How to Perform Diligence on Sustainability in M&A

Hello M and A Scientists. I need your help. We're building a new service line for on demand M and A talent. Something that sits between recruiters and consultants where you can hire experienced M and A practitioners on contract base with full flexibility to scale up and down as needed or even convert to full time. Since we have a massive network and control the level of training, we can guarantee top level talent. Now this is where I need your help. We're looking for an operational leader to help build this business line. Someone with five to ten years of recruiting experience, ideally in finance, strategy, innovation or corporate development. This is an opportunity for an entrepreneurial person to build a business line at M and A Science where we obsess over building sector leading products like our educational solutions M and A Science Academy and the Agile M and A framework. We own the fastest growing M and A tech products, deal room and firm room. You see where we're going with this? Best M and A training, Best M and A tools. Now let's help source the best M and A talent with a team of 50 people at M and A Science, a company that's growing profitable, no outside investors and our equity options are at a low strike price. I need your help to identify the best person for this role. Please reach out to me with your ideas or suggestions. You can reach me at Kisan K I S o n a science.com thank you. On to our interview.

I'm Kisan Patel and you're listening to M and A Science where we talk.

With deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Welcome to M and A Science where we curate knowledge from the best in M and A to continuously improve. If you're interested in keeping up the latest from M A Science, subscribe to our free newsletter@Mac science.com Every week we share highlights from interviews, invitations to events, M and A role openings and other resources as we build the greatest community of forward thinking M and A practitioners. Again, that's mascience.com I'm your host, Kisan Patel, CEO and founder of M&A Science. Joining me today is Sarah Thuo, Chief Operating Officer at IBM Consulting, Global Sustainability Practice. IBM is an IT technology and consulting firm providing computer hardware, software, infrastructure and hosting services. They're also an artificial intelligence and innovation company traded on NYSE under IBM. Today we're going to talk about how to perform diligence on sustainability in M and A. Sarah, how are you doing today?

I'm doing very well, thank you so much for having me. Kissan.

My pleasure. Can we kick things off with a little bit about your background?

Absolutely. I'm an operations and M and A executive at heart and I have transitioned into working on sustainability because of the urgency of ESG issues that we're facing in the world today. So I started my career in management consulting and then moved to be a practitioner in industry, specifically leading supply chains for private equity owned companies. In pe my roles morphed into operations due diligence and then M and A integration. Because of the complexity of the companies that I was working in and the need for acquisitions and integrations, I also spent some time at EY in the transactions advisory practice. I'm now part of IBM sustainability team where my role is focused on supply chain sustainability.

You got an interesting mix. Management consulting, supply chain M and integration, then transaction side and then the sustainability focus.

Absolutely, yes. It's been eclectic but really interesting and great.

So why is sustainability important these days?

So I think one of the primary reasons is that business is realizing the real effects of climate change. We have seen increasing disasters that are causing real supply chain disruptions, such as the droughts in Europe this past summer that caused worldwide disruption by stressing vessel routes. In addition to that, outside of environmental concerns, businesses are waking up to the interconnection between social issues and their ability to conduct business. There is a famous quote from the old Unilever CEO Paul Paulman. He said businesses cannot succeed in societies that are failing. And I think that is truer now than it has ever been. We're seeing that, for example, there's a war in Europe that has drastically increased global costs of many commodities and not just things like oil. But even when you look at something like wheat that you would not think about being affected by a war in Europe, the commodities have increased in cost significantly. Businesses also understand that issues such as human rights are important to their stakeholders. This is a part of the reason why, for example, in the US in 2020 you saw a huge reaction from American businesses with empathy and action to the death of George Floyd. I think the third reason is this increasing pressure from shareholders and customers for to run sustainable and responsible businesses. So customers are demanding proof of sustainability and there's also increasing activism in the shareholder community. An example that comes to mind is in 2021, Exxon lost some board seats to an activist environmental hedge fund. Their shareholders and customers are demanding sustainability from these companies. And lastly, there's increasing regulation that's driving sustainability action. I see it a lot in Europe. So regulatory bodies are starting to mandate sustainable business practices. And we've seen this in sustainability. What starts in Europe makes its way across the pond. We see that happening in the US A lot more regulation or proposed regulation around sustainable business practices and compliance.

It's a pretty wide scope there.

