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What Business Leaders Should Know About the Evolving Anti-ESG Landscape

While Republican proposed anti-ESG bills are making waves in the news as of late, the data from a recent KPMG survey of investment professionals shows that ESG considerations are growing in importance across the financial landscape. The trends we’re observing indicate a strong inclination towards ESG integration in M&A decision-making processes, as well as heightened ESG diligence by investors around the globe. Let’s take a look at some of the key findings:

Survey by KPMG Uncovers the Impact of ESG Due Diligence on M&A Deals

According to a comprehensive survey conducted by global professional services firm KPMG, the role of ESG factors in M&A deals has taken center stage. Over half of the surveyed professionals reported that they have cancelled deals due to material findings during ESG due diligence (68% of EMA investors and 53% of U.S. investors). Moreover, nearly two-thirds of U.S. investors (62%) indicated their willingness to pay a premium for companies that align with their ESG priorities.

The survey highlighted an increasing trend in conducting ESG due diligence, with professionals planning to incorporate it more frequently. ESG risks and opportunities emerged as the primary reasons for such diligence, followed by investor requirements and preparation for regulatory mandates.

The integration of ESG considerations in M&A agendas has become a norm, with 74% of professionals already including these factors. Among the leading motivations for conducting ESG due diligence were identifying ESG risks and opportunities (46%), investor requirements (19%), and regulatory compliance preparation (14%). The study also underscored the growing prominence of ESG considerations among EMA investors with 82% of respondents stating that they now incorporate ESG into their M&A strategies, encompassing both financial and corporate investors.

According to the study, investors are also looking to increase the frequency of their ESG due diligence efforts in the future, with 72% of investors indicating their intent to carry out such assessments on more than 20% of deals in the future, marking a significant increase compared to the previous two years.

Proposed Bills Seek to Influence ESG Initiatives

In the political realm, the House Republicans’ “ESG Working Group” in the U.S. Congress recently introduced a series of bills aimed at reshaping the role of ESG initiatives in the financial markets. Despite a mounting body of evidence pointing towards the materiality of ESG factors, these proposals seek to curtail the influence of ESG considerations.

Among the proposed bills, the “Guiding Uniform and Responsible Disclosure Requirements and Information Limits (GUARDRAIL) Act” stands out. This legislation aims to replace the SEC’s impending climate-related disclosure rules, allowing companies to disclose only issues deemed material to voting or investment decisions.

The bills also address shareholder proposals and proxy voting. The “Protecting Americans’ Retirement Savings from Politics Act” places limitations on the SEC’s ability to define “major policy use,” enabling companies to exclude certain ESG proposals. Meanwhile, the “Businesses Over Activists Act” seeks to limit the SEC’s power over shareholder proposals, shifting regulatory authority to state bodies.

Our Perspective

While these proposed bills are making waves, the data from the KPMG survey remains clear: ESG considerations are growing in importance across the financial landscape. It’s important for business leaders to note that non-financial metrics are critically assessed during M&A processes, and investors are seeking to understand if management teams are paying attention to these metrics as they chase profitability. We believe that ESG reporting is inherently tied to risk mitigation and stakeholder materiality. Non-financial indicators often carry significant financial implications for companies’ performance and operations. Addressing these factors is crucial to prevent potential detrimental consequences.

Considering the current administration’s stance on ESG, we predict that these proposed bills might face challenges in gaining traction. The broader consensus around the materiality of ESG factors and their impact on financial outcomes could contribute to the ongoing prioritization of ESG initiatives.

This study by KPMG reinforces the significance of ESG considerations in shaping M&A deals and investment decisions. As discussions surrounding the role of ESG in financial markets continue, we’ll keep you updated on the latest developments and their potential impacts.

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