Sustainability: An increasingly important factor in transactions

The CSR area is too often a neglected aspect of transactions, both in terms of potential risks and opportunities. As a CEO, you have to be sufficiently informed and engaged in sustainability issues in order to describe the company’s social and environmental impact, what challenges you face and how to solve them. Also, as a CEO or CFO, it is no longer accepted to pass on CSR related questions from investors to the company’s CSR department.

The sustainability analysis must be included already from the start

Faced with an IPO or M&A, great economic value is at stake and sustainability can be crucial for a company’s prospects and ability to create returns in the long-term. Identifying potential issues and assessing their risks and opportunities may appear to be a natural part of a due diligence but it’s usually not.

Examples of issues that may affect the company’s earnings over time are demands from stakeholders on the environmental and social performance of the products or services, working conditions for employees and the company’s suppliers, and whether the business model itself is responsible, efficient and sustainable.

During a due diligence, it seems reasonable to think that you may find shortcomings in relation to business ethics and environmental responsibility big enough to actually consider refraining from the merger or postponing the listing. Hence you would avoid paying a premium for a business that is not sustainable in the long-term. Or the other way around; you would discover untapped opportunities to improve the business and increase value creation.

Inability to anticipate and manage new demands can be expensive

There are various recent examples where an ignorant approach to sustainability has damaged organizations and their management and board. The crises that have emerged vary in predictability, but the common denominator is that they were caused by a lack of insight or respect for stakeholders’ demands or expectations.

New legislation, changes in charges and taxes and other social and environmental factors can have a major impact on a company’s outlook. The Paris Agreement, with requirements of dramatically reduced emissions by 2050, will further increase the pressure to change the course towards more sustainable business models and operations. The low-hanging fruits have already been picked, and many industries will be strongly affected by the new market demands for radically improved environmental performance. In addition, many industries are under strong pressure for change from new technologies that may radically contribute to a more efficient use of resources.

The owners lead the way and set clear requirements

Compared to publicly listed companies, businesses pre-IPO often face weaker requirements in terms of sustainability initiatives and reporting. However, if preparing to go public, one should be aware that institutional investors in many cases form the most competent stakeholder group with very specific demands on the companies they invest in. They act both individually and collectively to influence listed companies to perform better and to be more responsible. Hence, prior to an IPO, in addition to the thorough work to develop a strong IR practice, you should also ensure the company’s ability to present its sustainability ambitions and performance.

Sustainability creates pride and commitment

The good news is that most companies clearly contribute to the development of society in various ways. The value created for different groups are sometimes taken for granted, and many companies are not able to successfully communicate their stories of satisfied customers, employee development, life-changing products and services and contribution to society. Be open about your journey ahead and make sure to tell your story – even if you believe there is still room for improvement. Transparency might be a worn-out term, but to be open about both the positive and negative impacts of the business (and what you do to improve) builds respect and confidence among owners, employees, suppliers and customers. If you include them in the work and make them proud to be part of what you are trying to achieve, they will become your ambassadors and help you share the legacy of your company.