Impact Of ESG On Mergers And Acquisition

Author: LawSphereX

Category: Corporate & Insolvency

Published: 2026-08-23T20:16:46.42477+00:00

Updated: 2026-08-26T17:11:14.557+00:00

IMPACT OF ESG ON MERGERS AND ACQUISITION

Anshuman Singh & Farshaz Mirza, Government Law College, Mumbai

ABSTRACT

In the contemporary landscape of corporate governance and investment strategy, Environmental, Social, and Governance (ESG) criteria have emerged as pivotal factors influencing decision-making processes. This article explores the profound impact of ESG considerations on mergers and acquisitions (M&A) deals in the 21st century. ESG was first mentioned by a report of UN titled, “Who Cares Win: Connecting Financial Markets to a Changing World”1. The report advised board of directors and management of financial institutions to incorporate a strong ESG policy, ESG metrics have evolved from niche concerns to mainstream indicators of corporate health and resilience. The three core components of ESG—Environmental, Social, and Governance—each play a crucial role in assessing a company’s operational efficiency, risk management practices, and long-term viability.

The impact of ESG considerations on M&A transactions is multifaceted. Companies with strong ESG profiles are viewed favourably by acquirers seeking to enhance their own sustainability credentials, mitigate risks, and align with evolving regulatory expectations. Conversely, companies with poor ESG performance may face higher scrutiny, valuation discounts, or integration challenges post-acquisition. 1(2004) Who Cares Wins Connecting Financial Markets to a Changing World. United Nations. Available at https://www. unepfi. org/fileadmin/events/2004/stocks/who_cares_wins_global_compact_2004. pdf.

Introduction In the 21st Century, sustainability in the financial sector is not just a vestigial appendage but a necessary one. Even factors which are not finically important to businesses’ i. e. , climatic changes, pollution, resource depletion, labor rights, human rights etc. , have gained a greater impact in corporate governance. In the last decade, Environmental, Social, and Governance (“ESG”) ratings have gained much popularity in governance and risk management of companies. ESG are a set of standards that are usually used by investors to screen company as a possible business for investment2. These standards help the investors to extrapolate whether a company would be able to keep pace in a world that is increasingly moving towards sustainability and sustainable development. ESG has three components: i) Environmental; ii) Social; and iii) Governance.

Environmental component focuses on policies adopted by a company to reduce their carbon footprint and reduce climate change. Social component focuses on labour practices of the company, employee’s safety and regulations for human rights employed by the company. Finally, governance components focus on the procedure of corporate governance employed by a company, auditing of the company’s financial documents, etc. ESG was first mentioned by a report of UN titled, “Who Cares Win: Connecting Financial Markets to a Changing World”3. The report advised board of directors and management of financial institutions to incorporate a strong ESG policy. The reports further states, that the investor should request and reward research into the ESG policy of a company and they should incorporate such research into their decision of investment.

Since, United Nations published the report, environmental legislation has been passed across the globe to tackle the imminent global warming threat and other climate disasters. 4 Presently, ESG policies have become so necessary that they are not only being utilized by top investment companies like Blackstone in their investment procedure, but also policies are being adopted in their day-to-day functions to 2What is environmental, social, and governance (ESG) investing? Investopedia. Available at, https://www. investopedia. com/terms/e/environmental-social-and-governance-esg-criteria. asp (Accessed: 11th September 2023). 3(2004) Who Cares Wins Connecting Financial Markets to a Changing World. United Nations. Available at https://www. unepfi. org/fileadmin/events/2004/stocks/who_cares_wins_global_compact_2004. pdf. 4Byrne, D. (2023) What is the history of ESG?

The Corporate Governance Institute. Available at: https://www. thecorporategovernanceinstitute. com/insights/lexicon/what-is-the-history-of-esg/ (Accessed: September 2023).

battle climate change and issues5. Recent Trend Since people encountered ESG for the first time, around two decades ago, it has become a necessary industry practice. Governments around the world have formulated and enforced regulations with respect to reporting and disclosure for ESG requirements for companies. Governments have increasingly started promoting private companies to incorporate ESG policies in their management. Research shows that United States (“EU”) and Europe (“EU”) are the largest investors ESG investors in the world, while New Zealand, Japan and Australia are the top contributors6. In 2020, ESG investment has ballooned to USD 168 billion, thrice the amount which it was, in 20197. The heightened focus on ESG is symbolic of a wider trend where investors and consumers have begun to prioritize ethical and sustainable business practices.

