02 March 2023
Dr Phoebe Wynn-Pope, Head of Responsible Business and ESG
Sandy Mak, Head of Corporate/M&A
Phoebe: Welcome to another episode of Corrs’ Essential ESG podcast coming to you today from the lands of the Gadigal people of the Eora Nation. My name is Phoebe Wynn-Pope and I am the head of Responsible Business at Corrs and today I’m here with Sandy Mak who is our Head of Corporate and M&A.
Sandy is a market-leading M&A lawyer and acts for both corporate and private equity clients across the globe on cross-border public and private mergers and acquisitions, foreign investment, equity raisings, buybacks and restructurings. She also advises on ASIC and ASX regulatory work, foreign investment regulations and corporate governance issues. She has consistently and constantly been listed as a leading lawyer by legal directories and publications including Chambers & Partners and Best Lawyers and in 2020 she was named Dealmaker of the Year in both the Lawyers Weekly Australian Law Awards and the Women in Law Awards. Sandy it’s great to have you on the podcast today.
Sandy: Thank you for having me Phoebe.
Phoebe: I’m going to launch straight in. We’re so excited to talk to you about ESG in your space. So, it’s on the rise really in all facets of the corporate world. What are your predictions for 2023 in respect of ESG and M&A?
Sandy: So, I think ESG considerations and M&A probably have – there are two aspects to them. The first is M&A transactions the genesis of which is driven by ESG considerations. So, where acquisitions and disposals are being undertaken with the purpose of achieving specific ESG outcomes and goals. So, for example, carbon-intensive companies that are looking to rationalise portfolios, decommission assets, buy companies in order to offset their carbon emissions and in order to hit the targets that they have disclosed to their stakeholders. A lot of M&A in this space is being driven by this very specific targeted focus of trying to achieve a particular ESG outcome.
Phoebe: When you’re seeing that is the ESG elements looked at equally? So are buyers and sellers thinking about the ‘E’ and the ‘S’ and the ‘G’ parts of ‘ESG’ on an equal basis or are you finding that there is more emphasis on one space?
Sandy: I think, historically, ‘E’ has been front of mind for most people like it’s just the most obvious one. And there are many companies in which – where the space in which they operate makes it a natural focus for them. So anyone in the fossil fuel industry, carbon-intensive industries, you know, the ‘E’ part of ESG becomes a really big factor.
Phoebe: And in some ways it’s easier to measure isn’t it – that part?
Sandy: Oh yes absolutely and the fact that we’ve got net-zero commitments, you know, energy transition strategies that align to Paris Agreement targets make it, as I said, a driver. A lot of the M&A transactions which are driven by an ESG outcome are in the ‘E’ space. The ‘S’ and the ‘G’ considerations lag a little bit behind, but I think this is changing. And they really are much more evident in that due diligence space that we were talking about. You know, in every acquisition buyers are now looking to ensure not only about environmentally, but socially and from a governance perspective, that these businesses have been run in a manner that is consistent with the way in which they want to be able to be accountable to their stakeholders as acquirers of businesses.
Phoebe: Yes. So we have climate change really as a driver for the ‘E’ piece and what do you think are the main drivers really pushing that ‘S’ and ‘G’ piece forward?
Sandy: Human rights is absolutely one of them. Human rights accountability, good governance, modern slavery – you know all of this. I mean, you saw that in the Qatar World Cup and the backlash in some sectors in relation to that event where human rights breaches and the lack of public tolerance was just really evident by certain companies and a lot of, you know, people withdrawing support, sponsorship, broadcasting the rights, like France, you know broadcasting the event publicly.
So it really does go to show that modern slavery, human rights sort of elements of it are very, very big. A lot of people don’t necessarily see cyber and data breaches as part of the ‘S’, but I think it is. Cyber security, the handling of sensitive customer data, is not only a real business consideration and an IT consideration, but it really is a social consideration as well because you are handling large amounts of customer, employee and personal data which you have an obligation as a company to treat in an appropriate and sensitive way. Not just with a minimum level of legislative compliance but also to go above and beyond because you’ve got information that is personal to people.
Phoebe: There are other drivers aren’t there – like there’s so much more regulation and more stakeholders who are invested in looking at whether companies are actually doing what they say they’ll do in this space?
