Environmental, social and governance factors play a growing role in mergers and acquisitions, but so far this has limited impact on the insurance coverage that underpins business.
Recent research suggests that ESG is having a growing impact on M&A activity and corporate strategy. Some 42% of experts said ESG plays an important role in their organization’s M&A activity, while 68% said it will become even more important in the next two years, according to a Coleman Research Group report released in August. Respondents consisted of experts involved in M&A activities and ESG within their organizations across Coleman’s global network in the Americas, Europe, the Middle East and Africa and Asia-Pacific.
While there is greater scrutiny of ESG risks and buyers have stepped up their due diligence on target companies, ESG has not yet affected pricing and terms of representations and warranties, which cover potential liabilities arising from mergers and acquisitions, experts say.
ESG is top of mind for insurers in general and can influence their appetite for underwriting certain transactions, says Simon Tesselment, head of brokerage, transaction solutions, EMEA, at Aon PLC in London.
Several large companies, including insurance companies, some of which write M&A coverage, have made public statements that they are no longer happy to support certain industries, such as polluting companies in the energy sector, Tesselment said.
Insurers may decline some transactions based on corporate appetite or underwriting guidelines, but only a few take hard positions that affect a small segment of business, he said.
“One deal we did in London two or three years ago was a coal-related business. We secured terms and got it covered, but there was very limited appetite in the market. No one will necessarily play back to you, they will turn down a deal because of ESG concerns, but they will find a way to turn it down for multiple reasons,” Tesselment says.
Private equity fund mandates now typically include an ESG component, and limited partners and other institutional investors are increasingly making investment decisions based on ESG performance, said Matthew Wiener, Houston-based CEO of Aon PLC.
This has played out in the energy sector in the United States and abroad, as investment in renewable energy has increased significantly, Wiener said.
“In terms of underwriting these transactions, I̵7;ve seen more renewable energy transactions underwritten in the last 18 months than I did in the previous five years. There’s been a huge influx of capital there,” he said.
There is a growing focus on ESG in M&A, but there hasn’t been much of a shift in the representation and warranty insurance market, particularly in the US, said Stavan Desai, New York-based head of Americas Transactional Liability at Mosaic Insurance Holdings Ltd.
“When people say ESG, most people think of industry-driven best practices — companies should be doing this — while on the other hand, representatives and assurances are mostly focused on compliance with laws,” Desai said.
ESG-related regulation has so far focused on public companies and SEC reporting requirements, he said. “From a private company perspective, there are not that many new ESG rules and considerations that would cause concern, and the traditional due diligence process has been sufficient to cover most ESG risks,” he said.
Insurer appetite will differ between companies, and for risks that are harder to place, such as private arms manufacturing and coal mining, ESG is a consideration, Desai said.
“That’s not to say you can’t find reps and underwriters for any of those categories, but the number of quotes brokers get back will traditionally be fewer on more ESG-risky targets than others,” he said.
ESG as a topic doesn’t come up in middle-market private equity deals the way it does in the public securities world, said Randi Mason, co-head of the corporate practice at law firm Morrison Cohen LLP in New York.
“We don’t see reps and warrants that address ESG per se, and we don’t see reps and warrants that exclude ESG as a topic. That said, ESG is an umbrella term, and many components that make up ESG are getting increased attention,” Mason said.
For example, cyber security and data privacy are coming under greater focus, she said.
“A decade ago, we had to convince customers to let us do the work; now data privacy and security issues take a lot of time and get real estate in purchase agreements,” Mason said.
Even before ESG became a hot topic, environmental risk has been a consideration in mergers and acquisitions—for example, if a chemical company with a known environmental responsibility were to be acquired, says Jonathan Mitchell, Atlanta-based director, client advisory, at brokerage Founder Shield.
Questions and concerns about whether a company is complying with labor laws and the Fair Labor Standards Act, which sets minimum wages and overtime pay, have also been a focus, Mr. Mitchell.
More recently, social issues related to diversity, pay equity and the #MeToo movement have started to gain more attention, he said.
From the insurance perspective, “ESG is evolving as we speak,” and it will have a growing role going forward, Mr. Mitchell.