It’s a deal: six ways to think about sustainabililty in M&A transactions

Some of the most significant risks and opportunities facing businesses today centre on sustainability. As risks, they can result in financial losses and regulatory breaches, and even potentially destroy reputations that have been built up over decades. As opportunities, however, they can spark innovation, help a business stand out in the marketplace, and set it on course for long-term success. 

Given how high the stakes are, it is imperative that businesses consider sustainability criteria when transforming their operating models through mergers, acquisitions and divestments. In fact, Sustainability in transactions, a new report by ACCA and Chartered Accountants Australia and New Zealand, highlights that sustainability issues should be considered at every stage of an M&A transaction. That’s from initial strategy setting through to the closing of a deal and the post-deal integration or separation of an entity. 

Sustainability can be defined as a business’ ability to survive and thrive in the longer term, reflecting the need to transition to a more sustainable operating model that simultaneously addresses environmental, social and economic viability. Future cash flows could be impacted if an entity fails to manage its sustainability-related risks or seize sustainability-related opportunities. For this reason, sustainability must be factored into the valuation model and sensitivity analysis for every M&A transaction.

Do your due diligence

According to the report, which is based on the insights of accountancy and finance professionals across the globe, sustainability-related risks and opportunities must be thoroughly incorporated into the due diligence process. As well as being a specific workflow in its own right, sustainability needs to be integral to other forms of due diligence, including commercial, financial, legal and operational due diligence.

Key sustainability-related issues in due diligence include the target entity’s culture, strategy, emission and transition plans, labour practices, policies and procedures, and risk assessment practices. Those professionals who are evaluating the transaction will need access to the appropriate skills and knowledge to ensure they are making an informed decision. 

The report suggests more than 40 sustainability-related questions for businesses to consider as part of their due diligence process. These questions cover topics such as the target’s accounting policies, human resources policies, governance structure and exposure to environmental risks. 

Once the due diligence process has been completed, the results should be evaluated against the overall risks and opportunities associated with the transaction. All transactions should aim to enhance or create value – so a transaction should not go ahead if it is potentially detrimental to value creation. 

Vital considerations

The report makes six key considerations for considering sustainability in the context of the M&A transaction cycle. The first is that there should be strategic alignment on the sustainability objectives of both the acquirer and the acquiree, taking a risk-based approach. Secondly, sustainability-related due diligence needs to be integrated into the overall approach to the transaction. This is because sustainability is not a standalone business issue: it is integral to the future of the organisation. 

The third consideration is that there must be operational rigour in ensuring that the organisation’s assets are commoditised to meet sustainability objectives, recognising that the transition to a sustainable business model presents both opportunities and risks. Meanwhile, the fourth acknowledges that the sustainability agenda is agile and flexible due to our understanding of the issues and the regulatory environment continuing to evolve.

Fifth is the consideration that because of the technical nature of sustainability-related issues, those leading the work across all phases need relevant expertise, including a detailed appreciation of the issues at hand. This will enable them to effectively analyse and interpret the information they receive. 

Finally, any issues identified should be framed as actionable observations rather than as blocks to the transaction. It would be a shame for a transaction to fail not because of a specific sustainability issue, but because there is a lack of understanding about the implications of that issue and how the associated risks can be addressed in a post-closure process. 

Future of transactions

The integration of sustainability-related issues into the transaction process is currently only in its infancy. I believe it will become increasingly important over time, however, especially as market expectations heighten and regulatory requirements proliferate. 

Given that sustainability-related issues are critical to long-term operational success, it is essential that businesses consider them thoroughly when undertaking any strategic transaction that impacts their operating model. Only by looking at the transaction through a sustainability lens will they be able to identify the risks and opportunities that will indicate whether the deal is in the long-term interests of the business – or not, as the case may be.    

Read Sustainability in transactions and our other research at accaglobal.com/professional-insights