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January 8, 2024

While ESG (Environmental, Social, and Governance) is a fairly new term, it represents a range of critical issues and priorities that companies have long considered. And despite common beliefs, it doesn’t just apply to non-profit organizations. ESG elements are essential for risk management and maintaining company value even for for-profit organizations. In this article, we will discuss focusing on ESG in M&A, featuring Casey Nault, SVP, General Counsel, and Chief ESG Officer at Coeur Mining, Inc.

“If you uncover something, as the successor, it's your problem to deal with. So if there was a significant compliance issue, whether it's bribery or discrimination, stay away from it.” - Casey Nault

ESG in the Mining Industry

The common environmental concerns for most companies are greenhouse gas emissions. But beyond this, the more traditional environmental issue for mining companies is the tailings dam integrity. Catastrophic tailings dam failures impact local communities significantly and will decrease the company’s valuation because they will incur enormous liabilities, possibly including criminal, depending on the jurisdiction.

Other ESG issues tied to risk and valuation are workforce-related. There's a talent shortage in the mining industry, and there needs to be DEI (diversity, equity, and inclusion) initiatives to find good people, wherever they may be.

ESG Diligence in M&A

ESG scores are subjective. For instance, the mining industry is inherently high-risk, so regardless of risk management, it won’t have as high of an ESG rating as other industries. However, one way to assess companies on ESG is by their performance on issues identified as most important by leading stakeholders.

Assessment starts with an initial desktop analysis of ESG reports and public information, focusing on controversies and community reputation. If progressed, deeper diligence involves internal experts reviewing environmental aspects, workforce issues, and employment liabilities, often involving on-site inspections and third-party reviews. 

Look for data supporting the target’s public reports on emissions, water usage, and other issues. Direct inquiries with management are also crucial to understanding goal achievement, undisclosed incidents, and community pushback. 

The external ESG profile of a company is crucial, with emphasis on greenhouse gas emissions and decarbonization goals, which must align with the acquirer’s ESG goals and improve the portfolio.

Red Flags

In M&A, the successor will inherit all the liabilities of the target company. This is why anything related to compliance and proper past conduct is crucial for buyers. Any indication of past impropriety in obtaining the necessary permits to build or operate, or any other violation regarding ESG, will halt the deal. This includes bribery, high environmental risks, and discrimination or harassment in the workforce, to name a few. 

Another significant factor is the community support for the target company. For a mining company, any indigenous opposition can stop a project altogether. Because of this, regardless of how good the acquisition is, if there's trouble with the community, buyers will tend to avoid that deal. 

Advice for Practitioners

Casey strongly advises practitioners to understand what’s important to the acquiring company. Some issues are going to be crucial in every deal, but some are more deal-specific. For instance, in the mining industry, it's imperative to ensure that the indigenous community supports the deal. This may not be the case for other industries. 

What’s important is to consider ESG risk as a business risk. Many risks fall under the ESG umbrella, which has a direct impact on the value of the company, and how it operates.

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