The term "ESG" encapsulates Environmental, Social, and Governance factors, serving as key indicators in evaluating a company's sustainability and ethical impact. These indicators span a range of issues, encompassing shareholder rights, board management, environmental risks, climate change resilience, HR matters, and more. Consequently, ESG considerations are being discussed in shareholder meetings, assuming a pivotal role in M&A deliberations. This trend is anticipated to intensify over the next three years, with organizations increasingly integrating ESG norms into their systems to create future value. In a recent manifestation, particularly evident in the oil industry, activist shareholders have adeptly harnessed Environmental, Social, and Governance (ESG) themes to exert substantial influence on corporate entities.

This strategic utilization of ESG considerations serves as a potent tool, enabling activists to exert pressure, shape corporate strategy, and ultimately vie for control over the entity. In India ESG investments into ESG focused private equity fund has doubled to a staggering figure of USD 650 million in 2021, according to a report by Bain & Co. Another report shows that investments in ESG focused equity funds shall increase by ninety percent in the next five 5‘Environmental, Social, and Governance

(ESG)

Policy’. Blackstone. Available at: https://www.blackstone.com/wp-content/uploads/sites/2/2022/02/BX-Firmwide-ESG-Policy.pdf. 6 Global trends for ESG investment. Available at: https://timesofindia.indiatimes.com/blogs/agyeya/global-trendsfor-esg-investment/.

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years8. Industry experts predict that more ESG funds shall come up in India and climate tech would be a favorite company for investors.9 Investors are focusing increasingly on ESG indicators, according to India Private Equity Report 2023, ESG-driven investments have witnessed a growth in 2022, from five percent of investment value to thirteen percent in 202210. 1.) ESG Legal Framework in India The legal framework of ESG in India is drawn not from one legislation but it is a melting pot of different varying legislation. The major legislation which makes up the legal framework of ESG are: Environmental and Protection Act, 1986 (“EPA”), Companies Act 2013, Factories Act, 1948, Payment of Wages Act, 1936 and Securities and Exchange Board of India (‘SEBI”) Listing and Other Disclosure Requirements,

2015 (“LODR”)11. The EPA is an umbrella legislation that mandates the Central, State

governments and various other agencies to take measures necessary for protection and improving the quality of the environment. The EPA also set standards for companies and industries to check their hazardous waste management12 and overall carbon footprint13. The Factories Act, 1948, is a legislation to set standards for a safe and healthy working environment for employees. Section 1114 of the Act sets standards for the cleanliness to be maintained by the employer of a factory. Section 7A15, of the Act states that the employer is responsible for providing a safety and welfare of all the workers. Payment of Wages Act, 1936, mandates the responsibility of employer of payment of wage, time- 8 ESG activities of India Inc. are picking up, but the ‘s’ and ‘g’ elements missing (2022) Business Today. Available at: https://www. businesstoday.

in/magazine/corporate/story/esg-activities-of-india-inc-are-picking-up-but-the-sand-g-elements-missing-356665-2022-12-16 (Accessed: 22 September 2023).

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10 Dayal, G., Chauhan, P. and Sawhney, S. (2023) Impact of ESG on M&A in India, Lexology. Available at: https://www.lexology.com/commentary/corporate-financema/india/lakshmikumaran-sridharan/impact-of-esgon-ma-in-india (Accessed: 22 September 2023).

11 Group, G.L. (no date) Environmental, social, & governance laws and regulations report 2023 India,

International Comparative Legal Guides International Business Reports. Available at: https://iclg.com/practiceareas/environmental-social-and-governance-law/india (Accessed: 22 September 2023).

12 Section 7, Environment Protection Act, 1986.

English releases (no date) Press Information Bureau. Available at: https://pib.gov.in/newsite/erelcontent.aspx?relid=51884 (Accessed: 22 September 2023).

