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Environmental, social and governance factors are playing a growing role in mergers and acquisitions activity, but so far this is having a limited impact on the insurance coverage that underpins deals.
Recent research suggests that ESG is having a growing impact on M&A activity and corporate strategy. Some 42% of experts said ESG plays an important role in their organization’s M&A activity, while 68% said it will become even more important over the next two years, according to a report by Coleman Research Group released in August. Respondents comprised experts involved in M&A activities and ESG within their organizations across Coleman’s global network in the Americas, Europe, the Middle East and Africa, and Asia-Pacific.
While there is greater scrutiny of ESG risks and buyers have stepped up their due diligence of target companies, ESG has yet to influence pricing and terms for representations and warranties insurance, which covers potential liabilities arising from mergers and acquisitions, experts say.
ESG is top of mind for insurers in general and may affect their appetite for underwriting certain transactions, said Simon Tesselment, chief broking officer, transaction solutions, EMEA, at Aon PLC in London.
Several large corporations, including insurers, some of which write M&A coverage, have made public statements that they are no longer happy to support certain industries, such as polluting businesses in the energy sector, Mr. Tesselment said.
Insurers may decline certain transactions based on corporate appetite or underwriting guidelines, but only a few are taking hardline positions affecting a small segment of deals, he said.
“A deal we did in London two or three years ago was a coal-related business. We did secure terms and get it covered, but there was very limited appetite in the market. No one is necessarily going to play back to you they are going to decline a deal because of ESG concerns, but they’ll find a way to turn it down for numerous reasons,” Mr. Tesselment said.
Private equity fund mandates typically now include an ESG component and limited partners and other institutional investors are increasingly making investment decisions based on ESG performance, said Matthew Wiener, Houston-based managing director at Aon PLC.
This has played out in the energy sector in the U.S. and abroad, as investments in renewable energy have increased significantly, Mr. Wiener said.
“With respect to insuring these transactions I’ve seen more renewable energy transactions being underwritten in the last 18 months than I did in the prior five years. There’s been a huge influx of capital there,” he said.
There is a growing focus on ESG in M&A, but there hasn’t been as much of a shift in the representations and warranties insurance market, especially in the U.S., said Stavan Desai, New York-based head of Americas transactional liability at Mosaic Insurance Holdings Ltd.
“When people say ESG, most are thinking about industry-driven best practices — companies should be doing this — whereas on the other hand reps and warranties for the most part are focused on compliance with laws,” Mr. Desai said.
ESG-related regulation so far has focused on public companies and SEC reporting requirements, he said. “From a private company perspective there are not that many new ESG regulations and considerations that would give cause for concern, and the traditional diligence process has been sufficient to cover most ESG risks,” he said.
Insurer appetite will differ by company, and for risks that are more difficult to place, such as private gun manufacturing and coal mines, ESG is a consideration, Mr. Desai said.
“That’s not to say you can’t find reps and warranties insurance for either of those categories, but the number of quotes brokers get back will traditionally be fewer on more ESG-risky targets than others,” he said.
ESG as a topic is not coming up in private middle market acquisition deals in the way it is arising in the public securities world, said Randi Mason, co-head of the corporate practice at law firm Morrison Cohen LLP in New York.
“We are not seeing reps and warranties addressing ESG per se, and we’re not seeing reps and warranties excluding ESG as a topic. That being said, ESG is an umbrella term, and a lot of components that make up ESG are getting heightened attention,” Ms. Mason said.
For example, cybersecurity and data privacy are coming under greater focus, she said.
“A decade ago, we had to convince clients to let us do diligence; now issues of data privacy and security take up a lot of diligence time and are given real real estate in purchase agreements,” Ms. Mason said.
Even since before ESG became a hot topic, environmental risks have been a consideration in mergers and acquisitions — for example if a chemical company with a known environmental legacy liability was being acquired, said Jonathan Mitchell, Atlanta-based director, client advisory, at brokerage Founder Shield.
Questions and concerns around whether a company is complying with employment laws and with the Fair Labor Standards Act which establishes minimum wage and overtime pay, have also been a focus, Mr. Mitchell said.
More recently, social issues concerning diversity, pay equity, and the #MeToo movement have started to get more attention, he said.
From the insurance perspective, “ESG is evolving as we speak,” and it will have a growing role going forward, Mr. Mitchell said.