It is. It is a lot of drivers for sustainability, for sure.

I gotta admit, I'm a bit of a skeptic. I feel like there's a lot of noise around esg, but it's a little cloudy. It's hard to tell what's actually real and what's not. And then you see all these news about greenwashing and you're like, here you go. It's really foggy and it's tough to know what's truly getting actualized and creating value versus what's all just noise out there. I don't know. Is there any thoughts around that? Like, how do you get somebody like me to sort of take what you mentioned but then even turn it a notch up to make a little more sense out of it?

I certainly think there is a real need for education and sustainability and what it means. I think that in the US especially, the issue has become politicized, which is very sad. And it takes away from the real urgency and action that's needed, especially around environmental concerns. My encouragement to you, Kisan, would be to look into some of the publications that are out there from sources such as universities around sustainability and the real effects, especially on global warming. There's real scientific proof of the urgency of action that's needed to combat some of the issues we're facing right now. But in terms of action, I agree with you. Greenwashing is very much an issue with businesses dealing with sustainability. Unfortunately, sustainability in the past has had a lot of virtue signaling and the good thing that is happening now is there's a move away from what do people think of your company to what can your company prove that it's doing in a measurable way to demonstrate impact on environmental issues, on social issues as well as governance issues. And that's what makes me really excited about being part of IBM. We are a technology and data company and we're able to make action and impact tangible in terms of measurement and KPIs. There's a lot that has happened over the last decade that's making that possible. And we're able to cover issues of sustainability in a very tangible way and in a numeric way that makes it easier for companies to actually understand their impact.

It sounds like a lot of this is around esg. Maturing and that now they're starting to place some of these kind of metrics and ways to really create the transparency. Can you tell me a bit about the regulatory aspect of sustainability?

Absolutely, yes. So across the world, there's increasingly bold requirements. There are increasingly bold requirements in transparent, compliant and responsible business practices, and not just practices, but also reporting. So these cover all aspects of sustainability. They range from environmental issues, social issues and governance. A couple of examples start right here in the U.S. the SEC, for example, has proposed a new ruling for climate action. And the proposed law would require publicly listed companies to provide climate related financial data and greenhouse emissions insights in public disclosure filings. This would start in the fiscal year 2023. Similarly, in the UK, the regulatory bodies there are requiring companies to start reporting on climate action using the Task Force for Climate Related Financial Disclosures, which is tcfd. And it's starting with the largest companies this year and has to be adopted across all of the UK by 2025. So we see regulatory bodies, really governments waking up to the need of actually having a standardized way of reporting on sustainability and capturing the action that's there. On the social side, as an example, there's the German Supply Chain Due Diligence act, and that goes into effect in January of 2023. And this law requires companies to perform due diligence across multiple tiers of their supply chains and to ensure that there are no human rights abuses such as child labor, slave labor, unsafe working conditions, not just with the companies that the companies are shaking hands with directly, so tier one suppliers, but deep in the supply chain, so your supplier suppliers. And a similar law is expected to be passed by the European Union in 2024. So certainly governments are waking up to the need for due diligence, standardized reporting and compliance to widely accepted sustainability standards.

So we got some regulatory initiatives around this. Do you feel there's a lot of noise? Because I feel like I constantly hear of new consulting firms popping up, tech firms around esg. It just reminds me of the crypto scene as it is. It's just a lot of noise. And does the dust need to settle to see what's actually the real players?

I think so. I think with anything that's consumers and shareholders and stakeholders are waking up to, there's always an entrepreneurial spirit that goes in to say, how can we take advantage of this? And how can we capitalize on what people are really concerned about? Which is not a bad thing because I think in many ways that moves the science forward and it pushes us to make sure that what we are doing as sustainability practitioners is differentiated and it's impactful. So I agree there are a lot of companies that are moving towards this space just because it's the in thing and the dust probably does need to settle. But there's also a reality of other things that are happening in business. So there's a possible recession coming up. There are key issues like wars that are happening right now in the world that are extra pressures in business, at least on the business side. To me, it feels like there will be enough pressures outside of sustainability that will really focus the companies on what do we need to do on sustainability today? Not just in terms of giving us a great brand and having people perceive us as socially and environmentally stable and stewarding firms, but as companies that are making a real impact across the board financially and in terms of sustainability.

