Sustainability growing influence on financial due diligence process

Bengaluru, 12 March 2024: 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.