Natural resource M&As: Using enhanced ESG due diligence to optimise value

A joint white paper with our sister company Wood Mackenzie

PART 1: Asset due diligence – and the need to ‘go deeper’

We’ve partnered with our sister company Wood Mackenzie to release a joint white paper examining the degree to which mining and energy operators can ‘do better’ when carrying out ESG due diligence in the M&A context.

Currently, the integration of ESG due diligence into M&A processes is often underutilised and misunderstood. The scope can be relatively basic and fall far short of the kind of sophisticated commercial, market, financial and legal due diligence otherwise used in major transactions. Given the wide-ranging risks that are unique to each asset – especially in higher risk, higher reward operating environments – this is a significant gap that can destroy value for energy and mining companies alike.

Similarly, a lack of coherent assessment frameworks leaves considerable wiggle room for how ESG risks (and opportunities) are factored into transactions. In this context, better, deeper and richer ESG insight can help buyers influence the transaction price by identifying otherwise invisible / under-priced risks – and establishing whether the seller has these in hand or not. Similarly, sellers can optimise the price of their assets by pre-empting buyers’ identification of ESG risks and demonstrating their effective management in a convincing, data-driven way – whilst also identifying ESG opportunities.

A more comprehensive understanding of ESG risks and opportunities associated with a target asset (and its broader value chain) can give much more accurate insight into the potential for strategic value creation.

If used to inform buyers’ bidding strategies during competitive sales, such insight can offer real alpha advantage.

Taken alongside the rise of ESG investing and the need for buyers to understand how acquisitions are likely to affect their own existing risk profile, ESG due diligence is increasingly seen as a vital, yet under-served, part of the acquisition process. While many companies apply some kind of ESG analysis to their acquisitions, such efforts have the potential to go much deeper and much further.

Gus MacFarlane

Head of Extractives