Sustainability growing influence on financial due diligence process, ACCA and ANZ find

ACCA and Chartered Accountants ANZ published a report that sets out inter-relationship between sustainability and mergers, acquisitions and divestments and the key role played by accounting and finance professionals.

Achieving a sustainable future is one of the most significant organisational risks of the 21st century, according to the report. It creates an opportunity for organisations to ensure that their merger and acquisition (M&A) processes make a material, positive contribution to a sustainable operating model. Failure to adequately assess the impact of sustainability risks and can threaten the success of M&A transactions.

As accountancy and finance professionals are at the heart of the transaction process they have a crucial role using their skills to assess complex risk to help organisations transform their operating models to become more sustainable.

The report highlights how sustainability forms a fundamental part of the strategic intent of M&A transactions and of the valuation of an entity, and the related opportunities and risks cannot be ignored. 

It also stresses the importance of assessing sustainability-related risk and opportunities must be comprehensively considered as part of the due diligence process, both as a specific workflow and as an integral part of other forms of due diligence. 

Lastly, it urges organisations to ensure that they have an appropriate level of expertise to handle the transaction cycle and to understand the sustainability-related aspects of a target’s operations, assets and liabilities. 

The report examines the sustainability considerations in the due diligence process under strategic, environmental, social economic and governance. Sustainability should be a consideration through each step of the transaction workflow: from strategy and acquisition planning through to due diligence and closing. The report also provides tips to help guide CFOs and their finance teams when considering sustainability-related issues in the M&A transaction process. 

Clive Webb, head of business management, ACCA, said: “It cannot be stated too loudly that in the M&A process there are significant numbers of risks which could derail an organisation’s journey towards a sustainable operating model. Failure to adequately assess the impact of those risks, and the opportunities which arise, can create a threat to the success of the transaction. 

“Four main factors determine why sustainability matters in a transaction – financial institutions and investors, supply chains, regulators, and customers, clients and employees. They vary according to location and whether they are sunrise or sunset industries.”

Simon Grant, group executive APS and International, CA ANZ, said: “Accountancy and finance professionals need to grow the appropriate skills and knowledge and capitalise upon ‘on-the-job’ learning opportunities. They also need to constantly bear in mind the ethical dimension. Ethics must be at the heart of everything that we do.

“Assessing the impact of sustainability-related risks and opportunities requires a significant familiarity with social, economic and environmental issues. Professional scepticism is also required when considering risks of greenwashing and bluewashing against the potential upside of investment.”