Arthur Davis
Addisons, Sydney, Australia
arthur.davis@addisons.com

Co-Chairs

Richard Spink
Burges Salmon, Bristol, England

Damien Zoubek
Freshfields Bruckhaus Deringer, New York, US; Secretary, IBA Corporate and M&A Law Committee

Speakers

Frédéric Cohen
Foley Hoag, Paris, France

Lisa Forbes
Builders Vision LLC, Chicago, Illinois, US

Amisha Parekh
Blackstone, New York, US

Danielle Price
Holland & Knight, Miami, Florida, US

There has been significant coverage of how public companies are dealing with the increased focus on environmental, social, and corporate governance (ESG) and investor expectations and demands around ESG initiatives. However, questions remain:

• How should private companies think about ESG in relation to M&A, in particular around attracting investment capital from private investors?
• How has ESG become a focal point of closely held businesses?
• How do investors such as venture capital funds, family offices and other private capital sources think about ESG as part of their investment thesis?
• Do private companies need to think about ESG as part of their liquidity or exit strategy?

This panel of industry leaders reviewed and discussed how ESG considerations can give rise to success or failure in the M&A and investment context with respect to private companies. An outstanding panel assembled by the hard-working session co-chairs resulted in a particularly lively session.

The consensus is that we are currently in the fourth industrial revolution. Broadly speaking, there is significant technological innovation in:

• physical (eg, autonomous vehicles, robotics, 3D printing, new materials);
• biological (eg, genomic diagnostics, treatment, engineering); and
• digital, blockchain, disruptive business models.

Artificial intelligence is becoming more useful as a result of the combination of high computational power analysing vast amounts of data. This is providing significant opportunities for investment and acquisition. However, investment managers are beginning to look at the way in which capital is invested or allocated. Their role has been evolving beyond ‘sustainable investment’ to targeted investment, ensuring ‘positive ESG impact’. That is, capital is being used not only to generate monetary returns but to promote change.

One of the points discussed is whether there is a verifiable track record of the ESG performance of investments against which subsequent investments can be measured. There was not complete consensus on this point but some of the benefits were acknowledged. There is already significant opportunity to improve our day-to-day lives through developments in healthcare, agriculture, accessibility and environmental sustainability.

The immediate benefits to business include:

• enhanced engagement with employees;
• ensuring that businesses can compete where ESG compliance is an inherent aspect of the product or regulatory environment;
• the transparency and accountability to other stakeholders; and
• meeting the requirements of third parties, such as institutional lenders.

Investors typically track performance and are developing metrics to determine relative success of investments. Although metrics such as carbon footprints are available, a uniform system of measurement is still evolving. It was agreed that in the age of ‘cost accounting’, something does not need to be measured to validate its usefulness. Other broad impacts are being observed such as improvements in health and safety.

A lively discussion ensued, involving comparisons with the development of ‘B’ corporations. They are recognised by the majority of US states as being driven by both mission and profit. Investors hold the company accountable to produce a financial profit as well as some sort of public benefit. This involves an evaluation of the company’s impact on its workers, customers, community and the environment.

Conclusion

The panel believed that law was ultimately a social science which involves the interaction of people with all their foibles and differences. To a greater or lesser extent, every investment, acquisition or exit will consider reputational issues as well as financial and social return. The investment manager can not only identify organisational shortcomings with ESG compliance, but they can also be a catalyst for an organisation to improve its approach to ESG and overhaul fundamental operational practices. This requires thoughtfulness in considering, and where appropriate, adopting technical innovation and aspirational targets.

All in all, it was a well-structured and interesting session.