Climate change is having a significant impact on the M&A landscape. According to a survey of 400 dealmakers, environmental issues are transforming markets and influencing capital allocation. Climate change considerations are becoming increasingly important in mergers and acquisitions (M&A) transactions.

There are some key aspects to consider…

1. Physical Risks: Climate change can cause disruptions to a company’s business or damage to its assets due to natural disasters, such as rising sea levels, extreme storms, floods, fires, and droughts.
   • Example: Tourism-based assets like ski or beach resorts may face substantial physical risks due to warmer long-term temperatures or rising sea levels.
2. Customer and Investor Considerations: Carbon-intensive businesses face risks related to investors who have pledged to reduce or eliminate the carbon-intensity of their investments and portfolios.
   • Example: Nearly 1,000 institutional investors with $6.24 trillion in assets have committed to divest from fossil fuels, causing reputational damage and potential financial consequences.
3. Compliance Risks: Companies involved in M&A transactions need to be aware of the risks related to climate change that may arise in the transactional context, including regulatory and legal actions aimed at combating climate change.
4. Legal Risks: Failure to live up to climate-friendly claims could result in legal liability, in rare circumstances.
5. Future Trends: More genuine environmentally useful tie-ups are expected in the future, with a focus on risk mitigation and opportunity creation.
6. Industry Impact: Industries such as agriculture, tourism, and insurance are particularly vulnerable to the physical impacts of climate change.
7. Supply Chain Considerations: Climate change can impact a target’s suppliers and raw materials used in their operations, making supply chain due diligence increasingly important in M&A transactions.
8. Role of Technology: Technological advancements, such as software and data analytics, can play a crucial role in helping companies assess and manage climate-related risks.
9. Policy and Regulation: Public policies, such as the Basel III Endgame and the EU’s Corporate Sustainability Due Diligence Directive, can impact low-carbon investment and climate-related risks. However, there is an element of kicking the can down the road with these policies, as governments use what means they can to defer the political and societal pain from these changes.

In 2021, green-tinged transactions more than tripled in value to $164 billion, but there was a lack of genuinely environmentally useful tie-ups. More climate-driven M&A deals are expected in the future, with a focus on risk mitigation and opportunity creation. As such, it’s cutting to the core of M&A, impacting investments and growth strategies. Focus on climate impact is now the norm as investors and consumers exert more pressure than ever before. This has led to discussions on how oil and gas companies will play in the energy transition, shippers talking about carbon impact, and manufacturers examining their vendor and supplier relationships. M&A undoubtedly has an impact on climate change. Having said that, the advent of digital data rooms as opposed to ‘in-person’ document vaults means that a lot of work can be undertaken online (for example, the COVID-19 pandemic helped accelerate this trend. Changing physical footprints, supply chain disruptions, and government regulations are expected to disrupt business operations over the coming years, meaning that M&A professionals should be proactive when they evaluate deals.

In M&A transactions, parties should identify and assess compliance risks related to climate change. Many jurisdictions have passed laws or regulations aimed at combating climate change, which may directly or indirectly affect target companies. It is also important to assess potential litigation risks arising from climate change. Climate change diligence exercises in M&A transactions require the parties to consider the totality of a target’s operations and anticipate infrequent occurrences that may present catastrophic risks. When assessing companies that emit significant quantities of greenhouse gases, the parties and their counsel must examine issues concerning the target’s current and future compliance obligations with climate change-related regulations.