Accountants need ‘significant’ ESG familiarity in M&As
A report from CA ANZ and ACCA points out the risks and rewards of getting sustainability accounting right, but too few are taking it seriously.
Building on insights from nearly 50 global finance, sustainability, and M&A experts, a CA ANZ and ACCA report found that ESG should be front of mind in M&A transactions.
Finance and accounting professionals play a "pivotal role" in bringing about sustainably-minded M&A transactions, said Simon Grant, group executive in advocacy and international development at CA ANZ.
He added that they must be mindful of ESG to “not only mitigate risks but also uncover new avenues for value creation.”
The report found three key findings: sustainability cannot be ignored in a transaction, it must be explicitly considered in due diligence, and that organisations need to build capability to appropriately consider ESG.
The research found a variety of approaches, as some organisations have already integrated sustainability into their transactions – making it “one of the most critical factors in determining whether a deal proceeds or not.”
In some sectors and economies, however, sustainability is still “barely a subtle noise,” the report found. While there is debate over how seriously businesses should be taking sustainability, the report did broad agreement over the importance of social and economic factors in transactions.
Sustainability matters in a transaction for several reasons, including that financial institutions and investors are increasingly mindful of ESG, and the same can be said of supply chains, regulators, customers, and employees, said the report.
Dean Sappey, CFO of Allied Pinnacle said while smaller businesses might not be captured by the 2025 rollout of sustainability reporting standards, there is a chance their trading partners will be - meaning many will be required to comply before the regulation targets them.
Valuations are increasingly paying mind to sustainability, which often brings a host of complications. As one contributor said: “Assessing past economic performance is…easier than predicting future sustainability.”
On the other hand, another contributor said that of the three limbs of ESG, environmental performance is the easiest to value given the quality of environmental data. This will likely continue to improve with the global push for environmental reporting standards.
The International Valuations Standards Council has incorporated ESG into its latest standards which are available for early adoption. Those standards make provisions for the quality of the data relied upon by a valuer, though the Council acknowledged further work needed to be carried out in refining ESG standards.
“There is a requirement that the valuer needs to be clear in the scope of the applicability of each of the E, S and G components, and…on how this is reported in the valuation,” the report said.
In the due diligence process, sustainability can be considered as a “standalone exercise” or as part of a broader risk assessment process. “To ignore it, however, is to create a risk which may well have changed the valuation of the transaction,” said the report.
While sustainability is certainly a transacting risk, it does pose certain opportunities both to transacting businesses and accounting and finance professionals.
These professionals “are often at the heart of these transaction processes, including the due diligence phase, bringing specific expertise and an ethical lens that enables them to quantify risks, assess outcomes, and identify ‘deal-breakers’,” said Helen Brand CEO of ACCA and Ainslie van Onselen CEO of CA ANZ in their foreword to the report.
“This presents opportunities for accountancy and finance professionals who continue to upskill their sustainability knowledge as the accounting profession evolves.”
Professor Christopher Kummer, president of the Institute of Mergers, Acquisitions and Alliances wrote that, depending on the industry, environmental issues “have always been taken into account” in M&As.
Increasingly, however, ESG is becoming a determinative factor in both divestment and acquisition decisions. Firstly, organisations are applying ESG criteria to “exit current investments and applying them to make new ones.”
When a business unit fails to meet broader sustainability objectives or presents unacceptable climate risks, leaders are increasingly looking to detach from them.
Secondly, organisations are more commonly making purchasing decisions based on ESG opportunities, by undertaking “comprehensive assessments” of target company activities.
Professor Kummer added that social risk assessments are looking beyond HR functions to consider upstream and downstream activities.
“There is an increasingly prevalent acknowledgement that social considerations ought to be tackles ina more complete manner, extending beyond the confines of the organisation and encompassing a broader spectrum of societal concerns.”
Building the appropriate skills and knowledge to best apply ESG in M&A accounting is crucial. To assess sustainability-related risks and opportunities, professionals need “significant familiarity” across ESG applications.
“A level of professional skepticism is also required,” said the report, adding that those involved should “look to identify and corroborate evidence throughout activities in the value chain.”
