PwC Canada: growing emphasis on non-financial ESG factors in M&A

The new report released last February 27 starts:

"Environmental, social, and governance (ESG) issues are transforming the way deals are being done. Just a few years ago, environmental sustainability and social disparities were largely the concerns of activist stakeholders and forward-thinking regulators. Now, these topics are maturing into a set of ESG due diligence criteria with important implications across the mergers and acquisitions (M&A) landscape, from raising financing to carrying out acquisitions, divestitures, and IPOs. As the due diligence conversation shifts from one purely about risk and financial impact to include a broader range of nonfinancial priorities and metrics, dealmakers need to get up to speed and update their processes with some urgency."

Miriam Pozza, Global ESG Deals Leader, Partner, PwC Canada & team have identified six red flags in the M&A landscape that dealmakers need to be aware of. Unlike red flags that stop a deal from happening, orange flags signal that dealmakers should proceed with careful steps to limit risk and enhance value. The orange flags:

• Unethical marketing. Messages inconsistent with reality.

• Reputational risks. “Greenwashing” accusations, regulatory failures, negative midia, loss of consumer confidence and revenue.

• High risks in supply chains. Vulnerabilities including geopolitical issues.

• Disengaged employees. "Voice for the legitimacy of a company’s ESG credentials".

• The transformative deal that isn’t. M&A business models really need to support the ESG transition.

• Inadequate nonfinancial disclosures. Transparency and validity of data.

The topic of double materiality is also mentioned:

1. financial materiality, activity that has an effect on the company’s cash flows or enterprise value, and

2. impact materiality, activity that affects either people or the environment, whether directly or indirectly

Click at the image below to read this PwC report.

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