Do you have examples of that? I think I'm stuck in that prior example of people are doing as a branding exercise. And that's the thing to do now because that's what consumers are getting drawn into. And we're seeing that you mentioned it's evolving into more of this evidence and real examples. Can you give me some ideas or examples of that?

Yes. So we've been working with some CPG companies, for example, consumer goods companies, to help them understand what is important for them. So they have a lot of pressures right now. Commodities prices have exploded. They're trying to balance how to make sure they're listening to their customers who are demanding increasing sustainability with the cost of doing business with affordability. And so to them, they really need to be clear on where should their focus be, especially for publicly traded companies that need to go on a quarterly basis, show that they are doing the right thing to the markets we've been helping them really hone in on what does sustainability mean to your company, specifically to all your stakeholders, whether they're shareholders, whether they're consumers, whether they're employees. And then show them how they can leverage certain aspects of sustainability for winning business proposition. In transparent supply chains, for example, they are able to show their customers the journeys of products all the way from the first mile to the last mile. And show how commodities are responsibly sourced, for example, how there is footprint reduction in the production process of the final goods and services, and how the consumer themselves can make an impact by buying that product on people like Farmer, who've helped a company called Farmer Connect, for example, connect coffee retailers to the first mile. So a consumer is able to scan a QR code using their phone on their coffee cup and they're taken on a journey. They're shown the journey of the coffee beans all the way to the farmer and they're able to tip the farmer in app and see the journey of the coffee beans. So it's a real connection to the first mile. It's giving consumers the ability to actually see the responsible sourcing and the impact they as an individual can make on responsible sourcing. So there are many examples like this where sustainability does actually drive good business. It drives transparency, it drives compliance, and it drives visibility in many aspects that have not been seen before.

Those are good examples. What are the risks associated with not being sustainable?

There are a lot of risks. I think sustainability is inherently linked with risk mitigation. And other than the fines and litigation that can result in non sustainable practices, I usually try to help my clients think the other way. So what are the benefits that we losing out on by not being sustainable? Some of those we just talked about through the CPG companies that we are working with. But I try to help my clients think of benefits such as brand equity, customer loyalty, the ability to recruit. There's right now there is a huge war for talent. And with the younger generation especially, they're more focused on impact and purpose. Enabling companies to show that they do have impact and purpose gives them a leg up in the war for talent. There's even proven lower costs of capital that are associated with more sustainable companies. So sustainability is good for business. And non sustainable practices are increasingly going to become very costly for businesses because of some of what we talked about. Regulatory fines, because of customers fleeing, for brands that are a lot more sustainable because of higher cost of capital. That is many times associated with lack of transparency. And so there are a lot of things that I think will become a lot more costly for businesses if they don't show sustainable practices.

Do you ever see companies that struggle with balancing ESG initiatives and their business unit economics?

It's a struggle for most companies today, especially those that are high emitters. So if you think of oil and gas companies, their core business in oil and gas is not great for the environment at large. But what we see is companies that are kind of embracing that and understanding how do I then pivot for. For the new world. Right. So a lot of companies that we're working with in oil and gas, for example, have gone into the EV business and they're trying to create a whole new business out of electric vehicles and out of other technologies that are a lot more lower emissions. And so rather than thinking of it as a cost of doing business. I think the companies that are really successful are looking at what are the other opportunities that this brings on and how can I become a first mover and have an advantage as a sustainable business?

You have to have that disrupt yourself mindset. It sounds like absolutely.

It's a self disruption and it's also in keeping with the times. Business that doesn't change is usually a business that's dying away and change is inevitable. Embracing that change and understanding how companies can really thrive in that change is the way to go with sustainability.

What other benefits of sustainability? You think it actually increases your enterprise value somehow?

I think it does. The positive earned media is great in terms of brand equity, but also you can get stronger financial valuation through transparent reporting, which is part of esg, just bringing a lot of transparency to what you do and improved financial performance through enhanced corporate governance. These are some of the levers that you can use for better financial valuation through sustainability. Some other benefits I think are things like future proofing. Sustainability regulations are on the rise globally and embracing sustainability means that you're future proofing your company for what is required in the future. So imagine companies that don't do emissions reporting today. If the SEC ruling does come through in 2023, that's a huge cost of good business to actually start from scratch. Being ahead of a curve in terms of sustainability really is future proofing your business for regulations that are certainly on the rise. Lastly, I think really breathable air for all of us and lasting social good is the real impact all of us should be going for. I have kids. I want to make sure that I'm leaving society and an environment that is conducive to their well being. And so at the end of the day, I think for everyone, large breathable air and lasting social good is what we're after.

