Environmental, social, and governance (“ESG”) considerations have influenced corporate choices more and more in the past several years, especially when it comes to cross-border mergers and acquisitions (“M&A”). Companies have been compelled by ESG principles to incorporate sustainability and ethical conduct into their strategies, shaping investment decisionmaking, due diligence, financial valuations. Although ESG has become increasingly popular as a tool for improving long-term value and minimizing risks, it has also come across increasing opposition from a variety of business, political, and economic stakeholders – a phenomenon described as “ESG backlash.” This backlash arises primarily from concerns that complying with ESG standards imposes burdensome expenses and restricts profitability. These concerns are especially prominent in countries like the United States, where opposition to ESG principles is on the rise.
Regulatory authorities across different regions, particularly in the European Union (EU), have placed growing importance on ESG compliance, driving multinational companies to prioritize these standards when expanding into new markets. For instance, the EU’s Corporate Sustainability Reporting Directive and the Sustainable Finance Disclosure Regulation mandate detailed ESG reporting, compelling acquiring companies to thoroughly assess and evaluate the ESG practices of their target companies.
Despite the increasing influence of ESG, it has faced substantial backlash, especially in countries like the United States. In the U.S., the rise of ESG backlash has been driven by political and economic opposition, with critics arguing that ESG principles impose unnecessary costs and regulatory burdens on businesses.
These criticisms are particularly strong in conservative-leaning states. For example, U.S. states such as Texas and Florida have introduced legislation restricting companies from considering non-financial factors when making investment choices. In these environments, companies must balance ESG concerns with broader political and market forces, adjusting their due diligence processes to reflect these shifting sentiments. However, with the introduction of numerous anti-ESG bills in various U.S. states, many of these legislative efforts are facing political and legal challenges, which result in delays, modifications, or failures. Key factors influencing these outcomes include party control in state legislature and economic impacts influencing the outcome.
ESG has become an important factor in cross-border M&A transactions, impacting target company selection, negotiation procedures, and post-merger integration plans. Businesses with strong ESG credentials are commonly seen as less risky by investors such as because they are in line with sustainability objectives, in compliance with regulations, and prioritize long-term financial success.
Due diligence in cross-border M&A transactions has evolved to incorporate ESG-related risks as part of the process. Companies must assess ESG risks associated with their targets and the potential for regulatory or political pushback in regions with strong anti-ESG sentiment.
Moreover, the financial valuation of companies has always been an essential factor in M&A deals, but ESG backlash has led the role of ESG-related risks and opportunities to become more nuanced. Companies seen as ESG-compliant may enjoy a premium in markets where these factors are valued, while those in industries facing backlash may face discounted valuations. This creates tension for companies engaging in cross-border M&A, where differing regulatory landscapes can lead to strategic misalignments between ESG-driven priorities and profitability concerns.
The intersection of ESG and cross-border M&A is still a critical factor in the global business environment. Companies facing increasing criticism over ESG practices must navigate a more intricate landscape where regulatory, political, and economic factors overlap. Multinational corporations face the challenge of maintaining the viability of cross-border deals while also following changing global standards by balancing the advantages of ESG compliance with the consequences of any potential backlash. Understanding this dynamic will be essential to ensure that M&A strategies remain relevant in a landscape where ESG remains significant both as a means of enhancing value and causing contention.