.In October 2022 Coll and Holman of Bloomberg Law cited that in the US in the previous year more than half of deals valued over$25 million included specific language focused on sexual harassment or misconduct,though they also question the effectiveness of such clauses(Coll and Holm