Climate change risk
What does this mean for mergers and acquisitions?
What this could mean for valuation
The outcome of COP could impact valuations across three dimensions of transition risk:
- Policy risks arising from increased financial and operational costs of doing business as a result of climate policy, regulation and carbon pricing.
- Legal risks and liabilities arising if parties seek to take companies to court for losses or damage to parties – or the ecosystems they represent.
- Technology risks arising from changes to products, processes and operations as developments that support a low-carbon economy gain traction.
In early 2022, we will share more detail on specific risks in each of these areas, and how they can impact company valuations as the implications of agreements coming out of COP26 become clearer.
What does this mean for M&A due diligence?
The incorporation of climate-related considerations into investment decisions in an M&A context is both important and complex. Assessment of the climate-related legal risks described above should form part of that process. Examples of specific M&A due diligence considerations include the following.
- Does the target, or any subsidiaries, undertake any carbon-intensive operations? Do its customers?
- Is the target incorporated or does it operate in a jurisdiction that is particularly exposed to climate-related litigation risk, or in a jurisdiction in which potential climate change impacts are severe?
- Does the target require and/or is it in the process of seeking project approval or planning consent that could be vulnerable to opposition based on climate change arguments?
- What climate-related commitments and/or ambitions have been set by the target? Has the target disclosed a clear and credible plan to achieve these, and the assumptions on which any such targets/ambitions are based?
- Is the target’s strategy on climate change consistent with external obligations (for example, the Paris Agreement)?
- Has the target experienced stakeholder pressure on climate-related topics (for example, ‘Say on Climate’ resolutions, complaints from NGOs or stakeholders)? How has the target managed these pressures?
Why focus on M&A?
There is no doubt that climate change presents fundamental risks that all businesses must navigate.
Opportunities to make transformational improvements tend to arise where businesses are making significant change. And where there is change, there are transactions.
Businesses can use their M&A activity to leverage the transformational impact of strategic thinking on climate change risk.
As we develop our analysis of climate risk following COP26, we will provide you with a set of tools to guide your legal due diligence of climate-related risk in an M&A context.
Until then we leave you with a few questions to test your company’s resilience to the low-carbon transition:
- Do you know your carbon footprint across scope 1, 2 and 3?
- Are you assessing the climate risk of your operations and supply chain?
- Are you actively seeking out low-carbon opportunities?
- Have you integrated the cost of carbon – and its inevitable increase - in your business models?
- Do you understand the impact of climate related technological changes on your business?
- Does the cost of carbon influence the price you pay for investments and acquisitions?