How is ESG  Transforming M&A Dealmaking and Legal Strategy

Introduction:

Environmental, social and governance (ESG) considerations have become essential drivers of value and reputation in modern M&A transactions.[1] While M&A stands to be the consolidation of companies or major assets through financial transactions[2], ESG issues continue to be salient particularly in the energy sector. The growing prominence of ESG has welcomed profound legal implications that are reshaping M&A practices. It is clear that ESG is fundamentally transforming M&A deal-making by becoming a legal imperative in the commercial landscape.

What is M&A? 

The ordinary concept of M&A refers to transactions in which companies combine in some medium. By mergers, the entities join on relatively equal terms or through acquisitions where  one company assumes greater control over another. What unites both types of transactions is the growing significance of ESG, which has become the cornerstone of commercial transactions.

M&A intends to give organisations and practitioners a unique position to embrace positive impacts not only for people and business but also wider considerations for the planet. As identified by Maximillian Meyer, the executive director at JP Morgan, he underlines that in Europe, sustainability and ESG is at the front and centre of every transaction in the workstream.[3] In general terms ,this recognises the insight that private equity firms have over a company’s operations and this gives M&A buyers a real understanding of ESG performance and how to effect positive change that benefits financial performance.[4]

ESG Value in Deal Cycle

In modern M&A deals, being environmentally and socially responsible and having a good corporate governance make up an essential investment criteria. This makes an organisation more desirable due to their commitment to ESG initiatives, they will have an enhanced brand value and reputation.

The predominant impact of ESG has been embraced in the due diligence process as it is an integral part of dealmaking, influencing every aspect of transaction from deal structure, pricing and documentation as to whether a deal closes. The emphasis on ESG has broadened and modified the scope of M&A deals, adding to the complexity of the transaction.

It is evident that most corporations are increasingly exposed to a myriad of risks from climate change in their daily processes which means there has to be regular consideration of ESG interests.[5]

ESG allows corporations increased prospects to embrace valuable opportunities.  Brookfield Infrastructure has focussed on  expanding their climate technologies. During its 2021 IPL acquisition, Brookfield outlined their plans to diversify the natural gas and chemical business into including clean hydrogen and carbon capture. This strategy deeply aligned with their customers who joined an industry consortium committed to reaching net-zero by 2050. Brookfield highlighted this approach to their investors as a major opportunity, utilising  their expertise in decarbonisation to the best.[6] 

Sector Spotlight: Energy

The energy and manufacturing sector sit at the pinnacle of facing significant ESG risks, including emissions, waste and compliance. Legal review must consider these essential aspects within their deal structuring.

As recognised with consumer habits that have become more socially and environmentally  aware in how they choose their money on goods and services that are more environmental friendly and ESG compliant . This is also likewise demonstrated by investors who choose to allocate capital based on corporations ESG performance. This is evident with the first half of 2021, where there were 140 low carbon energy transactions completed globally, with the UK delivering 11 of these recognising that companies addressing ESG concerns are securing more favourable outcomes. Low carbon M&A allows for energy suppliers to shift to cleaner fuels and production by acquiring alternative resources.[7]

Environmental, social and governance (ESG) issues have increasingly become a top priority, where industry leaders like BASF, Dow, DuPont, LANXESS, LyondellBasell, SABIC and Solvay[8], have all issued detailed, data driven sustainability reports. While the trend is imposed on the Energy sector due to pressure from the investment community, government actions and expectations of employees. Major companies are embracing ESG goals by enhancing transparency and demonstrating genuine ambition, which in turn adds value to their brand.

While no two chemical companies have the same objectives when pursuing ESG initiatives, they do share common objectives that are material part of the transaction thesis. Some of these objectives include reducing plastic waste, lowering greenhouse gas emissions, addressing social issues with workforce and adhere to corporate governance policies and best practices. These commitments are not aspirational but they influence the value and strategic direction of M&A activity, mitigating regulatory and reputational risks. 

Legal Implications and Trends

With the current upheaval in environmentally friendly interests across numerous of actors, the rise in ESG scrutiny in corporate transactions is not unexpected. While there is external pressure, there are also other factors which affect such deals such as regulatory changes, financing and contractual pressures on buyers in M&A deals, investor and other stakeholder demands, as well as companies’ own internal policies, practices and procedures. In addition to affecting the business rationale for some M&A deals, these factors incentivise parties in M&A deals to enhance ESG due diligence and transaction planning.[9]

The fast-paced nature of deal-making often clashes with the complex scope of human right obligations as traditional M&A teams fail to meet such demands due to the need of navigating across laws across jurisdictions. The adherence to confidentiality also complicates the process as human rights inquiries conflicts with the very essence of keeping such details secured. However, such diligence also come with downsides as it introduces additional costs and delay. This underlines the growing need to increase interdisciplinary legal training, to equip M&A lawyers to identify and manage risks effectively.

