Mergers & Acquisitions 2022 Annual Review

20 MORRISON FOERSTER 2022 saw the continued rise of the attention given to environmental, social, and governance (ESG) issues in M&A, particularly with respect to climate and the environment, employment, talent retention, and, increasingly, data. Dealmakers’ concerns are driven by, among other things: ■ Perceived Value and Market Demand. Companies and institutional investors tend to focus on the aspects of ESG that drive value for their particular businesses, applying in effect a “materiality screen” to focus on the most important of the many issues that fall under the ESG rubric. Understanding the impact that an acquisition may have, including the differences between a buyer and a target in their approaches to the relevant aspects of ESG, is critical in addressing potential reputational issues and preparing for post-closing integration of the companies. For public companies, activists have sought to leverage ESG concerns, sometimes as the direct object of a campaign and sometimes as a secondary issue; while sometimes successful, such as Engine No. 1’s campaign at ExxonMobil, some have failed, such as Carl Icahn’s campaign at McDonald’s regarding animal security. ■ Legal and Regulatory Environment. Among other things, regulators have strengthened requirements for ESG-related disclosures, including: ■ United States. In March 2022, the SEC proposed extensive rules requiring disclosure relating to greenhouse gas emissions and other climate-related risks, as well as climate- related governance and risk management. The SEC also has proposed disclosure rules for cybersecurity and stepped up enforcement against greenwashing. The disclosure rules will require covered companies to report not only about themselves but also about companies in their supply chains. While the rules directly address disclosure, they also are likely to drive behavioral change and even deal activity. ■ Europe. The European Union, UK, Germany and certain other European countries have issued several ESG-related regulations, including the new Corporate Sustainability Reporting Directive requiring annual ESG reports. 18 2022 also saw some backlash against ESG investing, particularly in the United States, on multiple grounds, from allegations of greenwashing to outright bans by certain states for state pension funds to invest in ESG funds and/ or fund managers with an ESG strategy. ESG-Driven M&A Transactions. Some deals are driven by ESG issues or the desire to improve an ESG reputation. For example, oil and gas companies may divest assets that produce carbon- intensive products while acquiring assets in areas such as carbon capture, recycling, smart grids, or other clean technologies. Traditional consumer companies may seek to acquire sustainable product lines to capitalize on changing buying patterns and consumer preferences. 9. FURTHER RECOGNITION OF ESG CONSIDERATIONS, WITH SOME PUSHBACK