ESG Real Estate Insights 2021 | Article #6 RE-thinking Due Diligence - ESG impact on M&A

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ESG Real Estate Insights 2021 | Article #6 RE-thinking Due Diligence - ESG impact on M&A
ESG Real Estate Insights 2021 | Article #6
RE-thinking Due Diligence –
ESG impact on M&A
ESG Real Estate Insights 2021 | Article #6 RE-thinking Due Diligence - ESG impact on M&A
RE-thinking Due Diligence – ESG impact on M&A| ESG Real Estate Insights 2021

Shedding light on the increasing role of ESG
in real estate M&A deals

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RE-thinking Due Diligence – ESG impact on M&A | ESG Real Estate Insights 2021

                                                           Shareholders and stakeholders                             General concept of ESG due diligences
     Evidence is mounting that                             increasingly expect their companies’                      Generally, ESG due diligences analyze the
     business performance is                               management to focus on sustainability                     compliance of the targets with national
     impacted by environmental,                            and contribute to global environmental                    and international regulations as binding
     social and governance factors                         goals, to act socially responsible and to                 frameworks as well as non-codified
     and recent developments                               become more inclusive and diverse. In                     stakeholder ESG-related norms and
     demonstrate that the speed                            other words, issues such as human rights                  expectations. Further, it highlights the
     at which those elements                               violations, environmental ruthlessness                    environmental, social, and governance
     become material is increasing.                        or other ethical infringements can have                   status quo of a company.
     Drivers of this accelerating                          vast negative influence on business as
     change are, for example,                              the companies’ actions are increasingly                   With regards to the environmental
     increasing transparency based                         impacting on how their stakeholders                       dimension, a due diligence includes
     on improved data availability                         interact with and what shareholders                       the existence of internal policies,
     around environmental, social                          demand of them. Consequentially, in the                   responsibilities and management with
     and governance (ESG) factors,                         context of transactions, ESG aspects                      regards to several environmental aspects
     society’s changing expectations                       constitute financial and reputational risks.              (esp. energy, CO2 emissions, materials,
     as public awareness of social                         Investors seek for more transparency                      water usage and waste) summarizing the
     and environmental challenges                          before signing a deal to avoid potential                  ecological impact of the business model
     increases and growing influence                       pitfalls linked to ESG concerns. This                     as well as how it interacts with all key
     of investors as they integrate                        growing awareness for ESG amongst                         environmental stakeholders and works to
     ESG factors into the core due                         investors gives rise to ESG due diligence                 mitigate its impacts.
     diligence process. Hence, ESG                         which is evolving from a niche to a widely
     has found its way to the Mergers                      known term and required competence in                     The social dimension covers policies and
     & Acquisitions (M&A) business.                        the M&A business.1                                        responsibilities concerning social aspects,
     The real estate industry has been                                                                               such as human rights, labor standards,
     a particular focus of regulatory                      Especially for deals in the real estate                   health & safety, diversity and equal
     bodies, primarily as the sector                       industry, ESG due diligence enjoys                        opportunities among others.
     contributes to 36% of EU CO2                          increasing prominence as the sector faces
     emissions1. ESG due diligences                        being closely monitored by governmental                   Finally, the governance dimension
     provide meaningful insights for                       bodies and prudential authorities over                    constitutes of analyzing the risk
     investors prior to a transaction.                     its environmental impact. The EU Action                   management systems, the existence of
     This article sheds light on the                       Plan on Sustainable Finance should not                    corporate codes of conduct (anti-bribery,
     general concept of ESG due                            be left unmentioned, as the included                      anti-corruption, etc.) and the transparency
     diligences and its specifications                     EU Taxonomy defines the criteria for                      of board and management decisions and
     and particularities with regards to                   ecologically sustainable activities and                   remuneration.
     the real estate sector.                               investments, making the impact of the
                                                           investors’ business on the climate and                    It is of note that the approach to ESG due
                                                           other environmental criteria transparent.                 diligences is not a “one size fits all” approach
                                                                                                                     for all industries. Each industry presents
                                                           ESG due diligence takes the EU Taxonomy                   its own array of environmental impact
                                                           as well as other national and international               and stakeholder interaction that must be
                                                           regulations into account. Vigilant                        considered. For example, a target in the
                                                           due diligences highlight red flags and                    chemical industry would have a particular
                                                           may optionally also assess risks and                      emphasis on the environmental factors
                                                           opportunities and future value creation                   such as disposal of hazardous waste,
                                                           potential (e.g. cost reductions through                   whereas for a target in the textile industry
                                                           increased energy efficiency).                             the focus may lay on the social factors such
                                                                                                                     as child labor or poverty wages. Hence, ESG
                                                                                                                     criteria need to be selected from a bouquet
                                                                                                                     of KPIs taking industry-specific and target-
                                                                                                                     specific factors into account.

1
    European Commission: New rules for greener and smarter buildings will increase quality of life for all Europeans, April 2019.

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RE-thinking Due Diligence – ESG impact on M&A| ESG Real Estate Insights 2021

KPIs for the real estate industry                           machines are responsible for large parts                   Your Contact
For the real estate business with assets in                 of particulate matter and noise in urban
the utilization phase, environmental topics                 areas. Moreover, social KPIs need to                       Dr. Max Tucher
outweigh social and governance KPIs as                      include workers’ health and safety, such                   Director Operational Transaction
the industry’s impact on the environment                    as the exposure to hazardous chemicals                     Services | Financial Advisory
stands in the foreground. Due diligences                    or events (floods, fire, etc.), the existence              Deloitte Germany
hence may focus on environmental                            of emergency response plans, trainings,                    mtucher@deloitte.de
KPIs such as the existence of an                            and compliance checks. Especially for
environmental policy (and a responsible                     the project development business,                          Dr. Julian Blohmke
team), its compliance with national and                     governance KPIs should include policies in                 Manager Sustainability Services |
international regulations, the usage of                     place such as anti-bribery, anti-corruption,               Risk Advisory
renewable energy and the existence of                       and anti-money-laundering.                                 Deloitte Germany
monitoring systems and regular disclosure                                                                              jblohmke@deloitte.de
of sustainability reports. Additional                       As time is usually short for M&A decisions,
focus areas are the age of the buildings,                   the right selection of KPIs is crucial.                    Sophie Katharina Paul
the status of modernization and the                         Only an analysis of the appropriate                        Consultant Operational Transaction
recyclability of building materials.                        measures provides the management                           Services | Financial Advisory
                                                            and stakeholders with the information                      Deloitte Germany
For targets involved in real estate                         needed for making the right decisions.                     sophpaul@deloitte.de
project development, the list of KPIs                       An insightful ESG due diligence hence
should be extended to measures of the                       requires methodological and industry-
environmental impact of the construction                    specific expertise.
phase itself, as for example drilling

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Published 06/2021
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