From finance, legal and HR, to technology, intellectual property, strategic fit and more, all disciplines require expert review before any significant business acquisition is executed. But now, evidence is mounting that a new due diligence discipline is on the rise for M&A.
Environmental and Social Governance (ESG), the practice of reporting on nonfinancial objectives demonstrating ethical organisational behaviours, is being driven by broader stakeholder demand for better transparency and disclosure. Many investors are now demanding ESG be factored into the due diligence process.
Mike Davis, Executive Business Consultant at Waterstons explains: “In the past, issues like climate change and diversity were often deemed peripheral to ongoing commercial viability, but board rooms and executive teams looking to create a truly long-term value proposition are now taking them very seriously.”
Waterstons, which has provided business and technology management consulting expertise to UK and international clients for almost 30 years, lists value creation during the M&A due diligence process as a core capability. “When assessing the technology assets and enterprise architecture of acquisitions for Private Equity clients, we also identify and unlock opportunities to increase the value proposition.
“Value can be found through operational cost and/or risk reductions, or through new revenue streams embedded in organisational data. This makes ESG due diligence an obvious service expansion for us because ESG disclosure must be evidenced by data,” says Mike.
ESG due diligence analyses the environmental and social topics and objectives an organisation has chosen to disclose, comparing them to those being disclosed by peers and against the expectation of the organisational stakeholders.
This could be compliance with relevant regulations and standards across topics like energy, greenhouse gas emissions, water usage and waste; issues like diversity, inclusion, labour standards and health and safety from a social perspective, and risk management systems, policies around anti-corruption, and remuneration transparency for governance. Waterstons acknowledges that ESG due diligence is not a one-size-fits-all.
“Different industry sectors and business size can impact the extent of diligence required,” continues Mike. “Many frameworks are available to support ESG reporting, but there is no agreed standard in place. Knowing which to apply based an organisation’s objectives, or whether ESG disclosures are simply greenwashing, are among the biggest challenges.”
With a value creation mindset, where reimagining business by unlocking organisational potential through technology is baked into everything they do, Waterstons is well-placed to support M&A activities.