Sandy: Oh yes, without a doubt. And I think, you know, on the ‘E’ side as we were talking about we’ve seen for a long time a big focus on greenwashing, we’ve seen expectations amongst our regulators like ASIC, APRA, the ACCC in relation to ensuring that your disclosure is fulsome and not misleading and certainly, you know, best practice at TCFD style.
In relation to the ‘S' and ‘G’ points though – so we now have legislation that drives a lot of that requirement to comply like the Modern Slavery Act which has penalties for non-compliance and a mandatory due diligence component. And then recently – well when I say recently October last year it came into force – the Security of Critical Infrastructure Act (SOCI) and that puts a whole new level of compliance on companies that are likely to be in the sort of critical infrastructure businesses that handle a lot of data and there is an expectation in relation to reporting on cyber compliance on a regular basis as well. So you’ve got a minimum baseline from a legislative perspective, but on top of that you’ve also got a lot of stakeholder expectation and, in the current environment, I don’t think that just enough is good enough.
Phoebe: So it is that interesting space isn’t it between the legislative requirements and doing what’s required as a minimum and then what’s required by stakeholders and investors. And that’s the difficult space right? It’s that, ‘How much more do we need to be doing to get this right?’
Sandy: It’s the social licence that everyone keeps talking about – the social licence to operate.
Phoebe: I wonder if you can talk about any examples, either confidentially if you can’t mention particular clients or organisations or any examples that you feel like you can talk about, where ESG is really impacting or where you’ve specifically seen it impacting in the work that you’re doing?
Sandy: So we take that first category of M&A transactions which are driven by ESG outcomes. There have been a couple of examples: BHP selling its petroleum portfolio to Woodside was an example; Origin Energy, the bid for Origin Energy by Brookfield and EIG. We’ve seen a lot of activity – very, very contested bids in the Perth Basin for oil and gas, for mostly gas, and there is a view amongst a number of players in the industry that gas still has a significant role to play in the energy transition process.
And so some companies are at a stage in their development and cycle from an ESG perspective, where they are ready to exit. Other companies are ready to take these things on in order to transition into something else. And so there are lots of drivers that from an environmental and climate change perspective we are seeing a lot of these deals getting done.
So when you do these sort of M&A transactions, you have to also consider the stakeholder background and the likelihood of success or failure in the context of again, not just because it’s legal and it can be done, but is it something that your stakeholders are going to get arced up about. And there’s a risk in that.
So there’s a key demonstration of the vulnerabilities of transactions you know to external pressure, where the transitions don’t align with the ESG objectives of your major stakeholders. And you really have to start from that point before you launch into your M&A activity.
Phoebe: I think one of the things that we see a lot is that the ESG narrative for different business and different organisations is different depending on your risks, right? So depending on the industry, depending on where your most salient risks are – and being able to think about that in the context, as you say, of your own stakeholders and what that looks like – it will create a different picture for everybody.
Sandy: It is evident that public-listed companies are held to a much higher standard than private companies. And I don’t know if that’s necessarily a good thing all the time because you can end up in a situation where you take some of these ESG considerations out of the public eye simply because people find it just too difficult in the public space to keep owning carbon-intensive businesses where they are constantly under scrutiny from it. I think that that’s an interesting conversation that people are not always talking about as to whether or not some of this ESG/M&A activity is actually the right thing from an ESG perspective.
Phoebe: What about overseas? What trends are we seeing in Australia that are kind of reflective of those broader goals?
Sandy: So what we are seeing is that in a number of jurisdictions, like the US, the European Union, Japan, there’s been a significant uptake in M&A deals which have the word ‘ESG’ in it. So you know any transactions that involve renewable energy, decarbonisation, carbon neutral you know – and there’s an organisation in the UK called Hampleton Partners that has done a survey and it’s reported 173% increase in M&A deals that target ESG tech support analysis firms in the first half of ’22 compared to 2019. And it’s indicative of the fact that – so when we talk about ESG-driven M&A activity, we’re not just talking about buying and selling a fossil fuel business, we are talking about businesses that support carbon capture technologies, software, tech, all sorts of things that are actually driving you towards a better ESG outcome.
Clearly that has been the trend in the US and Europe and whatever they do we tend to see will occur in Australia. Australia is also just a fabulous place for renewable energy opportunities. I think, you know, our geography lends itself to fantastic renewable opportunities here. My prediction is that we are going to be really well placed to take advantage of all those opportunities and hopefully see not just development, but then also more M&A activity in that renewable space.
