Sustainability growing influence on financial due diligence process

ACCA and Chartered Accountants ANZ report sets out inter-relationship between sustainability and mergers, acquisitions and divestments and the key role played by accounting and finance professionals.

Achieving a sustainable future is one of the most significant organisational risks of the 21st century. This creates an opportunity for organisations to ensure that their merger and acquisition (M&A) processes make a material, positive contribution to a sustainable operating model. Failure to adequately assess the impact of sustainability risks and can threaten the success of M&A transactions.

As accountancy and finance professionals are at the heart of the transaction process they have a crucial role using their skills to assess complex risk to help organisations transform their operating models to become more sustainable.

With sustainability-related issues an increasingly becoming a driver for M&A activity, an important joint report Sustainability in transactions from ACCA (the Association of Chartered Certified Accountants) and Chartered Accountants Australia and New Zealand, examines how the interrelationship between M&A and sustainability is crucial for the corporates and their stakeholders.

The report sets out three key messages:

· sustainability forms a fundamental part of the strategic intent of M&A transactions and of the valuation of an entity, and the related opportunities and risks cannot be ignored;

· assessing sustainability-related risk and opportunities must be comprehensively considered as part of the due diligence process, both as a specific workflow and as an integral part of other forms of due diligence; and

· organisations need to ensure that they have an appropriate level of expertise to handle the transaction cycle and to understand the sustainability-related aspects of a target’s operations, assets and liabilities.

CFOs must identify sustainability considerations during the investment and divestment cycles. Critical business risks are now arising from sustainability-related issues, and these can pose a threat to the outcome of transactions. Sustainability can be a driver for an acquisition and – in the case of a sunset industry – the reason for divestment or demerger. Sustainability considerations in transaction are not uniform. The research suggests that in some sectors and industries it is barely a subtle noise, in others it is a loud drumbeat. It is clear from the research that sustainability is a multi-dimensional issue and the breadth of areas to be considered in a due diligence process is broad and interconnected.

The report examines the sustainability considerations in the due diligence process under strategic, environmental, social economic and governance. Sustainability should be a consideration through each step of the transaction workflow: from strategy and acquisition planning through to due diligence and closing. The report provides tips to help guide CFOs and their finance teams when considering sustainability-related issues in the M&A transaction process.

Clive Webb, Head of Business Management, ACCA, said: ‘It cannot be stated too loudly that in the M&A process there are significant numbers of risks which could derail an organisation’s journey towards a sustainable operating model. Failure to adequately assess the impact of those risks, and the opportunities which arise, can create a threat to the success of the transaction. As accountancy and finance professionals we are best placed to lead that assessment.

‘Four main factors determine why sustainability matters in a transaction – financial institutions and investors; supply chains; regulators; and customers; clients and employees. They vary according to location and whether they are sunrise or sunset industries.’

Simon Grant, Group Executive APS and International, CA ANZ said: ‘Accountancy and finance professionals need to grow the appropriate skills and knowledge and capitalise upon ‘on-the-job’ learning opportunities. They also need to constantly bear in mind the ethical dimension. Ethics must be at the heart of everything that we do.

‘Assessing the impact of sustainability-related risks and opportunities requires a significant familiarity with social, economic and environmental issues. Professional scepticism is also required when considering risks of greenwashing and bluewashing against the potential upside of investment.’

Prof Dr Christopher Kummer, President, Institute of Mergers, Acquisitions and Alliances (IMAA), Austria, said: ‘In the context of evaluating new investments or acquisition opportunities, organisations are now employing ESG criteria to gauge the extent to which the prospective target aligns with their sustainability objectives.’