This article has been written by Ajay Chavan pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. This article attempts to discuss the relationship between ESG factors and M&A transaction.


Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. ESG factors have become increasingly important in the last several years when it comes to merger and acquisition (M&A) deal-making, including deal values and decisions.

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ESG indicators cover a wide range of issues, including but not limited to shareholder’s rights, board management and decision making, environmental risks and regulations, climate change resilience, human rights issues, etc. It helps in evaluating an organisation’s ability to retain customers, employees and growth opportunities.

The relationship between ESG factors and transactional commercial risks and possibilities is becoming more widely acknowledged. Due to this, businesses are now using ESG-driven criteria to assess the investment target’s economic viability and potential for long-term sustainable value creation, while ESG reporting refers to the disclosure of data covering the company’s operations in three areas: environmental, social and corporate governance. It provides a snapshot of the business’s impact in these three areas for investors.


Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also help evaluate any environmental risks a company might face and how the company is managing those risks. For example, there might be issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions or its compliance with government environmental regulations. Companies not considering these environmental risks may face unforeseen financial risks and investor scrutiny.


The social criterion examines how a company fosters its people and culture and how that has ripple effects on the broader community. Factors considered are inclusivity, gender and diversity, employee engagement, customer satisfaction, data protection, privacy, community relations, human rights and labour standards.

Social criteria look at the company’s business relationships, like:

  • Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there?
  • Do the company’s working conditions show the right regard for its employee’s health and safety?
  • Are other stakeholder’s interests taken into account? 


Governance considers a company’s internal system of controls, practices and procedures and how an organisation stays ahead of violations. It ensures transparency and industry best practices and includes dialogue with regulators. Factors considered are the company’s leadership, board composition, executive compensation, audit committee structure, internal controls and shareholder rights, bribery and corruption, lobbying and whistleblower programmes. Key factors considered in governance include:

  1. Leadership and board composition:
    • The tone set at the top by the company’s leadership is crucial.
    • The composition of the board of directors influences governance decisions, with diverse backgrounds and independent directors strengthening oversight.
  2. Executive compensation:
    • Alignment of executive compensation with long-term performance and shareholder interests promotes responsible decision-making.
  3. Audit committee structure:
    • A robust audit committee structure, comprising independent directors, enhances financial reporting integrity and risk oversight.
  4. Internal controls and shareholder rights:
    • Implementing comprehensive internal controls ensures compliance with laws and regulations, safeguards assets, and mitigates financial risks.
    • Protecting shareholder rights, including access to information, voting rights, and dividend distributions, fosters trust and transparency.
  5. Lobbying and whistleblower programs:
    • Engaging in responsible lobbying activities within the confines of the law promotes transparency and ethical influence on policy decisions.
    • Implementing effective whistleblower programs provides a safe channel for employees to report misconduct and encourages ethical behaviour.

Differences between ESG and CSR

AspectEnvironmental, Social & Governance         (ESG)Corporate Social Responsibility (CSR)
DefinitionComprehensive framework encompassing environmental, social, and governance factors.a subset of corporate responsibility, mainly focusing on social aspects and philanthropy.
ScopeBroader and more comprehensive, covering environmental sustainability, social practices and corporate governance.Often narrower, with a primary focus on social and community-related initiatives.
Regulatory mandate in IndiaThe regulatory framework related to environmental, social and governance (ESG) is not found in any one piece of legislation but comes under various pieces of legislation, including: the Factories Act, 1948; the Environment Protection Act, 1986; the Air (Prevention and Control of Pollution) Act, 1981; the Water (Prevention and Control of Pollution) Act, 1974; the Company’s Act, 2013; and the Securities and Exchange Board of India, 2015 (Listing Regulations).Section 135 of the Company’s Act, read with the Company’s (Corporate Social Responsibility Policy) Rules, 2014, makes it mandatory for certain companies with a specified net worth, turnover or net profit. Eligible companies are required to annually spend at least 2% of their average net profits from the last three financial years on CSR.
Examples of Indian companiesTata Group emphasises sustainability and ESG factors.Reliance Industries has a significant CSR presence.

Is ESG relevant to M&A in India

ESG assumes a lot of significance in Indian mergers and acquisitions, as investors are increasingly favourably looking at companies that are ESG compliant, and therefore, if, as a company, you are ESG compliant, whether in terms of having robust anti-corruption policies, anti-money laundering policies, employee policies, or being environmentally sound, the chance of attracting good investors at a high valuation is very high.

For instance, a company that has poor environmental policies and is into manufacturing and therefore is vulnerable to a fire hazard that can cause accidents in the factory or a poor money laundering policy would really find it tough to attract good investors and that good valuation.

Also, customers are increasingly looking to do business with companies that are ESG, which gives some companies a significant competitive advantage over their competitors. Lastly, even employees are looking to stick around companies that are Pro ESG in their outlook and therefore, in order to attract and retain top talent, a company will be advised to be ESG compliant. 

