Dominique Ranson reveals why ESG should come first during M&A due diligence process

Dominique Ranson has been in the mergers and acquisitions (M&A) industry since 1995, when he first became an environmental consultant at Gerling, an industrial insurer that was acquired by HDI. He later joined AIG (American International Group), where he was a manager responsible for environmental impairment liability underwriting.  

However, Dominique said his M&A career really took off when he was first introduced to ERM in 2003 and started working in the Paris office. He worked as principal consultant in M&A and corporate risk for 12 years. In 2015, he became a senior managing consultant and practice lead of M&A at Ramboll, and in 2017 he was the interim global SHE manager at ChemicalInvest Holdings before joining ERM again in 2018 as the director of service development – the role he still holds today. 

The evolution of ESG as crucial topic in the due diligence process

During this time, he has seen the industry grow and change many times from a due diligence perspective. “Enterprise risks have become more complex in our quickly changing world. Elements such as health and safety of employees, product stewardship, human rights, environmental impacts and overall diversity have become important topics in the management and valuation of the business,” Dominique says.  

He explains that, when he started getting involved in M&A due diligence, investors were mostly interested in the environmental impacts of a business. “Their biggest concern was the company’s licence to operate – whether there were any environmental liabilities, what costs would be incurred and what the impact of that would be on the balance sheet.”   

Later, he continues, investors also understood that the human aspects of business were important too, so they started focusing more on health and safety. “This scope became part of due diligence too and now covers risk assessments, looking at how the organisation is organised in the event of a serious incident.”  

“Today, it’s more value specific and ESG due diligence requires a more tailor-made approach. Initially, it was more a check in the box exercise.”

Dominique notes that health and safety also represent a serious director and officers (D&O) risk and there is an important component of enterprise reputation in it. “Bringing machines and production lines into compliance and assuring operations occur safely from a fire- and process safety perspective may entail material investments. We experienced issues whereby outstanding investments in safety solely [excluding asset integrity issues] represented more than five percent of the deal value.”  

Moving on to 2007/2008, Dominique says ESG (Environmental Social Governance) came into play, which was all about the Principles of Responsible Investment (PRI). “Private equities adopted these principles and agreed they would not invest in businesses that have serious social issues, adverse impacts from an environmental or resource efficiency perspective, or which have no governance.”  

He adds that this is still an ongoing trend, but that there has been a lot of additional fine-tuning in the meantime. “Today, it’s more value specific and ESG due diligence requires a more tailor-made approach. Initially, it was more a check in the box exercise.”  

These non-financial enterprise risks are now at the top of almost every rep and warranty (R&W) insurance and are reshaping the content of share purchase agreements (SPAs) materially.  

Dominique explains that the initial pure technical due diligence, which includes soil and groundwater contamination, air and water emissions, waste management, asset integrity, restricted substances, radioactivity and nuisances, to name a few, is evolving into a tailor made approach. Now it is combining technical with social and governance elements such as Human Rights, supply chain and supplier’s management, Stakeholder Engagement, DE&I, and more. 

“Many investment organisations want to make the right decisions in order to make sure they meet the increasing regulatory requirements in, what we call, the ‘sustainability scope’ – focusing on enterprise value and business continuity,” he says. “We are also experiencing a more intense interaction with other work streams such as legal, operational, and commercial.”

Still a lot of non-compliance issues that may have a serious impact 

One of the biggest issues Dominique and his team at ERM are currently seeing in the industry is lower deal volumes. “In 2021, we saw massive deals. Now, mainly due to the interest rates going up, the number of deals has decreased significantly as companies practise strict balance-sheet management,” he explains.   

“We still see a lot of non-compliances related to health and safety,” he adds. This includes bad safety behaviour, lack of safety leadership, missing or incomplete permits, and deferred investments on EHS in general.   

Next to that, there are still a lot of companies that are not mature at all from an ESG perspective, in particular smaller businesses.   

“All these important business risks may have a serious impact on the business continuity and/or the company value and reputation in general,” Dominique says. “That’s why it’s important to identify these issues during the due diligence process, not only to identify issues, but also low-hanging fruit that may have a serious positive impact on the enterprise value.”  

He adds that it can also have an impact on a business’s relationships with its stakeholders.  

To help organisations address this challenge, Dominique explains that in the M&A market, AI is introduced via information technology tools which can screen for ESG elements and make an evaluation based on its actual status. ERM developed ESG Fusion, but there are many other tools available in the market which help organisations (and their advisors) to identify the ESG red flags, helping them to further focus on those in detail. 

Another common issue is buyers’ remorse, he adds. “Private Equity buyers are less emotional when chasing new businesses. Trade buyers, however, sometimes approach potential opportunities on a more emotional basis and realise at a later stage that the brilliant financial and commercial perspectives cannot sufficiently materialise given the serious cultural issues or differences,” Dominique says. “That’s why a high-level change management assessment during the due diligence period may have to be considered to identify those constraints and value which efforts are needed to integrate the business at a later stage.”  

He stresses the importance of understanding the cultures of both companies before any deal comes into play. “And even when there is a good cultural fit, still a lot of training is required to make sure a smooth integration takes place, and all noses remain in the same direction afterwards.”

‘Start sooner’

Asked what his top recommendations were for organisations embarking on a deal, Dominique advised businesses to start the due diligence process a lot sooner, especially around ESG.  

“Most of the time, ESG only comes at the end of the chain of considerations, but it’s often the biggest area of interest for investors. If you start the process sooner, and if you’re transparent throughout the process, it will be beneficial for the overall negotiations, given the higher transparency on these business risks,” he concludes.