Today, ESG investing is quickly rising in popularity among investors. During these times, when climate change is a hot topic worldwide and green investment products are blooming, it almost seems like there is not an investor who would not like to participate in ESG investing. However, while institutional investors have noticed the opportunity and are now focusing on developing more ESG investment products, direct investment transactions have not moved towards ESG integration as rapidly. May this be because ESG investment products have been marketed well but the true benefits of ESG integration to one’s investment policy are not yet well-known to private equity investors?
ESG integration and ESG due diligence have various benefits from an investor’s perspective
A truly important benefit of ESG investing is the possibility to gain higher investment return, at least when viewed from a longer investment horizon. In addition, investors have other drivers to integrate ESG strategies to their investment processes. Inter alia, ESG integration can also help in overall cost savings, improve investors’ reputation among their stakeholders, give competitive advantages in the future, create new business opportunities and also give investors opportunities to invest according to their own values. Moreover, during the worldwide pandemic situation, sustainable investing has been shown to be the key to better crisis performance and recovery.
In my research “ESG Due Diligence in a Share Purchase Transaction from an Investor’s Perspective”, I studied the main benefits and drives for investors to conduct ESG due diligence in M&A transactions, namely focusing on share purchase transactions. In the course of the study, I found various benefits that can be associated with performing ESG due diligence in M&A transactions. ESG due diligence can even be considered crucial in the first phase of an investment process, when the investor wishes to make sure that its investment target is suitable considering the investor’s ESG strategy and to make sure that the investment is viable.
More precisely, important reasons for an investor to perform ESG due diligence review are to find out the actual target value and to ex-ante discover and mitigate potential ESG risks following from the transaction, i.e. to know whether to move forward with the transaction. When aiming to reach the sustainability goals, ESG due diligence can be used to assess how the target creates its value and whether this value creation is sustainable. The risks that the investors wish to mitigate with ESG due diligence include compliance risks, operational environment risks as well as reputation risks.
Overcoming obstacles related to ESG integration and ESG due diligence
Undeniably, performing ESG due diligence may have downsides in some cases due to which some M&A investors may still be afraid to include ESG reviews in their investment processes. However, as found in my study, most of the obstacles that can be associated with general ESG integration and ESG due diligence, can be defeated when letting go of the short-termism paradox which still seems to be prevalent today. This means that private equity investors have little to be afraid of and there is still an excellent opportunity to take part in the “doing well by doing good”. Further, performing ESG due diligence is a great practical way to take action and to get the most of ESG investing in M&A transactions.
Getter Villmann, Faculty of Law, University of Helsinki, Graduate 2021