ESG in an M&A context - Selected tax and legal aspects


With the structural climate/sanitary reality and economic challenges, ESG (Environmental/Ecological, Social/Sustainable and Governance) has grown in importance for all stakeholders of an enterprise. So it’s no surprise that ESG has also become a hot topic in M&A and can no longer be regarded as a tick-the-box or footnote in M&A projects.

The 2021 PwC M&A Survey revealed that 68% of respondents consider ESG during the acquisition process. Another survey revealed that 83% of business leaders believe ESG factors will increase in importance during the M&A process.[1]

This makes sense when you consider that ESG directly impacts the value of an enterprise.

In a M&A context, missing the ESG element or not investing enough in ESG may prevent you from realizing the value you are trying to achieve through your M&A strategy. More and more, the success of  M&A projects will depend on their link or their ability to take into account the overarching ESG strategy of your enterprise. 

How do the “T” and “L” fit in ESG?

In order to achieve climate ambitions, governments across the world are looking at green and environmental taxes as a way to deter from unsustainable practices. This has been clearly stated as part of the European Union’s strategy for its Green Deal. Carbon price (or Carbon adjustment Border Mechanism for imports into the EU in the future) is one example of such a “E” related tax levy that can have a direct impact on the financial performance of your enterprise. So there’s a clear “T” (tax) in ESG.

Tax is also present in the “governance” pillar of ESG. It is relevant to investigate whether your enterprise or the Target has a sustainable tax paying level and a robust tax risk control framework. The EU’s Platform on Sustainable Finance’s Final Report on Minimum Safeguards identifies four core topics for which compliance with minimum safeguards should be defined:

●     Human rights, including workers’ rights

●     Bribery/corruption

●     Taxation

●     Fair competition

And our M&A Legal practice clearly identifies a growing role for the Corporate Counsels and HR Director to manage the ESG aspects in a deal. So there’s a clear  “L” (as in “Legal”) in ESG.

●     The EU and national legislator is managing ESG in a “hardlaw” way, new directives, regulations, laws, decrees mainly in the E space with clear obligations and penalties see the light every day. Risk matters for the board members of target and purchaser.

●     Human rights aspects of workforce (S) for groups operating with subcontractors crossborder is high on the HRO’s agenda.

●     Corporate governance (G) upskilling is needed to capture the upcoming ESG reportings under the CSRD.

In this small series of articles, we will look at how Tax and Legal ESG topics should be included in every step of a deal process:

(i)         In the pre-deal phase: deal sourcing / target identification / due diligence

(ii)        executing the deal itself: structuring the transaction and negotiating the SPA

(iii)       post-deal: operational and legal integration of the target company

The Pre-Deal phase: ESG aspects of target identification & due diligence - the L and T

As a purchaser on the outlook of buying a company, you may want to revisit your usual longlist shortlist criteria to include a couple of key ESG parameters from a T&L perspective, certainly if ESG is part of your growth strategy. ESG rating agencies exist but mainly only for large enterprises, not the Belgian middle market. So-called negative screenings become more customary, i.e. excluding immediately targeted companies from specific sectors or for ethical reasons.

As a seller you may want to anticipate and maximize your value by upskilling and regularizing where need be your ESG compliance. As ESG considerations increase in priority, sell-side due diligence can also be an opportunity to demonstrate and build upon a company’s ESG successes by giving the company a chance to emphasize improvements made to its operating model (for example, reductions in energy use), demonstrate effective management structures (such as well constructed board governance guidelines) and highlight the future opportunities available from its ESG strategies

Does ESG change the way M&A practitioners, sellers and purchasers organize and execute their due diligences? No, not significantly, although we see some changes:

(i)         the usual InfoRequestLists is more specific and detailed on ESG matters;

(ii)        the Q&A is more tailored on these topics;

(iii)       the management interview goes deeper into the ESG aspects and other specialists attend the interview in addition to CFO and legal counsel, you’ll see the sustainability officer or even dedicated “ESG Manager”;

(iv)       the due diligence analysis not only focuses on risks for non compliance, it also addresses potential upsides;

(v)        the due diligence report is expanded with a dedicated ESG section;

(vi) verification on knowledge of upcoming green and environmental taxes and its impact on the financial performance

(vii) robustness of the tax function and tax control framework

(viii) increased vigilance for material legal risks resulting in possible reputational damages (claims; public perception);


Crucially, ESG due diligence should help the purchaser to incorporate the target company into its business and ensure the complex risks associated with ESG issues are identified and minimized before significant reputational damage or financial liabilities grow. The importance of performing an ESG due diligence prior to entering into a transaction bringing great benefits to investors cannot be denied.

Based on the due diligence results, the investor will be able to evaluate the target’s potential for future growth. While it will increase the cost at the beginning of the investment stage, long-term benefits in the form of improved risk management and target’s operations may outbalance the initial costs, provided that the investor does not perform an exit shortly after its investment and acquisition.

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