October 13, 2021

DealTech: Climate Risks Emerge as Potential Dealbreakers in Due Diligence - Experts

By Rupert Cocke and Claudia De Meulemeester

Risks associated with climate change are increasingly emerging as dealbreakers in due diligence processes, experts said.

The price of not taking ESG factors into account in investment decisions is continuing to increase, said Rusty Wiley, CEO of Datasite, a SaaS service for M&A professionals.

Datasite surveyed 400 dealmakers in the US and the UK, he said, adding that 44% expect climate-change concerns to be the biggest dealbreaker in the next 12 months.

Dealmakers in the survey see climate change as a bigger risk than COVID-19, regulation, and geopolitics, Wiley said. Some 53% of the professionals surveyed are preparing for climate change-related activism, he said, adding that supply chain disruptions are also seen as a risk.

During the course of the pandemic, a number of high-profile investor-led campaigns on climate have gained momentum in Europe and beyond. Hedge fund activist Chris Hohn is targeting hundreds of US and European companies in his latest campaign “Say on Climate”. 

The campaign is asking companies to disclose their emissions on an annual basis, set up a plan to address those emissions and allow shareholders an approval or disapproval vote on set plan. Also, activist shareholder Engine No. 1 scored a historic win earlier this year by convincing a majority of ExxonMobil [FRA:XONA] investors to vote for its board candidates despite management resistance, resulting in three climate-focused and independent directors being added to the oil giant’s board.

“The financial system is undergoing a transition, and climate change is no longer something to be addressed years in the future,” said Courtney Lowrance, managing director of sustainable banking and corporate transactions at Citi.

“Capital flows are shifting to support decarbonization, and this is affecting companies without robust climate transition strategies or short, medium, and long-term targets,” Lowrance said.

European investors are paying particular attention to climate change risks in their due diligence, while US investors are still catching up, said one expert in due diligence. A few years ago, ESG concerns were more a question of marketing, this expert said, adding that dealmakers are beginning to realize these issues can impact internal rates of return (IRRs).

New tech and new regulation to adapt to climate change will both generate M&A opportunities, according to Datasite’s survey. Green energy is the most important climate change-related investment opportunity for 65% of the dealmakers.

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