Przemyslaw Furmaga
CRIDO, Warsaw
przemyslaw.furmaga@crido.pl

Aleksandra Czarnecka
CRIDO, Warsaw
aleksandra.czarnecka@crido.pl

Introduction

Environmental, social and governance (ESG) has been a buzzword for some time. In a global context, it is considered to be one of the paramount corporate governance trends of the last few years, and there is an ongoing debate about the need to take greater account of stakeholder involvement in corporate decisions, as well as the need for the general transformation of businesses to be more sustainable. In Poland, such discussion is still primarily about sustainable reporting, as the legislator has prepared the first draft for the implementation of the EU’s Corporate Sustainability Reporting Directive (CSRD)(Directive (EU) 2022/2464). Furthermore, entrepreneurs slowly, but surely, and painfully, are becoming aware that some of their business plans may soon turn out to be unbankable.

However, there is still relatively little discussion about ESG in the context of mergers and acquisitions (M&A). Should there be a place for ESG in something as profit driven as an M&A transaction? Are there any junctions between ESG and M&A, and if so, should they influence transactional processes from both the buyer’s and seller’s perspective?

While this is probably a matter for a decent doctoral dissertation rather than for a short article such as this one, these questions are worthwhile considering. Some practical comments from the authors are presented below.

Any intersections will depend on definitions

It is important to remember that ESG, or environmental, social and governance factors, may have different meanings. It may be a set of issues that should be integrated into an investment analysis, a manifestation of a world view and a moral stance (‘doing well by doing good’), or a guideline for investment decisions.^[1]

Consequently, depending on how ESG is understood in the context of a particular transaction, by specific transaction parties, the intersections and points of impact may be in different places. It will also be problematic if the understanding and approach to ESG of the target and the sellers is materially different from that of the buyer. Then, when assessing the same set of circumstances, the target may be able to claim to be ‘ESG friendly’ simply for eg, because it complies with reporting requirements. At the same time, the buyer may expect the target to reshape its entire strategy to be more sustainable in order to be able to call itself ‘ESG friendly’.

Implied ambiguities and politicisation

In most mature economies ESG tends to be highly politicised. In the United States, for example, Florida’s Governor Ron DeSantis claims that it injects ‘an ideological agenda through our economy’.^[2] In Poland, the ESG-related discussion is still rather limited, which we believe may be due to the fact that the Polish market is still less mature than the American one, or simply because a different set of world view issues electrifies the Polish public debate.

However, it is worth remembering that ESG matters are not just world view issues that you can agree with or dismiss as a figment of the liberal imagination. ESG issues are also tangible and practical, as they can pose risks to a transaction, as well as for the buyer or the target.

Examples of ESG risks

There is relatively little regulation of ESG risks in Poland. Of course, one can talk about labour law regulations to prevent discrimination against employees, but in our opinion, the general perception is that the protection of employees is an area covered by standard legal due diligence and is usually included in transaction deliberations as a standard matter. Therefore, some of the matters that make up the ‘S’ in ESG are already covered by legal due diligence. However, transactional legal due diligence does not always include a review of discriminatory issues, and in order to assess the target from a social perspective, it should.

ESG reporting is also a practical and regulatory issue. In an M&A transaction, if the target has no ESG awareness and does not collect the necessary data, one may end up in a situation where the buyer, who is subject to certain sustainability reporting obligations, is unable to comply.

Moreover, ESG risks are not only legal matters, but also broader business issues. Determining the impact of certain climate risks on a company’s business model or supply chain, especially if it spans multiple jurisdictions, can be a significant challenge in transactional due diligence. Assessing such risks is difficult in itself. However, it’s only the beginning of a more profound problem, as the next step will be to reflect these issues in transaction documentation by juxtaposing existing mechanisms, such as representations and warranties, the liability regime or price calculation and payment methodology, with the reality of ESG factors, in order to safeguard the interests of the parties to the greatest extent possible.

Finally, there is reputational risk. M&A deals can expose companies to reputational risk if the target is involved in controversial practices or has a poor track record in areas such as ethical business conduct, human rights or social responsibility. Buyers may face market and public backlash, which could damage the acquirer’s overall brand and financial performance.

ESG and valuations?

While this is more of a business issue than a legal one, the potential impact of ESG on price cannot be underestimated. Experts analyse past transactions and consider whether there is a justification for paying an ESG premium, whether companies that are more ESG friendly perform better or worse after a transaction, and therefore whether investing in ESG pays off.

Naturally, the problem of what ESG is and how to understand it is not without influence on these results. Perhaps this is also one of the reasons why no coherent conclusions have yet been reached on how ESG (and before that corporate social responsibility, or CSR) affects the value of a target and its post-closing performance.

Again, in Poland, this is not necessarily a transactional hot topic and one of the points negotiated at the transaction table. However, the chances are that it will soon become one, especially in the context of the cross-border deals (in-bound M&A) taking place in Poland.

Conclusions

We believe that ESG will increasingly gain importance on the Polish market, also with respect to M&A transactions. This will pose a challenge for Polish entrepreneurs, both on the buy and sell side, as they will need to adapt to the changing reality and the various perspectives on ESG issues. ESG will impact not only how we conduct legal due diligence, but also on how we prepare documentation and on the approach to the valuation of a business.