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Sustainability’s Growing Influence on Financial Due Diligence Processes

Mergers and Acquisitions


Sustainability’s Growing Influence on Financial Due Diligence Processes

In today’s rapidly evolving business landscape, achieving a sustainable future has become one of the most significant organizational risks of the 21st century. This paradigm shift presents a unique opportunity for organizations to ensure that their merger and acquisition (M&A) processes contribute positively to a sustainable operating model. However, failure to adequately assess the impact of sustainability risks can threaten the success of M&A transactions.

Accountancy and finance professionals play a pivotal role in the transaction process, utilizing their skills to assess complex risks and help organizations transform their operating models to become more sustainable. Recognizing the increasing influence of sustainability-related issues on M&A activity, a joint report titled “Sustainability in Transactions” from ACCA (the Association of Chartered Certified Accountants) and Chartered Accountants Australia and New Zealand explores the critical interrelationship between M&A and sustainability for corporates and their stakeholders.

The report underscores three key messages:

  1. Sustainability is a fundamental part of the strategic intent of M&A transactions and the valuation of an entity. The opportunities and risks related to sustainability cannot be ignored.
  2. Assessing sustainability-related risks and opportunities must be a comprehensive part of the due diligence process, both as a specific workflow and as an integral part of other forms of due diligence.
  3. Organizations need to ensure they have an appropriate level of expertise to handle the transaction cycle and understand the sustainability-related aspects of a target’s operations, assets, and liabilities.

Chief Financial Officers (CFOs) are urged to identify sustainability considerations during the investment and divestment cycles, as critical business risks are now arising from sustainability-related issues. Sustainability can serve as a driver for acquisition or, in the case of a sunset industry, the reason for divestment or demerger. However, sustainability considerations in transactions are not uniform across all sectors and industries. Some industries barely register sustainability as a concern, while in others, it is a significant factor.

The report highlights the importance of integrating sustainability considerations throughout the transaction workflow, from strategy and acquisition planning to due diligence and closing. It provides practical 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 at ACCA, emphasized the significant risks that could derail an organization’s journey towards a sustainable operating model if not adequately assessed. He stated, “As accountancy and finance professionals, we are best placed to lead that assessment.”

Simon Grant, Group Executive APS and International at CA ANZ, stressed the need for accountancy and finance professionals to grow the appropriate skills and knowledge and to constantly bear in mind the ethical dimension of their work.

Prof Dr Christopher Kummer, President of the Institute of Mergers, Acquisitions, and Alliances (IMAA), Austria, highlighted the growing use of ESG criteria in evaluating new investments or acquisition opportunities, emphasizing the importance of aligning prospective targets with sustainability objectives.

The report’s findings underscore the critical role of accountancy and finance professionals in ensuring that sustainability remains at the forefront of M&A transactions, driving positive change and fostering a more sustainable future for organizations and society as a whole.

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