TAIPEI (Taiwan News) — Environmental, Social and Governance (ESG) considerations are increasingly being integrated into the dealmaking process by mergers and acquisition (M&A) professionals.

Globally, deals have even been canceled due to material findings during the ESG due diligence process of an M&A transaction. Many investors insist they are prepared to pay a premium for companies that align with their ESG priorities.

Due diligence is the process of gathering and verifying relevant information about a company or person to enable the ordering party to make an informed decision. The ordering party can be the buyer or the seller. Due diligence has value for both parties in any M&A scenario.

According to a new survey by global professional services firm KPMG, over half of respondents reported that they have canceled deals due to material findings during ESG due diligence, and that nearly two thirds of investors would pay a premium for companies aligned with their ESG priorities.

The survey found that 74% of professionals are already integrating ESG considerations as part of their M&A agenda. The identification of ESG risks and opportunities is given as the top reason for conducting ESG due diligence by 46% of respondents, followed by requirements by investors, cited by 19%, and preparation for regulatory requirements by 14%.

Red flags

Many respondents indicated that red flags on ESG could be a deal stopper or result in additional closing conditions, and even purchase price reductions.

The frequency of ESG due diligence is expected to increase going forward. However, there are challenges facing professionals conducting ESG due diligence.

The major challenge is a lack of robust data and an inadequate understanding of what ESG due diligence means among stakeholders. These challenges will apply in Taiwan, as the market adjusts to not only to ESG reports but the potential of ESG due diligence within the M&A framework.

Both private and public M&A transactions drive the M&A market in Taiwan. While there were a few notable public M&A transactions in 2021 and 2022, there have been quite a few private M&A transactions in the market as well. For example, there have been several acquisitions in the energy and retail sectors, and smaller M&A deals for emerging technology companies.

COVID seemed to have little impact on Taiwan’s M&A transactions in 2022, but there was a dip in investments from countries such as Japan where investors typically prefer to conduct due diligence "on the ground" of the target company.

According to the Ministry of Economic Affairs (MOEA) statistical analysis of M&A deals from Q1 to Q3 of 2022, the total number of announced deals was 105, while the total deal count value of announced transactions in the same period in 2020 was 97.

Green energy

With the Taiwan government's positive policy to promote green energy, there should be a significant growth in M&A transactions pertaining to investments in offshore wind and solar energy projects, and other renewable energy companies. However, at present, the notable examples are several sell-downs of offshore wind farm developers.

This is where investors seek to de-risk their investment, often due to insufficient returns on the investment. Some of these see-downs were related to the extreme environmental and social hurdles placed on developers by the local regulators.

One particular "social" issue that is causing renewable investors difficulty within the Taiwan renewable market is the localization issue, which imposes highly restrictive local content requirements.

This issue, coupled with blanket "environmental" restrictions regarding on-shore renewable wind farms have a strong ESG resonance and the market is likely to see further sell-downs in the future. These issues are ESG related red flags for potential investors.

Renewable energy companies are very familiar with ESG, so there is no doubt that future deals will see further incorporation of ESG at all levels of the deal, especially as Taiwan progresses towards its 2050 net zero emissions goal.

As Taiwanese companies integrate ESG into their business operations and planning and reporting, ESG considerations will continue to impact M&A deals, including the decision to invest in certain businesses as well as a decision to divest certain assets.