ESG Concerns Could Make or Break Canadian Deals – Mergermarket Canadian M&A Forum

By Sydney Halleman and Rachel Stone 

Environmental, social and governance (ESG) concerns are increasingly important for Canadian companies during acquisition due diligence, industry experts said during Mergermarket’s Canadian M&A Forum.  

“An M&A deal can actually be killed by some bad governance in discovery,” said Senia Rapisarda, managing director at the private equity firm HarbourVest Partners, adding that ESG concerns have been crucial in the technology industry over the past 15 years. European companies, particularly Scandinavian ones, have been “extremely demanding” about ESG concerns, especially on social and governance issues, she said.   

Last year, the European Union created new regulations for ESG companies to prompt more sustainable investing. 

Two-thirds of M&A professionals polled by Datasite, a software-as-a-service (SaaS) provider for the financial services industry, said ESG concerns will move higher in due diligence checklists, and more than half said ESG concerns pose the biggest risk to deals this year, said Sean Dainty, vice president of Canadian sales at the company. ESG risks are “front and center” to investors, he said, adding that a number of large companies, including The Blackstone Group [NYSE:BX], have publicly announced their commitment to ESG issues. 

Mining projects have been “stranded for decades” due to haphazard community assessment, said Jeff Swinoga, co-leader of national mining and metals at EY Canada. 

“[ESG] is one of the most important issues beyond assessing the resources and reserves in the ground,” Swinoga said. “How does the local community benefit? How are we working with a local community?” 

In February, Inuit people halted Baffinland Iron Mine’s iron ore operation in the Mary River mine during a week-long protest over the Canadian company’s proposed increase in iron production and a new 110-kilometer railroad. Protestors cited concerns over the native wildlife, including effects on the narwhal and the caribou. In March, a Nunavut judge issued an injunction against the protestors, referencing the company’s financial losses.  

Poor ESG factors could also impact company valuations, said Salil Ratnaparkhe, associate vice president of corporate development at Sun Life Financial [TSX:SLF]. Social and governance concerns will be especially important in deal evaluation, and institutional investors are increasingly adopting the United Nations principles of responsible investing, he said.