ESG is increasingly critical in US M&A, but greenwashing concerns persist

Buyers are scrutinizing everything from an acquisition target’s projected greenhouse gas (GHG) emissions to ways in which a deal may impact their own climate mitigation strategies. In this regard, reliable and verifiable reporting of climate performance is set to become an essential tool for improving transparency.

Questions concerning the environmental sustainability of acquisition targets are increasingly important in M&A transactions. Buyers are scrutinizing everything from an acquisition target’s projected greenhouse gas (GHG) emissions to ways in which a deal may impact their own climate mitigation strategies. In this regard, reliable and verifiable reporting of climate performance is set to become an essential tool for improving transparency.

Meanwhile, the government is increasingly focused on efforts to mandate extensive environmental, social and governance (ESG) disclosure. For example, in March 2022, the Securities and Exchange Commission (SEC) proposed rules1 that would require public companies to disclose information about their direct GHG emissions and certain indirect emissions from their supply chains and customers. Another proposed regulatory regime in the works is the Federal Supplier Climate Risks and Resilience Rule, announced by the Biden administration in November 2022. This proposed rule would require large federal government contractors to “disclose their greenhouse gas emissions and climate-related financial risks and set science-based emissions reduction targets.”

Supply chain risk is another area of increasing scrutiny in M&A due diligence, and the government is once again placing this under the ESG spotlight. Buyers often assess reputational and litigation risks associated with potential human rights concerns in the supply chains of acquisition targets. For example, the supply of critical minerals will need to expand to support growing renewable energy production in the US. To mitigate supply chain risk, US regulations and laws, including the Inflation Reduction Act that was signed into law in August 2022, encourage investment in the domestic production of these materials and reliance on “friendly” foreign trade partners, with processes in place to avoid human rights abuses. For the time being, however, many renewables developers are heavily reliant on foreign sources of critical minerals, particularly China and the Democratic Republic of the Congo. Between the risk of enforcement under the Uyghur Forced Labor Prevention Act—signed into law in December 2021—and the potential for other regulatory scrutiny, these considerations can be important in M&A transactions and will become increasingly significant as the energy transition builds momentum and investment into renewable energy assets continues to rise.

Read more: Ldsupra.com