In my previous post on a November 7th Society of Corporate Compliance and Ethics (SCCE) panel on ESG through the life cycle of a business, I outlined the shifting landscape of ESG in the wake of recent regulatory and social developments in the U.S. This follow-up provides more detail on the insights shared by my fellow panelists, Eugenia Maria Di Marco and Ahpaly Coradin, who explored ESG in the contexts of startups, international markets, private equity, and M&A. As President-elect Trump continues to name cabinet members and advisors, I and others expect that ESG issues will continue to be a hot button issue here in the US.

Ahpaly shared his perspective on ESG trends, particularly in private equity. Although he acknowledged that in the US, interest in ESG is waning, many PE firms still screen for ESG risks at the initial target selection stage and during due diligence. Larger firms see market positioning and risk mitigation as the main benefits of ESG. However, revenue growth and capital allocation are not primary motivators due to the lack of data. He noted that many limited partners are increasingly deploying capital away from sectors like tobacco, alcohol, and to a lesser extent, fossil fuels.

Ahpaly opined that given the current climate, we are likely to see divergent trends between the U.S. and the rest of the world, with the U.S. pulling back on ESG-related initiatives. Additionally, PE firms in the U.S. are asking fewer and less detailed ESG-related questions compared to their counterparts in other regions, underscoring the stark difference in ESG priorities between the U.S. and the rest of the world.

When it comes to climate-related due diligence, Ahpaly emphasized the importance of focusing on four key areas: physical risk, compliance risk, litigation risk, and shareholder activism. Physical risk includes disruptions due to climate-related events like storms, floods, and droughts, particularly affecting supply chains. Companies need contingency plans, adaptation, and resilience strategies. Even if the decision is to take no action, having a documented analysis of why adds value. Compliance risk varies by industry and location. While the U.S. may see deregulation of GHG emissions and anti-DEI measures, international businesses must still comply with foreign regulations like the UK Modern Slavery Act and the EU Corporate Sustainability Due Diligence Directive. Litigation risk around greenwashing claims may become more difficult to pursue under potential U.S. deregulation, but this risk hasn’t disappeared entirely. Shareholder activism is increasingly focused on stranded asset risk, particularly in the energy sector, where assets may become obsolete due to market changes, technology, or regulation.

Ahpaly also advised that less regulation and enforcement in the U.S. might increase ESG-related risks for buyers in M&A deals. These risks should be factored into pricing and negotiations by considering strategies like reps and warranty insurance and expanding MAE clauses to cover ESG scenarios.

Eugenia Di Marco, who is headquartered in Miami but works with Latin American and European startups shared valuable insights on the role of ESG for startups and international markets. She emphasized that startups can use ESG as a competitive advantage, particularly in Latin America and the EU, where ESG considerations are becoming more critical than in the U.S. Investors and consumers in these regions are placing a higher premium on sustainability, ethical governance, and social responsibility. By embedding ESG principles into their business models early, startups can differentiate themselves, attract investment, and build trust with partners and customers. According to Eugenia, in international markets, ESG is not just a “nice-to-have” but an essential component of market entry and growth strategy.

KPMG’s 2023 statistics are revealing, as highlighted in The Sustainable Advantage: Leveraging ESG Due Diligence report:

• The top reasons U.S. investors are conducting ESG due diligence are to identify risks and upsides pre-signing, to meet increased investor focus, and to respond to regulatory requirements.
• 53% of U.S. investors have had deals canceled, and 42% have opted for a purchase price adjustment due to ESG concerns.
• 23% of U.S. investors are conducting ESG due diligence without an adequate understanding of ESG in their area of investment.
• 43% of U.S. investors will perform ESG due diligence on the majority of their deals in the future, compared to only 33% in the past.
• 90% of U.S. investors with a robust ESG due diligence approach use their findings to drive a clear post-close action plan.
• 62% of U.S. investors are willing to pay a premium for companies that align with their ESG priorities.
• 54% of U.S. respondents plan to work with external advisors for ESG due diligence in the future.
• The top challenges U.S. investors face with ESG due diligence are a lack of robust data, inadequate understanding of ESG across stakeholders, and difficulty defining a meaningful scope.
• 82% of investors in Europe, the Middle East, and Africa (EMEA) integrate ESG into their M&A agenda, compared to 74% of U.S. investors.

It will be interesting to see the results of KPMG’s survey two years from now.

This morning I spoke to an in-house lawyer in the EU, who is knee deep in ESG initiatives. Meanwhile, on this side of the pond, an HR executive for a major hospital system told me that they have been instructed to scrub all references to DEI from company policies and practices to avoid losing government funding.

Given this complex landscape and the incoming administration, businesses must stay agile. The only thing that’s clear is that there will be a lot of work for lawyers and a lot for me to talk about in my Compliance, Corporate Governance, and Sustainability course in the Spring.