CSRD reporting has quickly become an important element of transparency requirements across the EU. Currently, only the largest listed companies are covered, but more companies will be phased in over the coming years. In our M&A practice, we have observed increased attention for this topic as well. Important questions that arise include how CSRD reporting from the buyer and target company should be combined after the closing of a transaction. For example, CSRD will require companies to assess whether an acquisition or divestment needs to be reflected in their sustainability statement and how this should be done.
This is obviously not a straightforward exercise. Both companies, or groups of companies, will have performed their own Double Materiality Assessment (DMA) and formulated their own KPIs regarding their ESG goals and material topics. While the CSRD framework contains some guidance, the European Sustainability Reporting Standards (ESRS) do not contain a specific disclosure requirement to this effect. However, several disclosure requirements require considering whether acquisitions or divestments lead to positive or downward adjustments to targets and key performance indicators disclosed in the sustainability statement.
Does every transaction need to be included in the buyer’s CSRD report?
Transactions need to be included if they result in material facts and circumstances that affect existing impacts, risks, or opportunities identified during the DMA of the buyer. These changes may ultimately lead to adjustment of specific disclosure requirements or datapoints.
Examples of changed material facts and circumstances arising from M&A are:
- A major transaction leading to a new activity
- Entering a new sector, such as renewable energy
- A significant change in operations, like shifting to fleet electrification or reducing fossil fuel usage
- Divestment of high-intensity emission activities with the potential to shorten pathways towards net zero
Transactions that over time as part of the implementation phase lead to changes in key suppliers and business relationships due to envisaged synergies may also lead to modification of existing impacts, risk and opportunities previously identified by the company. These long-term effects of an M&A transaction are particularly relevant for a CSRD reporting team. Being aware of them enables timely consideration of potential effects for any reporting methodology or metrics applied.
How can the target’s CSRD report be used by the buyer?
From a business opportunity perspective, the CSRD reporting team is well-positioned to inform the M&A team about which types of transactions could positively or negatively affect the overall sustainability profile as reflected in the sustainability statement. This includes targets set to reach net zero by 2050. A substantive single acquisition or merger may have such an effect. A series of smaller acquisitions of companies active in more polluting sectors or sectors where resources are becoming scarce might also necessitate adjustments to a previously communicated target in a sustainability statement.
Timing of the transaction and impact on the upcoming report
There are other aspects to consider from a CSRD reporting perspective during the course of a deal. The timing of transactions during a reporting year determines whether to include the effects into the report or not. For example, Dutch implementing legislation allows companies to refrain from including changing material facts in exceptional cases. This applies when disclosing information about an ongoing negotiation could likely endanger the company’ commercial position.
Buying a target with totally different DMA/ KPI – How to integrate?
When a target becomes part of the buyer’s consolidation group, it must be included in the buyer’s CSRD report. This means that all activities and related impacts, risks and opportunities must be included in the buyer’s DMA, regardless of whether they are ‘greener’ or ‘less green’. To understand the impact on the CSRD report post-closing, two assessments need to be made. The first is an early stage assessment whether the different DMA and for example the use of less ambitious KPI’s may impact the initial materiality assessment of the buyer. Consequently, these differing targets, KPIs and ambitions will need to be included in subsequent CSRD reports. You also must assess any post-closing actions required to step-up the target’s ambitions. This may ultimately necessitate considering an additional investment when pricing the transaction.
Buying a (green) company - how to integrate the target’s CSRD-business conduct?
Acquiring a company with a green profile can positively impact the outcome of the DMA and help the buyer meet its targets more quickly. In practice, targets with a green profile and readily available materiality assessment information are becoming more attractive because they can boost a consolidating buyer’s overall ability to achieve its ESG goals. It is important to note that companies should not only focus on one single ‘green’ topic but also consider how other elements, such as corporate culture and business conduct policies, can be integrated.
Divesting (non-green) assets - impact for CSRD report
A positive ESG impact can also be achieved through active divesture of polluting assets or divesture of assets in countries with higher ESG-related risk. This may be the case if the divestment is of such significance that adjustment of the outcome of the DMA becomes merited. Another consideration should be how a divestment will be perceived from a reputational perspective and whether it fits into a well-defined corporate ESG strategy, or whether it may be perceived by stakeholders as a reactive step in an undefined ESG strategy. Having said that, a careful assessment of the impact of a divestment on KPIs, targets and priorities - and therefore on CSRD reporting - can prove very valuable.
What it means for you:
- Early-stage M&A - Identify early in the M&A process whether ESG is a driver of the transaction. If so, it is paramount to liaise with the CSRD reporting team and experts to evaluate potential impacts on CSRD reporting and how (timing of) the transaction may impact the ongoing reporting cycle in preparation for an upcoming CSRD report.
- Due diligence - Focus during the due diligence process on identifying gaps between the target’s sustainability approach - policies in place, targets set and KPI’s - and the buyer’s approach to determine necessary post-closing actions.
- Throughout the M&A process - Consistently engage with the CSRD reporting team throughout acquisitions or divestments while considering any related reputational risks – particularly when dealing with high-polluting asset divestments.
