🔒 ESG goes mainstream – now a key ingredient in mergers and acquisitions

In this Rational Radio interview, top lawyer Rudolph du Plessis explains how the previously marginal measure of a company’s Environmental, Societal and Governance impact has gone mainstream. The partner in leading global law firm Herbert Smith Freehills says that buyers (and sellers) are taking ESG into account not just in price determination – but even when deciding to do the transaction at all. – Alec Hogg

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People like Swedish environmental campaigner Greta Thunberg have got up the noses of US President Donald Trump and others – but their activism is playing a role in slowly getting corporates to be better global citizens, including in South Africa.
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That’s the message from Rudolph du Plessis, of big corporate law firm Herbert Smith Freehills, which mainly does M&A work (mergers and acquisitions). In this interview with BizNews founder Alec Hogg, Du Plessis discusses how Environmental, Societal and Governance (ESG) issues impact on the value of businesses.

“The way we see it in the M&A space, because of increased awareness pushed by consumers and environmental activists, the ESG issues have moved up the agenda.

Also read: David Shapiro: Why ESG is hot – and managers need to pay attention

“We have seen over the past couple of years it is important not only for the buyers but also the sellers. The social impact of operations is something you have to consider as part of due diligence when you buy, because it can have an impact on the buyer’s own reputation.

“There is reputational risk that is played on by all stakeholders. When you take over a company you need to make sure you can deal with these issues,” says Du Plessis.

Sellers are increasingly looking at what they are disposing of and in today’s world it is no longer possible to exit a business and leave it in a mess, he points out.

You need to investigate ESG issues carefully before take-over, because these issues will become yours in the future, Du Plessis advises business buyers.

“Your exit must be responsible. In today’s world people talk about a clean and responsible exit. For example, buyers are increasingly asking questions about how the company will operate in the future,” he says.

Hogg points out that in the real world, when guys want to sell their business, they have already taken a decision that they want out and quite often they have done a poor job of the ESG.

Also read: Responsible Investing – ESG – much more to it than simply “Do No Evil”

“What we see in practice is, if you look at traditional investing, there was a sole emphasis on financial return. Contrast that with philanthropy, which is to deliver a social return. More and more, we are seeing investment somewhere in the middle,” responds Du Plessis

Deal drivers include social and financial concerns. There is reputational harm for the person selling if there is a big mess.

“In the old days if you were buying a mine you had to make sure they had money set aside for rehabilitation of the mine. The Guptas played around quite nicely with those funds in some of their deals,” says Hogg.

Increasingly, says Rudolph, governments are also looking at those kinds of issues and saying we need to put in place measures to fulfil rehabilitation obligations.

“Governments are looking more and more at that… In France there’s a new law in which large companies must set out how they will prevent human rights violations and environmental issues and this is an indication of the direction in which the world is moving.”

How far behind the curve is SA?

Measures in King IV and Companies Act requirements of ethics committees indicates that in theory SA is not far behind, reckons Du Plessis. Shareholder activism isn’t as widespread in SA as elsewhere.

“SA still has some way to go though… but we aren’t that far behind. There are some progressive measures in our legislation that indicate we are thinking about those things.”

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