In India, while ESG norms have been in play since 2009 through voluntary compliance, it is only recently that the Securities Exchange Board of India (SEBI) came up with mandatory ESG disclosure requirements for the top 1000 listed companies. Further, financial institutions have also been asked to rely on voluntary guidelines on ESG risk management, issued by the Indian Banks Association (IBA), while providing finance to companies. It is applicable to both private and public companies.

The new ESG disclosure requirements are based on the Global Reporting Initiative (GRI) Standards and cover a wide range of ESG topics, including:

  • Environmental: Climate change, energy consumption, water use, waste management, and biodiversity.
  • Social: Employee relations, labour standards, human rights, and community engagement.
  • Governance: Board diversity, executive compensation, and anti-corruption measures.

Companies will be required to disclose their ESG performance on an annual basis and will be subject to review by SEBI. The new requirements are expected to have a positive impact on the Indian economy and environment by encouraging businesses to adopt more sustainable practices.

Here are some of the potential benefits of mandatory ESG disclosure requirements:

  • Enhanced transparency and accountability: Mandatory ESG disclosure will help to make companies more transparent and accountable for their ESG performance. This will allow investors, consumers, and other stakeholders to make more informed decisions about the companies they interact with.
  • Increased sustainable investment: Mandatory ESG disclosure will help to attract more sustainable investment to India. Investors are increasingly looking for companies that are committed to ESG and are willing to put their money behind them.
  • Improved competitiveness: Mandatory ESG disclosure will help Indian companies to become more competitive in the global market. Many countries are adopting mandatory ESG disclosure requirements, and Indian companies need to keep up with the trend in order to remain competitive.

The new mandatory ESG disclosure requirements are a positive step forward for India. They will help to enhance transparency, accountability, and sustainability in the Indian economy.

What are investors and lenders looking for in M&A transactions considering ESG

Banks, who themselves have their own net zero commitments, want the company’s compliance with ESG factors in M&A transactions and are interested in looking at the company’s performance to lend them money. Big businesses think about the supply chain when they are providing opportunities for transactions and that drives the behaviour of the supply chain. Investors and lenders also want to look at the stringent reporting of ESG  compliance. For each criterion, there are metrics to report on. Data is collected for each metric and these metric values are compiled together to give a final ESG score. Organisations with good ESG are considered proactive businesses with lower investment risks.

What ESG related risks should be considered in M&A


Acquirers should consider the impact of ESG on the costs and availability of financing, both in terms of acquisition financing and the ongoing financing of the acquired business post acquisition. The cost of capital may effectively increase for businesses that underperform on ESG criteria, as lenders often prefer to lend to greener, more sustainable ventures. Bank zone investors are pressing them to increase lending to renewable energy and decrease lending to traditional fossil fuel extraction. 

Regulatory risk

The evolving ESG regulatory landscape requires companies to keep abreast of the latest ESG standards globally and domestically. The broad range of areas subsumed within ESG includes climate and energy, diversity, pay equity, cyber security, forced labour and ethical business practices. 

Investment engagement and ESG activism

Boards and management should pay significant attention to ESG matters and M&A transactions, as they remain a top priority for investors. The trend would likely increase, as the growing body of evidence suggests. The companies that perform better on ESG criteria tend to have lower costs of capital and greater revenue growth potential in the context of M&A transactions, The board and management should be prepared to demonstrate how ESG considerations are sufficiently assessed and managed in investor presentations and transaction negotiations. Unaddressed ESG risks can cause bumps in the road when trying to obtain the required shareholder’s approvals for a transaction.

What focused due diligence needs to be done

Before an acquisition or other investment transaction, an acquirer should have a good understanding of the target’s ESG profile to assess the accretive or dilutive impact of such a transaction on the combined company’s aggregate ESG profile. In the initial target identification process, the threshold question that an acquirer would typically consider the strategic fit of relevant targets or assets is relevant in the ESG context as well.

Increasing significance of ESG in M&A

  • Value creation: Sustainable practices often translate into long-term value. Companies with strong ESG credentials are more likely to secure investor and consumer trust, thus enhancing their value. Buyers are increasingly interested in acquiring such companies.
  • Regulatory compliance: Governments worldwide are introducing stricter ESG regulations. M&A deals must align with these evolving standards to avoid compliance issues and future costs.
  • Reputation management: In the age of social media and instant information sharing, a tarnished ESG reputation can quickly erode market value. Acquiring a company with poor ESG performance can spell disaster for a buyer’s reputation.
  • Stakeholder expectations: Investors, consumers, and employees are becoming more ESG-conscious. Companies that fail to address these concerns risk alienating stakeholders. M&A decisions must align with these evolving expectations.
  • Risk mitigation: ESG factors are now recognised as sources of risk. Companies with poor ESG records may face legal liabilities, reputational damage, or operational disruptions. In M&A, thorough due diligence includes assessing these risks.

