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Dealmakers should continue to weigh the impact of ESG issues on M&A deals as ESG standards evolve.

By Richard Butterwick, Pierre-Louis Cléro, Paul A. Davies, Tobias Larisch, Michael D. Green, James Bee, and Catherine Campbell

Environmental, social, and governance (ESG) issues have become increasingly important for corporates in recent years, driven initially by investor and consumer demand, and now by legislative developments across multiple jurisdictions.

As ESG becomes a growing part of the dealmaking conversation and acquirers seek to improve ESG credentials through individual acquisitions, the M&A market is showing a greater demand for enhanced ESG due diligence, particularly in relation to value chains. A wider range of deal provisions are being considered in light of their potential to enhance the ESG outlook of acquisitions. Further, regulatory developments and forthcoming changes mean that reporting obligations, both voluntary and mandatory, should remain front of mind. In this M&A Views article, we consider how corporates and M&A dealmakers are responding to the growing importance of ESG.

By Aaron Franklin

The United States has the deepest, most liquid capital markets in the world, attracting issuers from across the globe. To sell to US investors, these issuers must comply with US securities laws, entailing a more rigorous diligence and disclosure process. Issuers must weigh the benefits of increased demand against the additional costs, but the outcome should not depend on whether the bonds will be green or otherwise have sustainability credentials.

The US securities laws that apply to bond deals include a variety of rules on who can issue and purchase bonds, such as the registration requirements in the Securities Act of 1933, the Trust Indenture Act of 1939, and the Investment Company Act of 1940. But the real concern for bond issuers and underwriters is the threat of investors claiming securities fraud under the Securities Exchange Act of 1934, using “Rule 10b-5.” In general, a plaintiff is entitled to damages under Rule 10b-5 if a bond issuer or underwriter misrepresented or omitted a material fact in connection with the purchase or sale of the bond, with the intent to deceive or with recklessness, and the plaintiff lost money by relying on that misrepresentation or omission. This right to litigate for “material omissions” does not exist in most other jurisdictions, even where contractual fraud claims are possible. To avoid lawsuits under Rule 10b-5, issuers and underwriters (and their legal counsel) typically spend more time and effort (relative to deals not sold to US investors) investigating the affairs of the issuer and ensuring the offering disclosure is sufficiently robust.

By Paul Davies and Michael Green

The Vice-President of the European Investment Bank, Jonathan Taylor called for “a renewed effort from the world’s financial institutions to make the Paris Agreement a reality” at the COP 22 Conference, held last month in Marrakesh.

Green finance will have an instrumental role to play in the transition of countries to a low carbon economy. Indeed, sovereign green bonds have been described by financial analysts as “the perfect financial vehicle” and “missing link” to enable signatories to finance their sustainable infrastructure.

There have been a number of notable developments in green finance in recent months, sustaining its momentum.

By Aaron Franklin

Green Bonds have led a tremendous growth in environmental finance over the past five years, but that growth has been heavily-weighted towards investment grade credits with their accompanying risk/return.  The predominance of investment-grade credits partially results from the all-or-nothing approach of Green Bonds – the bond is either 100% green or 0% green.  The 100% green requirement shuts out many issuers seeking to finance environmentally-sustainable projects because a company needs to be sufficiently large and well-capitalized to…

By Cesare Milani and Alice Gunn

With US$100 billion of issuances anticipated by year end, the green bonds market is increasingly attracting the attention of corporations, supranational entities, multilateral banks, cities and municipalities seeking to raise capital for projects or investments with a positive environmental impact.

There was a threefold increase in green bond issuances in 2014 (compared to 2013) and, in 2015, the first high yield green bond offering in France by independent recycling company, Paprec Group, was further evidence of not only a growing market, but a maturing one.

For the market to continue to grow, however, there may be merit in clarifying the definition of green bonds.