14 Section 11, Factories Act, 1948.

15 Section 7A (1), Factories Act, 1948

period of wage, mode of payment and any deductions16. The Companies Act, 2013 is another one of major legislations that sets up the framework for ESG in India. Sections of Act that affect ESG are: • Section 134 (3) (m) of the Companies Act17 states that every company shall strive to conserve energy, technology absorption, etc. in such manner as prescribed. • Section 149 (1)18 of the Act provides, every private or public company needs to appoint at least one-woman director if: (i) it is a listed company; and (ii) it has a paid-up share capital of INR hundred crore or more and a turnover of INR three-hundred crore or more. • Section 166 (2)19 of the Companies Act also lists protection of the environment and benefit of community as a duty of a director of a company.

It mandates directors of a company to not only think about financial gain of the company but also long-term effect of the company and community. • Section 17720 of the Companies Act directs every listed company in India to form an audit committee to audit the company’s financial statements. The Audit committee shall consist of a minimum of three directors with an independent director. Sub-section 9 and 10 of Section 177 also provides for a vigil mechanism, for employees and directors to report any grievance or concern against victimization of persons, etc. SEBI LODR 2015, also make the legal framework for ESG in India. Regulation 17 (1) (b) directs all the listed companies in India having the executive of board of directors as a non-executive director, at least one-third shall be independent directors.

Also, SEBI vide a circular dated 10th May 2021, title “Business responsibility and sustainability 16 Damini (2022) Payment of wages act, Deskera Blog. Available at: https://www. deskera. com/blog/objectivesof-payment-of-wages-act 1936/#:~:text=The%20Act%20establishes%20the%20employer’s,the%20sealing%20of%20the%20fines%2C (Accessed: 22 September 2023).

17 Section 134 (3)(m), Companies Act, 2013.

18 Section 149 (1), Companies Act, 2013.

19 Section 166 (2), Companies Act, 2013.

20 Section 177, Companies Act, 2013.

reporting by listed entities”21 and Regulation 34(2) (f), that it is mandatory for top thousand listed companies in India to release a report on ESG for investors. The report shall detail the actions and initiatives taken by the company to forward their ESG policy. While ESG disclosure in India is largely voluntary, the regulation that form ESG from different laws are applicable to all the companies in India. 2. ) ESG Disclosure in India Disclosure of ESG (reporting) is an undisputed pillar of any ESG framework, having a standardized form of reporting/disclosure makes it easier for an investor to compare ESG initiatives of a company. Various organizations have been working to develop standardized ESG disclosure/reporting such as Standard Accounting Standard Board (“SASB”), Global Reporting Initiative (“GRI”) etc.

SEBI LODR makes it mandatory for the top 1000 listed companies in India to make disclosures about their ESG initiatives to provide an in-depth information to the investors. ESG reporting/ disclosure in India began in 200922 after a notification by MCA for voluntary disclosure of details of the company to the investors. Since 2009 ESG reporting has grown by leaps and bounds, while in 2009 there were no hard guidelines for disclosure, and it was left at the volition of the companies. In 2015, SEBI introduced the Business Responsibility Report (”BRR”), vide a circular dated 4th November 201523. The BRR was obligatory to be include in the annual report of only the top 500 listed companies in India, for other companies, inclusion of BRR was left at their discretion.

Under the BRR policy every company shall formulate a sustainability report complaint with the guidelines of the BRR for the knowledge of the investor and any other person. The BRR was divided into 5 sections A to E, each section detailed on aspect of the company, the sections are: • Section A, highlighted the general information of a company.

21 SEBI/HO/CFD/CMD-2/P/CIR/2021/562

22Obhan, A. (2022) SEBI’s ESG Disclosure Requirements: Business Responsibility and Sustainability Reporting - Securities - India, SEBI’s ESG Disclosure Requirements: Business Responsibility And Sustainability Reporting - Securities - India. Available at: https://www.mondaq.com/india/securities/1196024/sebi39s-esg-disclosurerequirements-business-responsibility-and-sustainability-reporting (Accessed: 22 September 2023).

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Section B, highlighted the financial information of a company; • Section C, mentioned details with respect to the companies which deal with the company, subsidiaries or holding companies of a company, etc. ; • Section D, listed the Business responsibility (“BR”) policies implemented by the company; and • Section E detailed the performance of a company with respect to ESG factors including but not limited customer grievance redressal, policy relating to corruption and bribery and company’s marginalized stakeholder. In May 2021 SEBI published a new disclosure format for the top thousand listed entities in India titles the Business Responsibility and Sustainability Reporting (“BRSR”)24. The aim of BRSR was for standardization of disclosures across sector, industry, and time and thereby, aid investors to make informed decisions.

