Reading annual reports of various blue-chip companies, there are many ways that due diligence could be affected by this new focus on sustainability. One, we can consider it when considering senior management compensation. Companies such as Coca Cola and PepsiCo have all included ESG factors and milestones as one of the determinants to gauge compensation and bonus packages, and DD on such companies would thus follow in considering these factors. Additionally, ESG and sustainability factors would be important in environmental DD and legal DD, particularly if the businesses are huge polluters/have huge carbon footprints like oil/gas firms. Carbon pricing and ITS could also be included in costs and financial reports, as well as in compliance, which are also part of the DD process.
Hello RongFang, indeed ESG has become increasingly important and large companies started to pay more attention when considering M&A. For instance, when my company intends to buy some other company, we assess how the target generally deals with ESG, e.g. how their product portfolio can contribute to our from ESG perspective, whether the target product design reflects mandatory ESG requirements, whether target production assembly is sustainable, what is the portion of male/female in the management etc. In fact, this first assessment should be done even at the early stage of exchange with the target, before entering into deep DD, to see whether both companies “match”.