Over Half of M&A Dealmakers have Canceled Deals on ESG Due Diligence Findings, states an ESG Today report on a recent KPMG survey.

Here’s some of what it had to say:

• The survey found that three quarters (74%) of professionals are already integrating ESG considerations as part of their M&A agenda, with the identification of ESG risks and opportunities 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%.
• KPMG U.S. ESG and Climate Services Leader Mark Golovcsenk, said:
• “The data speaks loud and clear: Companies and investors are increasingly integrating ESG considerations into their M&A strategies, not only because it’s the right and responsible thing to do but also because of the value implications of ESG.”
• The survey examined the potential impacts of findings in the ESG due diligence process, with more than half of respondents indicating that red flags on ESG could be a deal stopper (51%) or result in additional closing conditions (52%), and 44% saying it could result in a valuation reduction. 53% of respondents said that material ESG due diligence findings have resulted in deal cancellations, and 42% said that they have resulted in purchase price reductions.
• While adverse material findings have impacted or cancelled deals, the study also found that over 60% of investors would be willing to pay a premium for targets that demonstrate high levels of ESG maturity and that align with their own ESG priorities. Of these, more than a third said that the premium amount could exceed 5%.
• The study also indicated that the frequency of ESG due diligence is expected to increase going forward. 72% of investors indicated that they will conduct ESG due diligence on more than 20% of deals in the future, compared to 56% who have done so in the past 2 years, including 27% who expect to conduct ESG due diligence on more than 80% of deals, compared to only 16% who have done so over the past 2 years.

This is somewhat significant, but leaves many questions for its significance to be entirely “loud and clear.” At its simplest, the due diligence process in this regard might consist solely of ticking off whether a company has issued some kind of positive-seeming ESG disclosure, regardless of its actual content and quality. Even if not quite that cursory, it seems inevitable that the process would often be at least somewhat high-level, given the time-pressured blizzard of activity that can surround such major transactions, and to the extent it does exist, it’s more likely to be focused on identifying undisclosed liabilities and exposures and other short-term pitfalls than on grappling with broader longer-term implications. And we shouldn’t downplay the flipside of the data, that even at this somewhat advanced stage in the awareness of sustainability-related challenges, over a quarter of professionals aren’t including ESG as part of their M&A agenda, and that (turning around the last paragraph cited above) even those who do conduct ESG due diligence only do so on a minority of their deals, for the most part. And regarding the potential impacts, the survey doesn’t go into detail about the magnitude of the valuation adjustments that most often result from this area, or about whether those canceled deals were truly as simple a matter of cause and effect as the summary suggests, and so on and so on. And again, many of the companies for whom successful deals were made may still have been “bad” from most ESG-related perspectives; it’s just that the disclosure was sufficient to allow the extent and effect of that badness to be quantified and priced.

I point this out not to be pointlessly negative, but to emphasize that there’s not much evidence yet of the door closing for ESG-delinquent companies. One can never forget the depressing precedent of executive compensation disclosure, which was supposed to bring some sunlight-is-the-best-disinfectant-inspired discipline to top-level pay practices, but instead just fed more juice into a corrupt, runaway system. No doubt executive compensation practices and disclosures are also part of every due diligence process as well, but likewise more to identify potential liabilities and consequent purchase price adjustments than to assess whether the target company’s practices are worthy ones from a societal perspective. Because, basically, most dealmakers just don’t care about that.

The implication, as usual, is clear enough: we can only expect the mechanisms of capitalism, no matter how informative the disclosure that feeds into them, to go so far on addressing our escalating problems. To take an example, the considerations described above might in theory entail that a particular airline has a higher cost of capital than its competitors, or has to work with a smaller circle of potential finance providers. But only broader societal movements can regulate airline advertising as we do with cigarettes, or impose constraints to limit flight volumes, or take the other constraining, capital-unfriendly steps which are ultimately going to be necessary…

The opinions expressed are solely those of the author.