BRSR is divided into 3 sections: Section A, Section B and Section C. • Section A: General Disclosures – This section provides general details of a company including but not limited to turnover, director's details, CSR policy employed by the company, operation and products offered by the company. • Section B: Management and Process Disclosure – This section highlights a company’s policies and commitment to CSR policy, their statements and targets set by the Board of the company, statements by directors towards the sustainability policy of the company. • Section C: Principle-Wise Performance Disclosure – This section details policies and procedures adopted by them to integrate sustainable policies and procedures in their day-to-day management. Principle-wise performance disclosures are further divided into Essential and leadership disclosures.

Essential Disclosures are those that have to be reported compulsorily by any entity, they comprise of minimum disclosure towards sustainable growth such as company’s goals and targets towards sustainable development, impact of a

24 SEBI/HO/CFD/CMD-2/P/CIR/2021/562

company on the environment, etc. On the other hand, leadership disclosures are voluntarily and go above and beyond minimum disclosures. 25 Examples of leadership are initiatives taken by the company to involve stakeholders into their sustainable development policies and other policies showcasing company’s engagement with the community. This section also contains 9 principles as advocated by the Ministry of Corporate Affairs (“MCA”), the principles are as follows26: Principle 1 Businesses should conduct and govern themselves with integrity, and in a manner that is Ethical, Transparent and Accountable. Principle 2 Businesses should provide goods and services in a manner that is sustainable and safe. Principle 3 Businesses should respect and promote the wellbeing of all employees, including those in their value chains.

Principle 4 Businesses should respect the interests of and be responsive to all its stakeholders.

Principle 7 Businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent. Principle 8 Businesses should promote inclusive growth and equitable development. Principle 9 Businesses should engage with and provide value to their consumers in a responsible manner. The BRSR incorporates ESG regulations from different legislations in India more comprehensively than BRR, for a better and more transparent disclosure of ESG parameters to potential investors27. 3. ) ESG Framework outside India Presently, there is no common reporting (disclosure) standard for all the world, European Union has recently finalized Corporate Sustainability Reporting Directive (“CSRD”).

The CSRD standardizes disclosure requirement for large and listed companies in European markets shall have to abide by the CSRD while making Environmental and Social specific disclosures28. According to CSRD, many companies across Europe shall have to report policies, models, targets, risks, etc. focused on Environment, social and human rights. A modified version of CSRD shall be applicable to non-EU countries which fall under the scope of activities of CSRD, namely they have a subsidiary or branch in EU and have a revenue in Europe above a certain threshold29. 27 Kalia, C. (2020) BRSR reporting and the evolving ESG landscape in India, EY US - Home. Available at: https://www. ey. com/en_in/climate-change-sustainability-services/brsr-reporting-and-the-evolving-esglandscape-in-india (Accessed: 22 September 2023). 28 Corporate sustainability reporting, Finance.

Available at: https://finance. ec. europa. eu/capital-markets-unionand-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainabilityreporting_en (Accessed: 22 September 2023). 29 Triggs, M. , Mishkin, S. and Meynier, T. (2023) EU finalizes ESG reporting rules with international impacts, The Harvard Law School Forum on Corporate Governance. Available at: https://corpgov. law. harvard. edu/2023/01/30/eu-finalizes-esg-reporting-rules-with-international-

In the United States, there are no mandatory reporting/disclosure requirements for ESG by companies. Though, Securities and Exchange Commission (“SEC”) has been attempting to standardize the reporting rules for ESG, SEC requires all public companies to disclose any information which may be material to investors30. ESG reporting in the United States are led by market practice. ESG reporting in the Chinese context has traditionally been characterized by fragmented and voluntary guidelines. However, recent developments indicate a change in Securities Regulatory Commission’s (SRC) stride. These emerging rules deviate from the previous voluntary nature of reporting, now demanding stricter and more detailed ESG disclosures. Notably, the new regulatory framework includes areas such as waste and environmental policy reporting within its ambit.