All right, I got to put another point on the less being a skeptic, Sarah, what the hell are carbon credits? I don't mean to say it like that. People talk about it and have no idea what they're talking about.

So carbon credits are tradable certificates or permits that represent the right to emit a certain amount of greenhouse gas into the air. So what they represent is a carbon equivalent offset project, such as reforestation, that would sequester the same amount of greenhouse gases from the atmosphere. So imagine a manufacturing company, for example, that has published net zero ambitions by, let's say 2030, but in their supply chain, they're not really able to change their processes enough to emit zero greenhouse gases into the air. So what they do is they buy carbon credits to ensure that any emissions they have through their operations or their supply chain partners are offset by projects represented by the carbon credit certificates that they buy. And this is usually through, as I said, reforestation rehabilitation. Recently IBM got a patent for engineered coral reefs that sequester carbon from the air. And so there's a lot of technology there that also can be used for carbon sequestration as well as other greenhouse gas sequestration. And this is what carbon credits and tradable certificates are used to trade.

That's interesting. So there's little parts of supply chain where, hey, we can't get to hit this optimal sustainability that we want, but we're going to do other good things and make up for it and get credit that way and get to our net zero.

Exactly. The carbon credits market is kind of the wild wild west right now, especially the voluntary carbon credits market. There are a lot of players, a lot of different roles. It's rife with issues of greenwashing, truthfully speaking, and sometimes double counting. So some of the regulations that we see coming through are in carbon credits trading. And we see a lot of entrepreneurship in carbon credits trading as well, where companies are trying to make sure that offset projects are well accounted for. This traceability. There's actual sequestration data that's being captured. And so it's a whole industry by itself. And I think it's going to become a lot more regulated going forward.

That's interesting. As soon as you told me that I had this idea to go start selling parts of the Amazon forest. Probably not going to work.

There's certainly a lot of companies and organizations that that own or have taken up ownership of land and they are doing a lot of good things, which is reforestation rehabilitation to increase that greenhouse gas sequestration.

Let's jump into doing diligence on all this stuff. How do you perform diligence for sustainability?

It's certainly complex. I think it's one of the more complex types of diligence that you can do. But simply put, it's the assessment of how a company complies with either regulatory, company set or widely accepted regulations and expectations across environmental, social and governance KPIs. The relevant KPIs really vary widely and they depend on geographic scope, they depend on industry, they depend on a company's own stated commitments. And the first step in determining which KPIs you should really be looking at is conducting a materiality assessment. And what a materiality assessment Means is an assessment of the relevant ESG factors that affect a company. So whether those are enforced by government regulatory bodies that the company is aligned with, or stakeholders such as shareholders or customers or even peers, we determine through our materiality assessment what those specific KPIs are. In environmental matters, for example, hazardous material management for example, would be more pertinent to a chemicals company. But if you think of a food retail company, it would be more focused on issues such as water conservation and minimizing waste. So in total, an ESG due diligence has to determine whether a company already achieves or is capable of achieving the specific KPIs expected by their stakeholders. And these are either through industry norm or through their own stated commitments. A good ESG due diligence also needs to ensure that company meets existing as well as upcoming ESG regulations and should also uncover any risks associated with non sustainable practices.

That was a lot. Can you like break that down for me step by step? If I'm, you know, more of a layman, like what would be the steps you'd go through?

The first step is understanding what are the ESG KPIs that you are looking at? That depends on many times it depends on which industry you're in and which geography that you're in. If I think of a manufacturing company, for example chemicals manufacturing company in North America, I would be looking at some of the big chemicals KPIs such as hazardous waste, such as materials management, such as circularity, such as safety for their workers as well as safety for the end consumer. And I'd also be looking from a regulatory perspective. Where do they sit? So are they in a state that's highly regulated in terms of what they can do with their facilities? And if I look at the US wide, how does the SEC upcoming regulation on GHG emissions as well as climate financials affect them? So these are some of the questions.

