Friederike Henke
Head German Desk | Lawyer
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The Importance of ESG
Environmental, social and governance (ESG) factors are a set of standards that can influence the performance of companies. ESG criteria are especially used in the financial industry to assess how well a company performs on ESG metrics that the investor or financial institution considers favorable. A successful ESG strategy promotes positive stakeholder engagement and is increasingly viewed as a significant driver of value.
In this article, we highlight how ESG risks can be minimized in M&A (documentation). If you are interested in how ESG risk and value are assessed, we have a separate article on our website for you.
E - The E in ESG, environmental criteria, covers the energy a company takes in and the waste it puts out, the resources it uses, and the consequences it has on living things. So, the E is about a company's compliance with environmental laws and permits.
S – The S in ESG, social criteria, addresses the relationships a company has and the reputation it fosters with people and institutions in the communities where they do business. S includes labor relations and diversity and inclusion.
G – The G in ESG, governance, is the internal system of practices, controls, and procedures a company adopts in order to govern itself, make effective decisions and comply with the law.
How to minimize ESG risks in M&A | Representations and Warranties
How can buyers reduce their exposure to ESG risks and how can sellers reduce their exposure to ESG related post-acquisition liability?
If ESG risks have been identified, it must be assessed whether the risks are covered by standard comprehensive warranties. If the risks result from breaches of hard law, e.g. non-compliance with anti-bribery or environmental legislation, standard comprehensive warranties should provide a sufficient means of contractual protection. If the risks result from undesirable conduct or omission for which the target, however, cannot be held legally accountable, standard warranties may be too narrow in scope to provide protection.
Buyers should expand the scope of sellers’ representations and warranties to make sure that specific ESG risks are fully covered. The expanded scope of the “ESG reps” is a tool to obtain better disclosures by the sellers as a way to gain knowledge of all ESG related conduct by the target. Although specific representations and warranties on ESG related matters are rarely agreed, standard representation and warranties (health & safety, labour, environmental) may be reinforced by ESG content.
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