Merger & Acquisition (M&A) transaction communications have almost become de rigueur for listed companies. However, an astute public and investor relations consultant knows that environmental, social and governance (ESG) considerations are issues that must be addressed consciously in any M&A transaction, as stakeholders place increasingly higher expectations on companies and their boards to play a greater role beyond merely making profits.
Poor ESG practices may result in reputational damage to parties in an M&A transaction, or even cause the breakdown of such a transaction. Conversely, companies that take proactive measures to manage ESG risks and have robust ESG practices implemented internally reduce the likelihood of such damages and risks.
It doesn’t take months of investigative journalism to uncover poor ESG practices, now anyone can publicly report (sometimes unverified) wrongdoings on social media. Videos of unsanitary conditions at production facilities or workers’ dormitories can quickly spiral into a public relations crisis.
Firstly, environmental practices of a target companies and its supply chain need to be assessed thoroughly during due diligence. Companies risk losing key clients that stake their reputation on being responsible corporate leaders if there are doubts on the green credentials of its supply chain.
Secondly, acquirers must ensure that target companies do not engage in exploitative practices. In addition to avoiding ethical and legal violations, having a good track record in developing local communities reflects the social dimension that bestows reputational benefits.
Finally, while corporate governance is not new to Singapore’s existing regulatory requirements, perceptions matter. Companies must be seen to promote transparency and oversight as provided for by the relevant acts and the Code of Corporate Governance. In particular, pertinent questions from shareholders and the media must be addressed with clarity to protect the company’s reputation.
Post-completion of any M&A transaction, ESG considerations must remain a focus of the integration plan. Acquirers need to communicate how they intend to address ESG risks of the target company and the progress made in its remedial efforts.
The growing importance of ESG in M&A transactions cannot be overstated. We expect ESG to be increasingly incorporated into mainstream valuations and risk assessments, with parties being expected to factor in ESG risk when evaluation the impact of any potential transactions.
Failure to comply with ESG standards has real consequences.
Ignoring social issues can weaken a company’s competitive position and can also lead to boycotts, labour strikes, community hostility, and loss of licences to operate, all of which can significantly impact future earnings. Enhancing corporate governance and transparency helps avoid future controversies which carry significant reputation risk.
After thousands of workers at the world’s largest rubber glove maker contracted Covid-19, asset managers criticised the Company’s Board for failing to safeguard the workers’ health and safety of their workers living in the company’s dormitories. The Company was then hit by an import ban over forced labour allegations, stalling its Hong Kong listing plans.
As more and more companies realise that higher ESG standards will enable them to attract a higher valuation and have better access to capital, strategic public and investor relations will also need to adapt.
To do right is a long-term commitment and building your reputation as a responsible and green corporate leader begins well before any M&A. Talk to us today for a consultation and how you can integrate and embed ESG considerations into your company’s overall plans.