That start asking this first step, we got the KPIs and looking at the regulatory part as well. Is this stuff that I'm forging or is it stuff that I'm looking for the company that Already has some KPIs established? Where are they coming from?

A lot of companies are already reporting on this. So most companies have ESG reports, annual ESG reports, and they collect data from many different sources to put into that ESG report. Worst case scenario, if you're dealing with maybe a smaller company, a non publicly listed company, this is information that you'll have to gather. And part of what we do at IBM is Help collate all that information from the very many different sources and put it into one structure and many times into a specific structure that's needed for regulatory reporting. So if you think of tcfd, for example, in the uk, there are very specific regulations on this is the standard that we have, this is what we mean by emissions, this is scope one, two and three, et cetera. It's not just gathering data randomly, it's also aligning it to a specific reporting standard for reporting as well as for due diligence.

Okay, and then once I get that information and start looking at it, what's next?

It's comparing that information to expected standards and those are either set by regulations or, or they're set by customer expectations or they're set by peers. So how are peers in the industry doing compared to the company that you're working with, for example, or what do customers expect or even what has the company actually said that they're doing compared to what the data says they're doing? And so that is what a sustainability due diligence project would look like. And then the output is the results of those KPIs. How is a company doing against the different KPIs for the different ESG KPIs and then how are they set to do in the future based on the operations and based on their, their growth goals and how their supply chain will change, for example.

And then you make a report and all this stuff.

Correct.

How does this impact actual deal?

It has a lot of factors. It depends on the buyer, it depends on the industry, and it depends on what you find. There are some buyers that are very risk averse and they see that if a company for example, is doing well compared to peers in terms of sustainability, their future in the new world that we're living in is not great. And so that would probably negatively affect the valuation or even their willingness to do the deal. There are other companies that figure out, well, yes, we might be in a bad situation from a sustainability perspective, but we have a way to help this company become more sustainable in the future or in the worst case scenario, companies that really don't care about sustainability and see this as a nice to have, but thankfully that group is much less the norm these days. Most companies and most investors understand the value and the view of sustainability and why that is important for them and for stakeholders in general.

Would it ever like brought a deal if they came across and things weren't what they thought they were?

I have seen a deal almost fall through because of environmental concerns. So specifically I was dealing with a company that had very hazardous chemicals and some of the labeling was an issue compared to the standards of a new company that was going to be acquiring it. That became almost a deal breaker. There were a lot of corrective actions that had to be put in place before the deal went through. Some companies and some industries, it's a lot more important and also depends on the level of severity of the sustainability issue. Obviously, when it's much more tied to regulatory concerns, it becomes a much bigger issue than when it's tied to maybe what consumers might want or what activist shareholders might want.

Are there any other considerations that tie to the acquiring organizations ESG initiatives that they look at with the target company?

There are certainly issues around synergies, how environmental, social and governance issues are being handled and how one company can learn from the other, how efforts from one company or alliances can be leveraged to help the acquiring company. There certainly is a view on synergies as it relates to brand equity, as it relates to the acquiring company's own commitments that come into place for sustainability. Due diligence for sure. IBM, for example, we bought a company called Nvizzi. Nvizi is a company that helps to standardize ESG data, collate it and standardize and visualize it. So it's a software company in our own supply chain. It has been really helpful, especially with our real estate, in helping us map our own environmental footprint and understand which issues to prioritize first. So not only are we using it for clients to help them with their ESG reporting, it's also helping us internally as a company with our own commitments.

That's interesting. What are other examples of what sustainability looks like in different industries?

Yeah, it looks different in each industry, but overall it's the practice of ensuring that businesses lead to positive impact for the environment, for for the community that it affects. In terms of governance, we've talked about cpg, we've talked about chemicals companies. If I think of another example, it would be maybe life sciences. We are helping some of our life sciences clients think about issues such as their own environmental impact through their production, but also health impact of their operations. If you think about access to health care, affordability and the ability to have a social impact throughout what they're doing, that's been huge for some of our life sciences clients. Circularity is also something that's big for some of our life sciences clients, especially in the medical devices area and when it comes to packaging and also in terms of emissions, when it comes to things like Logistics. As I said, sustainability looks very different in many different industries. But at the end of the day, it comes down to what is the impact on the environment and on the communities around you and within you.