Challenges of ESG integration in M&A

In India, there are currently no enacted laws relating to ESG other than the compulsory Business Responsibility and Sustainability Reporting (BRSR) framework, which requires disclosures to be made by the top 1000 companies’ market capitalization as mandated by the Securities and Exchange Board of India. Except for BRSR disclosures, there is no reliable information database about the ESG credentials of any company in India. This makes it difficult for stakeholders to make informed investment decisions.

Another challenge is integrating ESG norms into a set of standard principles. Since ESG norms are still evolving (and ESG issues are inherently endogenous), standardising ESG compliance criteria is difficult. While it may be possible to create a broad ESG framework, region and industry-specific variations will remain.

Another issue is the lack of awareness and the absence of proper governance and legal requirements outside of BRSR. While companies recognise the importance of ESG, they may not be willing to invest the necessary resources to implement ESG practices. This is because, currently, awareness about the long-term impact of ESG is still less significant in India, especially compared to Europe or the United States.

Some contractual protection that should be used

  • Representation and warranty clause: The companies shall make sure that a target company is in compliance with ESG regulations and that there are no material liabilities relating to ESG.
  • Indemnification clause: It is included to make good on losses done by the defaulting party in case of breach related to ESG matters, covering damages, and compensation because of non-compliance.
  • Audit rights clause: To allow buyers to conduct periodic ESG audits to ensure continuous compliance with agreed ESG standards.
  • Insurance clause: To obtain coverage for potential ESG-related liabilities.
  • Termination clause: In case of any material breach related to ESG matters, the non-defaulting party may terminate the deal.
  • Dispute resolution clause: A mechanism for resolving disputes related to ESC matters through arbitration or mediation.

Post-closing integration

Following closing, having a detailed road map of changes to be implemented based on ESG diligence facilitates the integration period and minimises the potential risk of continued misconduct that could cause us legal and reputational harm post-acquisition.

The acquirer should ensure that appropriate ESG policies and reporting of an equivalent scope and standards are implemented by the target, communicated effectively to the relevant stakeholders and enforced by management to expedite the transition process.

Case study of a successful M&A with strong ESG considerations

One example of a successful merger and acquisition (M&A) that incorporated strong ESG considerations is the acquisition of Burt’s Bees by Clorox in 2007. Burt’s Bees, a personal care products company, had a strong commitment to environmental sustainability, which was a key factor in Clorox’s decision to acquire the company.

Clorox, a multinational manufacturer and marketer of consumer and professional products, was looking to expand its portfolio into the natural products market. Burt’s Bees’ commitment to environmental sustainability, ethical sourcing, and natural ingredients made it an attractive acquisition target.

Clorox recognised the value in Burt’s Bees’ ESG commitments and sought to preserve and enhance these values post-acquisition. Clorox continued to operate Burt’s Bees as a standalone business, maintaining its commitment to sustainability and natural ingredients. This acquisition has been successful, with Burt’s Bees continuing to grow and expand its product offerings while maintaining its commitment to ESG principles.

Case study of an M&A where ESG issues resulted in deal failure

Another case where ESG issues led to M&A complications is the attempted acquisition of Energy Solutions by Waste Control Specialists (WCS) in 2016. Energy Solutions, a nuclear waste disposal company, was set to be acquired by WCS, a company that also specialises in the treatment and disposal of nuclear waste.

However, the deal faced significant opposition from environmental groups and some government officials due to concerns about the environmental and public health risks associated with nuclear waste disposal. These stakeholders argued that the merger could lead to a near-monopoly in the sector, potentially reducing incentives for the company’s use of nuclear waste responsibly and safely.

In response to these concerns, the U.S. Department of Justice sued to block the deal on antitrust grounds. Although the company contested the lawsuit, it eventually decided to abandon the merger in 2017 due to the ongoing legal challenges and public opposition. 


Research from data management firm ESG Book shows that ESG regulation has increased by 155% over the past decade, reflecting the rapid growth of sustainability-based policy interventions. This sharp rise is only expected to continue, as markets look for more effective and transparent ways to drive capital to sustainable businesses and outcomes.

As ESG gains more significance, market forces will drive companies to re-evaluate their ESG policies. Similarly, the ongoing attempt at global standardisation of ESG principles (which has its own challenges) will also drive legal reform in India.

At this point, Indian companies need to understand both the relevance and the inevitability of compliance with ESG principles. This is a permanent change and not merely an investor trend. The prudent approach would be to introduce future-ready policies and strategies that are cognizant of ESG and hence capable of helping companies build sustainable businesses, attract investors and ensure long-term, sustainable returns on their investments.



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