Bankers Face ESG Risk With Potential to Upend Deals, Study Shows

Lisa Pham, Bloomberg News

Workers arrive at Goldman Sachs headquarters in New York, US, on Wednesday, June 15, 2022. The Securities and Exchange Commission is looking into whether some investments for the funds are in breach of ESG metrics promised in marketing materials, one of the people said. Photographer: Michael Nagle/Bloomberg , Bloomberg

(Bloomberg) -- Investment bankers working on mergers and acquisitions need to review their due diligence processes to ensure deals aren’t upended by an evolving set of ESG risks, according to Berkeley Research Group.

A survey of corporate finance professionals and M&A lawyers conducted by BRG revealed that environmental, social and governance issues have become a key factor in driving an increase in disputes this year, with more expected over the next 12 months.

“There’s likely to be more undisclosed issues which need to be worked through in due diligence,” Andrew Webb, a managing director at the research group and one of the contributors to the analysis, said in an interview.

Last year saw global M&A deals hit transaction volumes of almost $6 trillion, according to BRG, with low interest rates and frothy stock markets boosting valuations. With liquidity now far less abundant, the outlook for deals has darkened, and those trying to settle transactions face a long list of hurdles ranging from recession risks to geopolitical upheaval.

BRG’s findings around ESG risks mark a significant departure compared with earlier annual surveys, which saw hardly any mention of such issue. In the European Union and the UK, respondents now point to the rise in regulations covering everything from ESG to data privacy and antitrust laws as a principal factor driving disagreements between M&A parties.

“Deals don’t fall apart because of the ESG concerns,” Webb said. “My experience has been that the deal falls apart because unpicking the ESG causes the trust to evaporate between buyer and seller.” In general, the issue is “a lack of fulsome disclosure that causes the problem during the negotiations.”

At the same time, a wave of divestments by companies trying to get rid of their carbon-intensive assets will ultimately aid M&A activity, the BRG survey found. But much of that is likely to be tainted by friction between the parties involved, as the evolving regulatory landscape makes such holdings riskier to deal with, it said.

Almost 80% of respondents in the survey said they either agreed or strongly agreed that the lack of established metrics and rules around ESG, coupled with a more aggressive regulatory environment, make disputes more likely in the coming 12 months.