How about tech companies? How can they be more sustainable if they're operating in the cloud?

Operating on the cloud is a really sustainable way of doing business. If you think of all the infrastructure that came with not being on the cloud and the data centers that it takes to run big companies, the move to cloud is one of the greenest things that companies can do. And it's also around responsible computing and responsible computer science. I don't know whether you've watched a movie called Coded Bias, but it's a movie about how some MIT researchers found that there was bias in facial recognition technology. And mostly because it was designed in an environment that was very homogenous, the technology was able to recognize people of Caucasian dissent a lot more easily than other, really any other group, and mostly male Caucasians a lot more than other groups. And it opened the eyes of many companies to how do you actually code? What is that group of test subjects that you have? Who are you designing for? I'm proud to say IBM was one of the companies that took that information and really redid their facial recognition technology to account for that issue and to start looking at what does responsible coding look like. There are a lot of things that tech companies can do, such as IBM around green, it, around responsible computing, around circularity. So if you think of all the hardware that goes out, how do you refurbish it, repurpose it, reuse it? These are some of the things that technology companies can think of if you're.

In the cloud is that fall back on the provider you're using and what their infrastructure looks like.

A lot of it falls on the cloud provider that you're using, but part of it also falls on the client. So there is a way to create your apps, to create your code that uses less energy, that is a lot more energy efficient. It's a shared responsibility, not just on your cloud providers, but also on the apps that you're creating, on the apps that you're buying and loading. And so it is a much better way though, of doing business on the cloud rather than with hard infrastructure.

I'm always intrigued by M and A press releases that put a PR spin around sustainability because that's where the real skeptic in me comes out. Because some of this stuff, I really think it's more of a PR play as opposed to real gain in Sustainability through an acquisition. Do you have any interpretations of that or have you seen it?

I've certainly seen it. I know of companies that are not very sustainable. If you look under the covers, but give the market this illusion of sustainability, it's becoming less of an issue because of the requirements on reporting and transparency and reporting. So the more educated we become as investors, as consumers, as shareholders on what sustainability means, the more we demand transparency and accountability for stated impact. And so you'll see, especially with the SEC ruling, there's a need to show when you say you're going to be net zero, for example, what does that look like for you in terms of emissions that you're actually cutting versus what you will be offsetting? The fact that this is going to become transparent for public companies is huge because you actually get to see the commitment of a company through its own operations and its urgency, its understanding of the urgency of environmental impact. I think it is right to be skeptical. Just like anything, nothing should be taken at face value. But certainly as the science becomes better and as CIS become a lot more transparent, we'll be able to make better determinations on whether a company is actually sustainable or not.

So I'm still convinced it's more of a PR exercise. A lot of times, hey, we're doing this and we want to make sure we get a favorable market response.

I don't think I'm as skeptical as you just because I do see the tide shifting. And as I said before, there's a real big move away from virtual signaling to actual action. I'm really happy that's being demanded by consumers, being demanded by people like me and you, and it's also being demanded by investors, so shareholders. I do think that historically there has been a big issue around greenwashing and around virtual signaling. But as we get clearer on the KPIs that we are looking at and as we get smarter on how to measure companies on sustainability, I think that's going to become a lot less of an issue.

You're seeing them underpinning movement around actually validating sustainability in organizations.

I am. And it's interesting because it's both internal as well as external. If you look at the Great Resignation as it's called, a lot of employees are talking about impact and rethinking what they do on a day to day basis, understanding what do they want to do with their careers and how does it align to their personal values. So you see companies shifting a lot towards really showcasing both internally and externally, this is what we do. And of Course, it's always harder to fool people who are in an organization than it is to fool people who are outside of an organization. And so the fact that it's multifaceted, this push towards sustainability from employees, from shareholders, from consumers, I think is what is making this great. It's making it something that companies cannot move away from and something that they.

Do need to prove who's usually in charge of sustainability.

So in most leading companies, and when I say leading companies, I say companies that are leading in sustainability. Sustainability. The Chief Sustainability Officer is in charge of sustainability, but this is more of a recent trend. So sustainability is highly cross functional. Some companies don't have a Chief Sustainability officer. So aspects of ESG sit with the corporate environmental affairs team or the legal team, or the Chief Operations officer or the Chief Supply Chain officer. And even more recently, because of the ESG report and disclosures tied to lending and regulations, the CFO also owns a part of sustainability. It's highly cross functional. It's very dynamic and a lot of companies now are starting to see the need for Chief Sustainability Officer who brings all this together. That would be the person that would be working hand in hand with a due diligence team, for example, an ESG due diligence, but certainly an area that is evolving and an area that is new to most companies as a function.