Phoebe: So Sandy with all of this environment and all of these trends, what should our clients be aware of when acting in this M&A space?
Sandy: I think the key takeaway here is that poor ESG is a key risk for both buyers and for sellers. So buyers want to avoid transactions with evidence of poor ESG practices and sellers will lose out on lucrative opportunities for profit as a result of poor ESG practices. So buyers who – they do want to be assured of the ability to build and strengthen saleability and value of the target post-acquisition as well – so there’s, you know, particularly private equity if there’s turnaround play involved. What we are seeing that’s really interesting and we didn’t see that five years ago, is when we kick off an M&A process and you bring in the specialist advisors, you have the legal work stream, you have the financial work stream, you have the tax work stream and now you have the ESG work stream. It is a whole separate due diligence work stream that we didn’t see five years ago. So it goes the show the level of importance that private equity buyers are placing on ESG-related matters and it’s because they recognise that there are just some significant consequential losses that can flow from the damage to (a) reputation and (b) economics if you don’t get the ESG piece right.
Phoebe: Yeah absolutely. And do you think that they're also seeing it as an opportunity? So understanding what those risks might be or where the vulnerabilities might be, but it actually could be an opportunity for value creation?
Sandy: Absolutely. I think that’s definitely the case and we have seen it with some of our own clients in some of our own deals where they look at a particular target and they say, “Well this is not up to scratch and this is not consistent with what we would do,” but then they apply their own standards to it and you actually do get a better outcome. It is all about identifying risk up to a point, to work out whether or not you can change it or whether it’s so endemic that reputationally it's going to cause you a problem going forward.
Phoebe: When we're thinking about this whole space obviously a lot of it is new and for some CEOs and company directors and executives they're not exactly sure what the implications are for them. Are there consequences for those individuals involved in companies in this space?
Sandy: There’s definitely a link between good ESG practices and disclosure and directors’ duties. I don’t think anyone disputes that. So, in order to discharge your duties properly as a director of a company, you need to have regard to the ESG considerations and ‘E’ was particularly forefront of everyone’s mind at the time we’ve got climate change.
When you put an M&A lens on it, then the question becomes: if you do an M&A deal as buyer or seller and it’s a bad one from an ESG perspective, are there then consequences for you as a director from a directors’ duties perspective as a result of undertaking those transactions? And I think the answer to that is yes. And it’s not a direct breach of a director’s duty. It might be, but I think that would be harder to prove. I think the issue is reputational. I do think that there are transactions that when you embark upon an M&A deal you have to recognise, particularly if you’re listed, that the world will look at that transaction and it will judge whether or not that’s a good thing or a bad thing from an ESG perspective and whether you’ve done the right thing. Directors do have to demonstrate, if you are on the buyer’s side, that the acquisition will be in the best interest of the company over the long term and that they have considered a full range of risks including ESG risks. So that, I think, is your minimum baseline.
Phoebe: Sandy, it’s been a really great conversation. I wonder if you could just give us a couple of key takeaways – those important things for people to be thinking about to go away with at the end of this podcast.
Sandy: So I think my key takeaway would be that planning cannot be underestimated – just looking forward a little bit in the M&A process from an ESG perspective. Should I be doing the deal? And if I am doing the deal, what level of diligence do I need to be undertaking in order to ensure that I have accurately identified ESG risks and value opportunities? Detailed forward planning especially for acquirers. And then for targets, consideration of alternative strategies and restructure options if the acquisition doesn’t pan out and particularly for public companies when you are put in play by an approach to acquire the company, often not as a result of anything proactive that the Board has done, but suddenly the company becomes the focus in the financial press, in a whole range of media. If it falls over and if it falls over for ESG reasons and that for some reason becomes public, I think that you as a target board really do need to start thinking about your messaging to the market. You know, what is the message that you want to give to your shareholders as to the plan for this company going forward – why you back it, what it means – and to counteract any negative ESG perceptions that might have been cast. I mean, I think this is true for any takeover defence frankly, whether you walk away for value reasons or for ESG reasons, but I think, you know, from an ESG perspective as we’ve seen it can be particularly reputationally difficult for directors. So a fall back and an alternative message for being proactively and meaningfully engaged with your shareholder base from an ESG perspective I think is really important.
Phoebe: Thanks a lot Sandy it’s been a really great conversation and I’ll look forward to having you on the podcast again.
Sandy: Thank you for having me Phoebe.