Greater importance is also being laid on employee welfare disclosures now. This regulatory evolution aligns with the global trend towards enhanced transparency and accountability in corporate practices. The SRC's proactive approach highlights China’s commitment to align itself with international standards in respect of sustainable and responsible corporate governance31. 4. ) Role of ESG in M&A transactions Mergers and Acquisitions (“M&A”) in a layman’s terms is the process where two entities/companies combine their resources and assets to become a larger more resourceful entity. Though the term “merger” and “acquisition” are used interchangeably, both have different connotations. Merger is when one company combines with another company of nearly the same size, on the other hand acquisition is when a larger company absorbs a smaller company into itself32.

Companies in all industry be it telecom, pharmaceutical, clean energy sector, etc. have used mergers and impacts/#:~:text=Scope%20of%20Reporting&text=Disclosures%20will%20be%20required%20to,sustainability %20matters%20affect%20the%20company. (Accessed: 22 September 2023).

30 Group, G.L. (no date) Environmental, social, & governance laws and regulations report 2023 USA,

International Comparative Legal Guides International Business Reports. Available at: https://iclg.com/practiceareas/environmental-social-and-governance-law/usa (Accessed: 22 September 2023). 31 Nair , N. and Mishra, S. (no date) ‘Sustainability Reporting: A Step Towards the Future or a Shot in the Dark’, SCC (2021) 4.2 JCLG 35 .

32 Dutta, D. (2022) Mergers and acquisitions in India – a brief overview - corporate and Company Law - India, Mergers And Acquisitions In India – A Brief Overview - Corporate and Company Law - India. Available at: https://www.mondaq.com/india/corporate-and-company-law/1210798/mergers-and-acquisitions-in-india--abrief-overview (Accessed: 22 September 2023).

acquisition to become leading companies in their specific sectors33. In the last decade, ESG disclosures have become quintessential in M&A transactions, ESG reporting of a company aids the investors to determine the trajectory that the company shall have in the future. In the age that increasingly is moving towards sustainability, if a company’s policy is not aligned with sustainable growth/development the company won’t be even financially successful. ESG address a wide range of concerns, it aids in assessing an organization's capacity to attract and keep customers, employees, and growth opportunities. ESG considerations are no longer incidental but integral to any business, it has become a staple consideration for any investor investing in a company 34. Investors around the world are using ESG, as a factor, to identify and select potential businesses to invest in.

Low ESG rated companies are acquiring and merging with companies with higher ESG rating to increase their own ESG compliance standards35. Company reputation is one of an important aspect of any M&A transactions, high-profile M&A deals have to face public backlash due to poor governance and environment ratings of a company36. According to a report by “Global data”, a private data collection and analytic company, ESG is a major factor in driving business deals and consumer engagement in green energy, electric vehicle sector and Technology sector37. 2023, witnessed a combined total of $ 7 billion worth ranging over six hundred transactions in customer-led transformations, driven by ESG considerations38. 33 Merger of Vodafone India and IDEA: Creating the largest telecoms operator in India (no date) Vodafone. com. Available at: https://www. vodafone.

com/news/corporate-and-financial/merger-vodafone-india-idea (Accessed:

22 September 2023).

34 Smruti Shah, A. C. (2023) Interplay between ESG and M&A transactions: Key factors to consider, India Corporate Law. Available at: https://corporate. cyrilamarchandblogs. com/2023/02/interplay-between-esg-andma-transactions-key-factors-to-consider/ (Accessed: 22 September 2023). 35 Dayal, G. , Chauhan, P. and Sawhney, S. (2023) Impact of ESG on M&A in India, Lexology. Available at: https://www. lexology. com/commentary/corporate-financema/india/lakshmikumaran-sridharan/impact-of-esgon-ma-in-india (Accessed: 22 September 2023). 36 The role of ESG factors in shaping M&A deal value and reputation (no date) International Bar Association. Available at: https://www. ibanet. org/Role-of-ESG-factors-in-shaping-M&A-deal-value-and-reputation (Accessed: 22 September 2023). 37 Robarts, S. (2023) ESG the biggest theme driving mergers and acquisitions in Q2 2023, Energy Monitor.

