ESG and the Omnibus Directive – implications for M&A and investments

Running a business today involves greater and different risks than before. Companies need to work systematically to ensure control over their operations and value chain, prevent irregularities, and comply not only with laws and regulations but also take ethical and social considerations into account. It has hardly escaped anyone that issues related to ESG (Environmental, Social & Governance) have taken an increasingly prominent place in corporate strategies and investment decisions in recent years. Demands and expectations are rising, and not only legislators but also stakeholders, such as investors and shareholders, are seeking increased transparency in corporate governance matters.

From a legal perspective, it is essential for buyers, sellers, and potential investors to consider ESG as an integral part of the due diligence process in corporate acquisitions and investments. This may include posing questions such as: Are there deficiencies in the company's social and governance work, e.g. as regards production and supply chain, that risk leading to significant negative publicity and damage to the company brand? Is the company's business model dependent on a raw material with an uncertain future?

A current question in this context is whether the EU's proposed "Omnibus" reliefs mean that ESG issues can be set aside pending final regulation? The short answer is no. It is, and will continue to be, crucial to have a well-thought-out ESG perspective in a due diligence process.

Companies that integrate sustainability issues into their business model stay ahead of the game, regardless of adjustments in legal requirements, should Omnibus become a reality. Even if current reporting requirements change, ESG remains crucial for competitiveness, profitability, and market expectations. Customers, investors, and partners will continue to demand transparency, and companies that proactively manage ESG risks have a better chance of completing successful transactions while creating long-term value. It is far from only the legislator who draws the sustainability map of the future – ESG issues need to remain central in decision-making processes in corporate acquisitions and investments.

Why include ESG in the due diligence process?

1. Risk Reduction
   A central function in every due diligence process is to minimize risks. By gaining a better overall view and analyzing potential ESG-related risks, companies can anticipate future demands from authorities, legal disputes, or criticism from stakeholders at an early stage. Deficiencies in sustainability work can also lead to sanctions from supervisory authorities or damage to the brand. It is increasingly clear that ESG risks can be equated with other business and financial risks.
2. Value Creation and Long-term Profitability
   ESG is not just a matter of compliance but can also drive value in the long term. Investors increasingly prefer companies with clear strategies for climate, social sustainability, and good corporate governance. Additionally, sustainable supply chains and energy efficiency can reduce costs and minimize risks of production and delivery disruptions. An ESG analysis in the due diligence process can thus create added value and strengthen a company's business model.
3. Protect Reputation
   Ignoring ESG aspects can lead to negative publicity, boycotts, or trust crises, both for target companies, investors, and buyers. For example, environmental destruction, inadequate working conditions, or unethical business practices can cause significant damage to a brand. By analyzing how the target company has historically handled ESG issues, potential trust risks can be identified and addressed early.
4. Increased Expectations from Stakeholders
   Investors, banks, and other financiers increasingly expect corporate acquisitions and investments to take sustainability factors into account. Consumers and employees also seek transparency and clarity regarding companies' sustainability efforts. Companies that prioritize ESG often become more competitive and are perceived as more reliable in the market.

ESG issues are central to evaluating a company's value, risk profile, and long-term development capability. At a time when the EU is gradually expanding regulations around sustainability, ESG is a core issue for both buyers and investors. A due diligence process that overlooks ESG risks and opportunities can not only miss crucial information about the target company's future but also expose investors to increased costs and legal risks after the transaction.

Regardless of how the final Omnibus proposal will be formulated, it is clear that ESG will continue to play a significant role in corporate transfers and investments. Companies that are already preparing for new and upcoming regulations and establishing clear structures to manage ESG issues will stand stronger in an increasingly competitive and uncertain market.
 

Anna Domander, advokat/Senior Legal Director, MAQS Advokatbyrå
Linn Strömberg, advokat/Senior Associate, MAQS Advokatbyrå