A new expert talk from Refinitiv explores the growing need for due diligence relating to ESG to be incorporated into pre-deal analysis in the private equity space.
- Robust due diligence can help investors to identify a range of potential risks before concluding any PE deal – and ESG-related due diligence is becoming increasingly important.
- Conducting broader due diligence research and adopting additional risk mitigation measures are also essential.
- Due diligence is an ongoing process and partnering with a trusted, specialist due diligence expert can add immediate value.
PE deals and the need for ESG due diligence
Potential PE acquisitions and investments – which involve illiquid, private or unlisted companies and assets – must be thoroughly researched and analysed prior to concluding any deal.
This is the message of a new expert talk from Refinitiv, which underscores the critical importance of comprehensively evaluating any potential risks that could be linked to a PE investment. The core challenge in any PE deal is maximising profitability, and therefore mitigating risk is of paramount importance.
This is where thorough and robust due diligence, which can help investors to identify a range of potential risks, becomes invaluable.
Our expert talk goes on to stress that, in addition to risks such as those relating to financial or IT concerns, ESG risk factors must also be considered, as ESG legislation and directives continue to gain traction across the globe.
Two pertinent examples include:
- The German Supply Chain Due Diligence Act (SCDDA), which has been in force since January 2023. The act regulates corporate responsibility around issues such as (but not limited to) human rights and environmental standards – and crucially extends due diligence responsibilities to cover a firm’s contractual partners and other indirect suppliers and subcontractors.
- The EU Commission’s Corporate Sustainability Reporting Directive (CSRD), also effective January 2023, which requires companies to report on how their business activities impact people and the environment and how sustainability impacts their organisations.
The consequences of non-compliance with these and other relevant regulations can be significant and can extend to potentially substantial fines and reputational damage.
Ensuring that any new acquisition or investment complies with ESG-related regulations and will not inadvertently introduce risk to the PE fund, is therefore key.
Best practice insights
Our expert talk offers a range of practical insights into how to develop a best practice response to the need for ESG due diligence.
Companies need to ensure that they acquire a holistic understanding of the ESG-related policies and practices of any target company before concluding any deal.
Environmental:
It is worth assessing a target company’s waste management initiatives, energy use, pollution control, treatment of animals and conservation efforts, to name a few.
Social:
Factors to consider include supplier relationship management, whether there is support for local community initiatives, whether employees have safe and healthy working conditions, and more.
Governance:
PE funds should ensure, for example, that a target company maintains transparency in their accounting and promotes the participation of shareholders. They should also seek to understand how the target deals with conflicts of interest and other challenges.
In addition to the critical importance of gathering ESG-related information such as this, conducting broader due diligence research is also essential. This research should include, inter alia:
- Screening and further research where areas of concern are identified
- Official corporation registry checks
- An analysis of ownership and UBO records
- Media checks for any adverse media
- Litigation and regulatory checks
- Reputational enquiries
Broader risk mitigation that extends beyond due diligence includes such considerations as:
- Detailed risk analysis on the prospective target and their direct and indirect suppliers
- Formulating, establishing and adopting policy statements post-acquisition
- Developing comprehensive remediation procedures
- Formalising complaints procedures and clearly documenting findings
Finding the right due diligence partner
When considering any acquisition or investment – including those that fall under the PE umbrella – many companies find that the volumes of information that must be analysed and assessed can be overwhelming – and partnering with a trusted, specialist due diligence expert can be a valuable exercise.
Not only does using external specialists ensure independence and objectivity, but it also can help verify any information collected by the investor.
A trusted due diligence partner should not only have access to world-class data, but also offer global coverage and regional, on-the-ground insights to further inform better investment decisions.
Our expert talk goes on to stress the importance of remembering that due diligence is an ongoing process that requires reliable access to accurate, up-to-date information.
The key takeaway is this: due diligence – including that relating to ESG considerations – has a crucial role to play in any potential PE acquisition or investment decision.
Read the full expert talk here.
Legal Disclaimer
Republication or redistribution of LSE Group content is prohibited without our prior written consent.
The content of this publication is for informational purposes only and has no legal effect, does not form part of any contract, does not, and does not seek to constitute advice of any nature and no reliance should be placed upon statements contained herein. Whilst reasonable efforts have been taken to ensure that the contents of this publication are accurate and reliable, LSE Group does not guarantee that this document is free from errors or omissions; therefore, you may not rely upon the content of this document under any circumstances and you should seek your own independent legal, investment, tax and other advice. Neither We nor our affiliates shall be liable for any errors, inaccuracies or delays in the publication or any other content, or for any actions taken by you in reliance thereon.
Copyright © 2023 London Stock Exchange Group. All rights reserved.
The content of this publication is provided by London Stock Exchange Group plc, its applicable group undertakings and/or its affiliates or licensors (the “LSE Group” or “We”) exclusively.
Neither We nor our affiliates guarantee the accuracy of or endorse the views or opinions given by any third party content provider, advertiser, sponsor or other user. We may link to, reference, or promote websites, applications and/or services from third parties. You agree that We are not responsible for, and do not control such non-LSE Group websites, applications or services.
The content of this publication is for informational purposes only. All information and data contained in this publication is obtained by LSE Group from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, such information and data are provided "as is" without warranty of any kind. You understand and agree that this publication does not, and does not seek to, constitute advice of any nature. You may not rely upon the content of this document under any circumstances and should seek your own independent legal, tax or investment advice or opinion regarding the suitability, value or profitability of any particular security, portfolio or investment strategy. Neither We nor our affiliates shall be liable for any errors, inaccuracies or delays in the publication or any other content, or for any actions taken by you in reliance thereon. You expressly agree that your use of the publication and its content is at your sole risk.
To the fullest extent permitted by applicable law, LSE Group, expressly disclaims any representation or warranties, express or implied, including, without limitation, any representations or warranties of performance, merchantability, fitness for a particular purpose, accuracy, completeness, reliability and non-infringement. LSE Group, its subsidiaries, its affiliates and their respective shareholders, directors, officers employees, agents, advertisers, content providers and licensors (collectively referred to as the “LSE Group Parties”) disclaim all responsibility for any loss, liability or damage of any kind resulting from or related to access, use or the unavailability of the publication (or any part of it); and none of the LSE Group Parties will be liable (jointly or severally) to you for any direct, indirect, consequential, special, incidental, punitive or exemplary damages, howsoever arising, even if any member of the LSE Group Parties are advised in advance of the possibility of such damages or could have foreseen any such damages arising or resulting from the use of, or inability to use, the information contained in the publication. For the avoidance of doubt, the LSE Group Parties shall have no liability for any losses, claims, demands, actions, proceedings, damages, costs or expenses arising out of, or in any way connected with, the information contained in this document.
LSE Group is the owner of various intellectual property rights ("IPR”), including but not limited to, numerous trademarks that are used to identify, advertise, and promote LSE Group products, services and activities. Nothing contained herein should be construed as granting any licence or right to use any of the trademarks or any other LSE Group IPR for any purpose whatsoever without the written permission or applicable licence terms.
