ESG in M&A transactions: Global practice and application in Vietnam

In the world of M&A, both in the global and local context, Environmental, Social, and Governance (ESG) considerations are becoming increasingly important. ESG involves assessing a company’s impact beyond financial metrics and evaluating their environmental practices, social responsibility, and governance structures. By integrating ESG into M&A process, investors can mitigate risks, enhance reputation, and align increasingly with their investment mandates. Comprehensive due diligence now includes evaluating a target’s ESG performance and post-merger integration plans incorporate sustainable business practices for long-term success.
ESG due diligence is integral to global M&A practice, with regulations, investor expectations, and supply chain considerations driving its importance. Identifying and addressing ESG risks has become crucial for companies navigating diverse regulatory landscapes and business environments. Deutsche Bank predicted that by 2035, ESG factors will be considered in 95% of investment decisions. Over the past decade, ESG funds have demonstrated superior performance, surpassing the MSCI World Index by 16.8% in cumulative returns.
 
There are still many challenges and criticisms that need to be addressed. Current issues include the lack of standardization in ESG reporting for consistent evaluation, where companies may misrepresent their ESG practices for a positive image.
The limited availability and inconsistency of high-quality ESG data pose hurdles for thorough due diligence, and the integration of ESG considerations into M&A processes is recognized as complex.

Conflicts and disagreements between short-term financial goals and long-term ESG commitments, as well as skepticism about the clear financial benefits of prioritizing ESG, are common concerns across industries and markets.
The regulatory landscape is highly fragmented, and the associated compliance costs raise considerations about the financial and operational burden on companies, particularly small- and medium-sized enterprises, which is making ESG measures somewhat counterproductive.

The subjectivity of ESG ratings in most methods, relying on varying methodologies, can result in different interpretations and hence, different results. There is also a risk of an overemphasis on reporting without meaningful changes adds another layer of complexity to the whole picture.

In Vietnam context, ESG reporting rate remains notably low and ESG adoption remains hindered by the absence of standardized reporting, limited awareness, resource constraints, sector-specific challenges, and evolving regulations. Sector-specific and country-specific challenges also require tailored due diligence approaches. However, ESG awareness is rising, driven by investor interests, business associations, and government initiatives. Collaboration between businesses and government agencies is increasing. ESG reporting and due diligence are gradually being exercised to enhance transparency and accountability in M&A transactions.
 
There were insignificant ESG due diligence activities in M&A transactions a decade ago but for the last 5 years, at ASART alone, around two of every five M&A deals transacted in Vietnam specifically required ESG due diligence. Most deals that have transaction value of USD50 million or more, or investors coming from leading institutions, require deeper involvement and transparency of ESG due diligence, making this the newest development in the due diligence scope for this market. As we have more sophisticated investors doing more sophisticated transactions in Vietnam, the country will see more ESG due diligence taking place.

As the global trend toward ESG integration continues, businesses established and operating in Vietnam have to learn about ESG and overcome its challenges, fostering a sustainable and responsible business environment in response to evolving global and local expectations. The imperative for robust ESG due diligence in the global M&A landscape is evident, shaping the future of sustainable business practices. As Vietnam navigates these dynamics, businesses need to be prepared for and prioritize ESG in their strategic planning for enduring success both in their normal business conduct and in M&A transactions.
 

(By Duy Vo – Analyst – ASART Deal Advisory)

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