Environmental, Social and Governance (ESG) is attracting increasing attention from investors and acquirers when evaluating investment, growth funding and M&A opportunities.
At the outset of a possible deal, investors and acquirers are now taking more rigorous ESG considerations into account. They are seeking alignment with their own ESG policies – therefore understanding and assessing a target’s ESG position can be crucial to them, right from inception.
DRIVEN BY FUNDER EXPECTATIONS
Some investors and acquirers will be driven by ESG expectations from their funders on where their capital is being deployed. Many of these, for example will be institutional investors, pension funds and family offices, and their criteria then flows down into growing rigor in investment conditions and performance monitoring requirements.
Private equity company investors are leading the way here. This is partly attributed to their funder expectations, but it is also being driven by increasing regulation.
INCREASING REGULATION CAN BE AN UNEXPECTED SURPRISE
It may be a surprise to many private equity or growth fund backed businesses in the UK that they may be subject to an important EU regulation for ESG. SFDR (Sustainable Finance Disclosure Regulation) is an EU regulation is designed to provide compulsory ESG disclosure obligations and transparency towards sustainability. The reason why this could apply to some UK businesses is because if their backer raises any funds in the EU (most of the big ones do) then they may be obliged to report on SFDR.
SFDR is only one of many regulations that businesses will need to be aware of. The list is large and potentially confusing, so understanding what is necessary and applicable is important. A company’s jurisdiction and where it operates is also key. For example, with its cross-border trade arrangement with the Republic of Ireland, businesses in Northern Ireland might need to consider how competitive they are compared to those with stricter EU ESG reporting requirements, which may make them more appealing for investment.