There are not only legal implications but high profile allegations of “greenwashing” and ESG misstatements when such regulatory standards are not met can lead to public backlash leading to diminished brand trust and financial losses. This had led to a changing depiction on how firms assess not just compliance concerns but the creditability of ESG claims and how firms uphold ESG friendly policies. 

Future Outlook: ESG as a Legal Imperative 

Following our consideration above, it is evident that ESG has opened new pathways in which value can be embraced in transactions. This can be translated by the array of organisations which have expanded their offerings, found new revenue opportunities and discovered hidden value due to ESG. This has led to ESG focussed corporations securing premium evaluations in comparison to their counterparts. For example,  Emerson recently sold its climate tech business for $14 billion. That’s more than 12x its cash flow the year prior to the acquisition, a premium compared to typical HVAC[10] manufacturers. In a similar vein, Deloitte has also aided a consulting service provider to explore an acquisition of an ESG consulting business that was valued at 8-15x sales.

With opportunities that ESG elicits, it is necessary to consider the complexity of risks arising from environmental liabilities. To manage such risks, stakeholders should adopt a proactive and collaborative approach in order to enhance the value of their transaction. Buyers should invest in comprehensive assessments and variety of tools that help them identify ESG liabilities. Collaborating with insurers also aids to mitigate risks and reduce exclusions within W & I insurance policies. By integrating W&I insurance into a broader ESG framework, buyers and sellers and insurers can drive responsible and forward-looking M&A transactions that generate value and uphold long-term sustainability.[11]

Conclusion:

The impact of ESG on the energy industry M&A is fundamentally transformative. M&A will be a critical tool for chemicals companies to achieve their ESG objectives, and market practices will continue to evolve as the industry’s focus on ESG matures. This article has articulated that while ESG stands to be a commercial and legal imperative, it is still   necessary to mitigate the downsides this elicits in transactions: adding complexity and greater legal compliance. However, ESG considerations should be celebrated as it has added noveau means of adding value to M&A transactions through increased brand image, reputation and creditability.

Reference(S):

[1] ‘How ESG Impacts M&as and Dealmaking’ (Legal Developments, March 2025) <https://www.legal500.com/developments/thought-leadership/how-esg-impacts-mas-and-dealmaking/> accessed 27 July 2025

[2]Hayes A, ‘Mergers and Acquisitions (M&A): Types, Structures, and Valuations’ (Investopedia) <https://www.investopedia.com/terms/m/mergersandacquisitions.asp> accessed 27 July 2025

[3] Clancy H, ‘ESG Can Make or Break a Merger: Here’s What Dealmakers Are Looking For’ (Trellis, 24 July 2024) <https://trellis.net/article/esg-can-make-or-break-merger-heres-what-dealmakers-are-looking/#:~:text=%E2%80%9CEspecially%20in%20my%20field%2C%20every%20transaction%20that,where%20he%20manages%20advisory%20services%20in%20Europe%2C> accessed 27 July 2025

[4] ‘From Manufacturing to Medicine: How Digital Twins Can Unlock New Industry Advantages’ (Deloitte Insights, 11 July 2025) <https://www.deloitte.com/us/en/insights/topics/business-strategy-growth/digital-twin-strategy.html> accessed 27 July 2025

[5] Afra Afsharipour and others, ‘ESG Dealmaking’ (Oxford Law Blogs, 13 January 2025) <https://blogs.law.ox.ac.uk/oblb/blog-post/2025/01/esg-dealmaking> accessed 27 July 2025

[6] Brookfield, “Brookfield Infrastructure Partners: 2021 Investor Day,” September 2021. ‘Homepage’ (Brookfield Infrastructure Partners) <https://bip.brookfield.com/> accessed 27 July 2025

[7] (Destination net zero: Why de-risking The Energy Transition Is Good for everyone | WSP) <https://www.wsp.com/en-gb/insights/destination-net-zero-why-de-risking-the-energy-transition-is-good-for-everyone> accessed 27 July 2025

[8] ‘Top 10 Chemical Manufacturers in Europe’ (Sanudo) <https://www.sanudotrade.com/post/top-10-chemical-manufacturers-in-europe#:~:text=Conclusion,also%20innovation%20and%20sustainability%20initiatives> accessed 27 July 2025

[9] Ibid5

[10] (Four ways ESG is reshaping M&A) <https://www2.deloitte.com/content/dam/Deloitte/us/Documents/mergers-acqisitions/us-four-ways-esg-is-reshaping-m-a.pdf> accessed 27 July 2025

[11] ‘Managing Environmental, Social and Governance Risks in Non-Life Insurance Business’ (UN Enviroment Programme) <https://www.unepfi.org/industries/insurance/managing-environmental-social-and-governance-risks-in-non-life-insurance-business/> accessed 27 July 2025