Available at: https://www. energymonitor. ai/esg/esg-biggest-theme-driving-mergers-acquisitions-q2-2023/? cfview. (Accessed: 22 September 2023). 38 www. ETBFSI. com (2023) M&A resets to pre-pandemic level, FinTechs and ESG to be top deal hotspots in 2023 : Report - ET BFSI, ETBFSI. com. Available at: https://bfsi. economictimes. indiatimes. com/news/financialservices/ma-resets-to-pre-pandemic-level-fintechs-and-esg-to-be-top-deal-hotspots-in-2023-report/98269867 (Accessed: 22 September 2023).

5.) Checklist ESG Compliances to be done before an M&A transaction/deal. As ESG factors have become a gold standard in M&A transactions, it has become imperative for investors to have a checklist for ESG policies in a target business for a fruitful transaction. A pre-deal due diligence has become the need of the hour, good and detailed due diligence is directly proportional to the positive result in an M&A deal. As already mentioned in India, under the Regulation 17(1) of SEBI LODR, top 1000 listed companies (by market size) are required to disclose their sustainability report in their annual financial statement. Even if a company is not mandated by law to release a sustainability report market practices are compelling most companies to release an ESG report. A proper ESG safeguard can be incorporated either by companies or by business in the following 2 ways: I.

Assessment on a company’s ESG report or policies; and II.

Incorporation of ESG in transaction or deal documents I.

Due-Diligence - After a company issues a letter of intent (“LOI”) ,assessing the ESG profile of a company being acquired and the acquiring company in the case of acquisition and both the merging companies is an important procedure of a deal. A general assessment would include policies against climate pollution, employee rights, sound corporate governance policies, etc. ESG Due Diligence should focus on critical factors such as compliance with data protection regulations, board decision-making processes, employee incentive and retention schemes, disclosure and reporting obligations, supplier onboarding policies, operational efficiency in crisis management, anti-corruption compliance, engagement with related parties, adherence to employee health and safety regulations, and liability risks related to environmental issues.

Moreover, an evaluation of the target company's loans, both short-term and long-term, becomes relevant to ascertain if financial institutions have considered ESG compliances in extending loans39 . The areas which should be kept in mind while 39 Smruti Shah, Aviral Chauhan & Priya Gupta"Interplay between ESG and M&A transactions: Key factors to consider”, Cyril Amarchand Mangaldas Blogs, February 1, 2023.

profiling a company are as follows40: S.R.

Key areas for ESG Profiling 1.) A compliant policy on Anti-corruption.

2.) Sound decision making procedure incorporated in the corporate governance structure of the company. 3.) Compliance with Data Protection regulations (Digital Personal Data Protection Act, 2023 and other regulation). 4.) Full compliance with any and all disclosure regulation with any applicable supervisory authority. 5.) Liability and risk associated with environment and climate pollution. 6.) Employee health and benefit polices, diversity and gender equality policies for safeguarding employees of the company.

industry in which a business operates. Conditions and warranties with a wide purview include ESG specific risks including but not limited to corruption, policies on sustainable growth and money laundering. A buyer may opt for ESG centric warranties or conditions violations of which may result in damages or breach of contract. Alternatively, contract of indemnity can also be used by the buyer/investor to put in ESG focused clause, breach of such caused, would result in making it good by the indemnifier42. 6. ) Conclusion As the world grows more aware of the impact of human activity on the environment and issues related to social and governance, ESG policies shall continue to become more and more important. It is probably that further regulations shall be introduced by Indian regulators regarding ESG.

Looking forward, ESG impact on M&A transaction shall continue to increase, not just in India but also throughout the world. As businesses grow more aware of need of ESG in M&A transactions, the need for a standard ESG disclosure requirement for cross border M&A deals are at an all time high. While there are still many impacts of the growing sector of ESG to be seen in M&A, there shall be more advancements in the due diligence required to be done before a transaction. While putting clauses about warranties and conditions in deal documents avert risks in a deal, it is not enough as warranties are only for a limited time and there may be difficulties in enforcing specific warranties. Newer due-diligence procedures must be evolved to identify risk associated with ESG in companies.

Now that the world is increasingly becoming aware of ESG issues, it has become a key for generating and maintaining investor trust and there by has become an integral part of Mergers and Acquisitions deal. Moving forward a standardized worldwide ESG disclosure would be required for ever growing Cross border M&A deals.

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