Yeah, I was curious on how they would participate in diligence. Particular tsg ideally.

So the Chief Sustainability Officer would be able to provide all the information that a due diligence team would need. So they'd be able to showcase, for example, the materiality assessment they've done for their own company, show why they focus on specific KPIs and not others. And then they'd also be able to bring information together of how they've been tracking towards the different KPIs. As I said, given the highly cross functional nature of sustainability and the fact that some organizations still do not have Chief Sustainability officers, it usually is the work of the due diligence teams to work with. Now all these different functions that own parts of sustainability to bring all the information together. So it can be a huge lift, but it's certainly, I think a lift that is worth it.

What are some do's and don'ts of ESG diligence?

Some do's are certainly to look under the covers, not just trust whatever reporting that has been done, but look under the covers. Some do's are to really understand the trends, the sustainability trends that are happening in the industry and what peers are focused on and certainly some do's are to look at not just existing regulations, but upcoming regulations, what will be required sustainability wise, going forward. Some don'ts. I guess there are a lot of don'ts, but I would say don't take things at face value. Beware of greenwashing.

Let's clarify. People don't know what greenwashing means.

So greenwashing is when a company represents it is responsible from an environmental perspective, when it really isn't. So for example, if a company, most of the products are recyclable, one of my questions that always comes to mind is how much of your products are actually being recycled, not just recyclable. And there's a big difference between ambition and action. It's easy for a company to say things can be recycled from a hypothetical perspective, but actually taking the action to help consumers and the entire supply chain actually recycle something very different. And that's something that we see in cpg, especially companies saying something can be recycled versus actually recycling. So part of greenwashing is looking at ambition versus action and also understanding has a company actually done what they've said that they have done? If they have reduced their emissions by 15%, can they prove that from their operations and what is the science that they've used to prove that in their operations? That is what I mean when I say we should be really focused as supply chain due diligence practitioners on making sure that a company is not greenwashing its reports.

So don't, don't greenwash, don't greenwash anything else.

There are companies that have a carbon tunnel vision. And what I mean by that is when people talk sustainability, a lot of them are talking about the E in esg, they're talking about the environmental issue and specifically they're talking about emissions. And while emissions are important to make sure that we have a sustainable world, they're not the only issue that should be on the table. Now there are issues even in the environmental part around biodiversity circularity, things that contribute to the environmental well being. Outside of emissions, there are social issues that are important to many stakeholders. And certainly governance is a big thing in terms of ensuring transparency and ensuring that the company is doing the right thing in the long term.

Sarah, what's the craziest thing you've seen in M and A?

One that comes to mind is I was part of the beauty and personal care industry during the pandemic. And in the middle of the pandemic I was in charge of integrating an acquisition that had just been made right at the beginning of the pandemic and what was crazy about it is we had to toss most of the synergy and integration assumptions that the due diligence team had done and we had to create what our roadmap looked like from scratch. Because the world pre pandemic looked very different in the beauty and personal care industry than it looked post pandemic or during the pandemic. So there was a huge spike in demand for things that had been considered commodity and dying brands such as cleaning products, whereas things like high end beauty products that were flying off the shelves before that, there was barely any demand for them. The demand had literally disappeared with the lockdowns. So it was a lot like learning a whole new aircraft system as a pilot while flying the airplane. And it was pretty intense. But I'm proud that we did it successfully. And so what it taught me is to always be able to pivot with the times, to pivot with the demands that come with integrating a company.

Yeah.

Especially when they're really out of scope.

Exactly. Exactly.

Be ready for anything.

Be ready for anything.

I like it. Sarah, thank you so much for taking the time. I appreciate it. You're helping me become a better M and a scientist.

Thank you Kassan. Have a good one.

Those of you still with us us, thank you for staying through this and till next time, here's to the deal.

Thank you for taking the time to explore the world of M and A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We love to hear from you. If you need help standing up an M and a function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal. Views and opinions expressed on M and A Science Reflection only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.