ESG impact on limited M&A insurance coverage

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Environmental, social and governance factors are playing an increasing role in M&A activity, but so far this has had a limited impact on the insurance coverage that underpins transactions.

Recent research suggests that ESG is having an increasing impact on M&A activity and corporate strategy. According to a Coleman Research Group report released in August, some 42% of experts said ESG played an important role in their organization’s M&A activity, while 68% said it would become even more significant over the next two years. Respondents included experts involved in M&A and ESG activities within their organizations across Coleman’s global network in the Americas, Europe, Middle East and Africa, and Asia-Pacific.

Although there is greater scrutiny of ESG risks and buyers have stepped up their due diligence on target companies, ESG has not yet influenced prices and terms of representations and warranties. insurance, which cover potential liabilities arising from mergers and acquisitions, according to experts.

ESG is a priority for insurers in general and can affect their appetite for underwriting certain transactions, said Simon Tesselment, director of brokerage, transaction solutions, EMEA, at Aon PLC in London.

Several large companies, including insurers, some of which underwrite mergers and acquisitions, have publicly stated that they are no longer happy to support certain industries, such as polluting companies in the energy sector, Mr. Tessellation.

Insurers may deny certain transactions based on business appetite or underwriting guidelines, but only a few take hard stances affecting a small segment of transactions, he said.

“A deal we did in London two or three years ago was a coal deal. We got conditions and covered everything, but there was a very limited appetite in the market. No one is necessarily going to tell you they’re going to turn down a deal because of ESG concerns, but they will find a way to turn it down for many reasons,” Tesselment said.

Private equity fund mandates now typically include an ESG component and limited partners and other institutional investors are increasingly making investment decisions based on ESG performance, said Matthew Wiener, chief executive of Aon PLC based in Houston.

This has happened in the energy sector in the United States and abroad, as investments in renewable energy have increased significantly, Mr. Wiener said.

“When it comes to insuring these transactions, I’ve seen more renewable energy transactions written in the past 18 months than in the previous five years. There has been a huge influx of capital there,” he said.

There is a growing emphasis on ESG in M&A, but there has not been as much change in the representations and warranties assurance market, particularly in the United States, said Stavan Desai, head of transactional liability for the Americas at Mosaic Insurance in New York. holdings ltd.

“When people talk about ESG, most think of industry-focused best practices – companies should – while on the other hand, reps and warranties are mostly legal compliance-focused “, Mr. Desai said.

So far, ESG-related regulation has focused on public companies and SEC reporting requirements, he said. “From a private company perspective, there are not many new ESG regulations and considerations that would be of concern, and the traditional due diligence process has been sufficient to cover most ESG risks,” he said. .

Insurers’ appetites will vary from company to company, and for harder-to-place risks, like private firearms manufacturing and coal mining, ESG is a consideration, Mr. Desay.

“That’s not to say you can’t find reps and warranty coverage for either of these categories, but the number of quotes brokers get will traditionally be lower on more expensive targets. ESG risk than others,” he said.

ESG as a topic is not addressed in private mid-market acquisition transactions as it presents itself in the world of public securities, said Randi Mason, co-head of corporate practice at the firm. of attorneys Morrison Cohen LLP in New York.

“We don’t see reps and warranties dealing with ESG per se, and we don’t see reps and warranties excluding ESG as a topic. That being said, ESG is an umbrella term, and many components that make up ESG are receiving increased attention,” Ms. Mason said.

For example, cybersecurity and data privacy are getting more attention, she said.

“Ten years ago, we had to convince clients to let us do the diligent; now privacy and data security issues take a lot of due diligence time and get assigned real estate in purchase contracts,” Ms. Mason said.

Even before ESG became a hot topic, environmental risks were considered in mergers and acquisitions – for example, if a chemical company with known environmental liability was acquired, said Jonathan Mitchell, director, consulting at clientele, based in Atlanta, at brokerage Shield founder.

Questions and concerns about whether a company is complying with employment laws and the Fair Labor Standards Act, which establishes minimum wage and overtime pay, have also been a focus, said Mr. Mitchell.

More recently, social issues around diversity, pay equity and the #MeToo movement have started to get more attention, he said.

From an insurance perspective, “ESG is evolving as we speak” and will play an increasing role in the future, Mitchell said.

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