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ESG is rising as an M&A factor. Just ask U.S. Steel

Nippon Steel’s proposed $14.1 billion takeover plan lists accelerated decarbonization potential as a “strategic benefit.”

U.S. Steel plant in Pennsylvanai

A U.S. Steel plant in Pittsburgh. Image via Shutterstock/Heather Schor

Environmental, social and governance considerations are both driving and deterring mergers and acquisitions.

Almost a quarter of senior M&A executives cited ESG regulations such as mandatory reporting requirements as one of the top two factors most likely to suppress deals in 2024, according to a global M&A trends and risks report from global law firm Norton Rose Fulbright. (Registration required.) The firm surveyed 200 senior executives at large corporations, private equity firms and banks in Q3 2023. 

Yet, almost the same number of survey respondents said they believe ESG strategy will be the most important driver of M&A activity in the U.S. this year. 

U.S. Steel takeover in the spotlight

This tension is evident in the debate surrounding Nippon Steel’s $14.1 billion takeover bid for U.S. Steel last December, which lists several ESG factors as "strategic benefits." Among them: the combined companies’ ability to build on decarbonization efforts and maintain strong labor relations.

A fact sheet put out by the companies positions Nippon as "one of the top electrical steel producers in the world" and notes that one of the transaction’s goals is "to make U.S. Steel one of the leading electrical steel producers in the United States and accelerate its decarbonization goals."

The document also highlights a shared "commitment to decarbonize by 2050" and recognizes that solving sustainability challenges is fundamental to every steelmaker’s existence and future growth. Advancing decarbonization initiatives and related technologies will be a "key area of collaboration post-transaction," the companies said. 

Still, Nippon’s commitment to "maintaining strong stakeholder relations, including with employees, customers, suppliers and communities" was not enough to earn the trust of the United Steelworkers.

The 1.2 million-member union has filed a grievance arguing it was left out of M&A conversations, the deal threatens domestic jobs and poses a national security risk. President Joe Biden also has come out against the deal, citing his support for American steel workers and taking the position that U.S. Steel should remain domestically owned and operated. The pushback highlights the risk social factors play in mergers and acquisitions. 

Add ESG to your M&A playbook 

Given heightened interest in ESG issues and the phase-in of related regulations, corporate M&A teams should add an ESG section to their roadmap for M&A processes, roles and best practices, said Betty Huber, partner and global co-chair of the ESG practice at Latham & Watkins, a large multinational law firm. 

Among things a playbook should include:

  • more ESG due diligence questions, such as "how have harassment claims been handled?" or "how is the company mitigating potential human trafficking risks?"
  • a system for understanding reporting requirements in various jurisdictions that could be impacted
  • a framework to address ESG concerns in the 100 days after the deal closes 

Once a company has incorporated an ESG strategy into its M&A playbook, it should be rechecked and updated regularly. "Playbooks will be really critical in this time when there's this sort of tsunami of ESG-evolving regulation," Huber said. 

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