The growing importance of ESG factors in how businesses in Africa are valued is impacting investor decisions and bringing effective analysis of ESG compliance to the fore in M&A processes and strategy, say Adeolu Idowu and Ajibola Asolo.
“ESG criteria indicate to investors the potential of a company to deliver long-term returns, so we see our clients increasingly seeking ESG-specific due diligence services on the investor side,” explained Idowu, who heads the Governance Risk and Compliance practice of leading Nigerian firm Aluko & Oyebode, part of the ALN alliance. “Companies want to attract sustainable finance and are starting to realise investors have embraced ESG as one of the metrics with which they assess them and understand the material risks in their investment.”
Successful M&A transactions involve companies which have solid values, so in the mid- to long term, ESG components and ESG compliance will correlate to the value of companies both globally and on the African continent, commented Asolo, who was head of legal for a large financial markets group before joining Aluko & Oyebode’s partnership last year.
“It makes sense for companies to take ESG very seriously, and [operating companies] can and are doing this deliberately by beginning to incorporate ESG principles into their operational processes and internal policies on their business strategy and agenda,” Asolo explained. “Acquiring entities are also beginning to embed effective analysis of ESG compliance as part of the M&A process.”
As an example, the measure of how environmentally efficient a company is will ultimately begin to correlate with their operational costs, which in turn will correlate with the company’s value.
In terms of African businesses harnessing ESG compliance to create greater value for their company, whether in an M&A sense or generally, Asolo and Idowu point to practical steps like publishing sustainability reports, adopting renewable energy sources, taking deliberate steps to avoid questionable workplace practices, ensuring compliance with local codes of corporate governance and international best practice, and embracing diversity on boards.
While such steps may increase costs and compliance burden in the short-term, they’ll create and capture good value for companies in the mid- to long term, noted Asolo and Idowu.
The experts at Aluko & Oyebode and others in the ALN network can help buyers and sellers navigate their way around this issue.
“In the M&A context, on the sell side we can assist with liquidity position by conducting regular diagnostics and analysis on how clients are incorporating ESG components into operations and internal processes, which is essential to capturing value in the long term,” shared Asolo. “On the buy side, for example, we can also see to it that the fulfilment of ESG objectives is embedded as part of post-completion obligations, to ensure value is retained in the business.”
While the ESG landscape is evolving, Idowu believes there is an overall positive mood towards change. “It’s a strategic imperative for many businesses, as well as a national imperative, that if we want to develop as a nation we need to be able to organise ourselves and evolve our economy in a way that adapts to what is best practice worldwide.”
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