Article 11.03.22
The Carrots and Sticks of Environmental Social Governance (ESG) Performance: How to Get Your ESG Carrots
Source: Sustainable Investment
Alert
Alert
04.27.23
Over the past several years, environmental, social and governance (ESG) considerations have gained global importance in the context of mergers and acquisitions (M&A). Corporations, customers, regulators and investors are increasingly demanding the integration of ESG factors into the decision-making processes of businesses with regards to M&A in an effort to enhance business opportunities, protect reputations and mitigate risks. In today’s globalized economy, many companies rely on a complex web of supply chains that span multiple countries. Beginning with the exposure of China’s crimes against Uyghurs and other Muslim ethnic groups in Xinjiang and compounded by Russia’s recent invasion of Ukraine, there has been a renewed push for global brands to take their ESG efforts more seriously. As a result, companies and potential buyers are more sensitive to the risk of doing business in countries like China where labor costs are much lower than in other developed countries but where there is simultaneously a lack of respect for human rights and humane labor conditions.
Conducting human rights diligence in the context of an M&A transaction involves the process of assessing a target’s human rights risks and impacts, as well as its compliance with applicable laws and international standards related to human rights. This diligence includes assessing the effectiveness of a target’s human rights policies and procedures (or lack thereof) and identifying the specific risks associated with the target’s operations, business relationships and supply chains. Some examples of human rights policies include anti-human trafficking and slavery policies, non-discrimination policies and anti-harassment policies. Human rights diligence also includes identifying any potential human rights violations or incidents that could negatively impact the buyer’s reputation or result in the buyer’s acquisition of associated financial and legal liabilities.
The following are some practical steps that an acquiring company could take in conducting effective human rights diligence in the context of an M&A transaction:
As the international legal framework around ESG issues continues to change, conducting human rights diligence in the context of M&A also continues to evolve. Investors and businesses are increasingly viewing ESG diligence as a critical component of mitigating risk and driving financial success. By identifying and addressing human rights risks during the diligence phase of an M&A transaction, buyers can mitigate risks and protect their reputations. Pillsbury attorneys can assist companies and investors who seek to conduct ESG diligence, including human rights diligence, in M&A transactions.