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Impact of ESG on Lifecycle of M&A Transactions

In this article, we explore the evolving role of ESG factors in Türkiye's M&A landscape, addressing rising trends, regulatory frameworks, and the transformative impact of ESG on M&A transactions from negotiation to post-closing phases. We provide insights into the unique challenges and opportunities, highlighting the crucial role ESG plays in the country's economic development.


Impact of ESG on Lifecycle of M&A Transactions

Introduction: what is ESG?

The term ESG is an abbreviation of the words "environmental, social and governance". ESG, which has developed as the concept of sustainability and social impact performance of an investment, covers one of the main issues that investors should research and consider before making an investment decision. ESG is not solely about what a company manufactures, markets or sells, but how said company goes about these processes.

ESG investing

Sustainable finance is generally referred to as the process of considering ESG factors when making investment decisions, leading to increased longer-term investments into sustainable economic activities and projects. Its growth has been driven by the desire of investors to have an environmental and social impact, along with the economic performance of investing.[1] For this reason, ESG investing occurred and has been rapidly developing day-to-day. Along with the concept of ESG investing, new investment concepts such as responsible investment, socially responsible investor and impact investing came to the fore. In the baseline scenario for PwC's asset and wealth management search, the share of ESG assets over total assets under management is expected to increase to 21.5% by 2026, comprising more than one-fifth of all global assets within the next 3 years.[2]

In parallel, the European Commission adopted the sustainable finance package in 2021, which includes the Corporate Sustainability Reporting Directive (CSRD).[3] This directive reforms and significantly expands the scope of reporting for companies, meaning that nearly 50,000 companies operating in the European Union (EU) will have to report on ESG issues starting from 2023.[4] The ESG standards represent the three pillars of these reporting requirements for companies. ESG standards are designed to encompass all non-financial risks and opportunities inherent in the daily operations of a company, measuring the company's transparency and accountability and its impact on society and the environment. While ESG investments and regulations in Europe are developing rapidly, although ESG investments in Türkiye have started to attract attention, it is possible to say that Türkiye is at an early stage in the establishment of ESG regulation and ESG investment. ESG-oriented instruments in Türkiye lag behind global practices both in terms of frequency and size of adoption. Although Türkiye has lagged behind a bit in these processes, it is not left behind, and with increasing awareness, it is a candidate country to catch up with the level of developed countries in the shortest time, especially since the regulatory authorities in Türkiye also closely follow the global ESG developments.

Holistic and future-proof approach to implement ESG standards

Considering ESG's main titles, it is a fact that environmental awareness, social relations and corporate governance principles are the focus of ESG-oriented investments. In order to create a consistent and sustainable investment, the relations between ESG applications need to be evaluated with an integrated approach. As stated in PwC's Global Investor survey, a holistic view of data is vital since the diversity of topics addressed in ESG reporting emphasises the requirement for a wide range of expertise to integrate them coherently. In so much as investors with higher scrutiny predicate on annual reports, sustainability reports and investor presentations all together to gain insight into how a company is addressing ESG concerns.[5]

Why is ESG important?

ESG has a significant impact on business performance and society. Driven initially by investor and consumer demand, ESG has become a crucial focal point for companies. Therefore, during merger and acquisitions (M&As), acquirers pay attention to the role of these standards in targeted company operations. Companies that stand out with their compliance with ESG standards acquire a significant reputational impact. As the shares of the acquired company and its reputational (hence the market) value in the sector increase, it helps the acquirer enhance its own reputation through the acquisition. This positions the acquired company as one of the sought-after and in-demand market actors in M&A transactions.

The increased scrutiny from investors and stakeholders, driven by growing commercial and data risks in today's technological landscape, along with the evolution of dynamic national and international legislation from an ESG perspective to one that broadens the scope of ESG reporting to include sanctions (eg, the EU's CSRD and Organisation for Economic Co-operation and Development (OECD) Guidelines for Multinational Enterprises, and legislative developments like the SEC proposing new rules on climate-related disclosures) has significantly elevated the importance of ESG. These factors have also played a pivotal role in shaping business practices and M&A processes. For some key sectors, in terms of Türkiye's intensive ongoing (and/or potential) with companies in the European Union, full compliance with regulations such as the Carbon Border Adjustment Mechanism Regulation and the German Supply Chain Due Diligence Act will undoubtedly be a sine qua non condition for M&As as a deal requirement. For this reason, ESG standards are gaining importance in M&A transactions globally and encouraging contracting parties. In some cases, ESG standards also provide significant feedback about dealmakers' potential success or failure based on the outcome of their M&A due diligence (DD) process.

This article explores the impact of ESG on the M&A process in Türkiye and provides a basic roadmap for evaluating ESG DD processes.

Rising trends in M&A process

Governments and regulatory authorities – especially the European Union and the United States – have implemented or expressed an intention to implement compulsory ESG reporting frameworks. The International Sustainability Standards Board (ISSB), established under the auspices of the International Financial Reporting Standards (IFRS) Foundation, has undertaken the commitment to formulate a comprehensive framework of ESG reporting standards for corporate entities to harmonise international norms. Governmental actors and institutional bodies in the United States and Europe expressed support for the ISSB's endeavours, thus, legislative improvements signal a practice trend on M&As. As in the aforementioned survey, 82% of the investors expect companies to embed ESG directly into their corporate strategy.[6] These factors influence investors' new ESG investments in Türkiye along with the states with high investment potential.

As the prominence of ESG considerations continues to grow within the realm of dealmaking, acquirers are increasingly focused on enhancing their ESG credentials through transactions. Consequently, the M&A market is witnessing a heightened demand for ESG DD and progression in the incorporation of ESG-linked performance metrics. In recent years, the EU has adopted a "double materiality approach", necessitating that companies incorporate an assessment not only of the influence exerted by external factors (ie, trade tension and supply chain dynamics) on their financial valuation but also of the broader impact of their operations on both the environment and society.[7] In a survey conducted in the year 2023, it has come to light that 82% of investors affirm the inclusion of ESG factors on their agenda pertaining to M&As.[8]

Global and local M&A trends in light of ESG factors

Investors are paying more attention to tracking and improving ESG factors to recognise the value of its contributions. Over the past few years, access to ESG-related financial products has significantly broadened, creating opportunities for potential acquirers to secure more favourable terms when they meet specific ESG criteria. For example, the growing demand for green bonds and socially responsible investment (SRI) funds among investors has provided an incentive for companies with vital ESG track records. Shareholders and stakeholders now more than ever expect companies to prioritise ESG standards in their potential M&A transactions due to the financial and reputational risks involved.

In addition, artificial intelligence (AI) would significantly impact ESG investing and ESG-related M&A DD Process. According to the OECD Publications, "AI and big data could be used for ESG investing to:

  • assess company data (issuer data);
  • assess non-company data; and
  • assess the consistency and comparability of ratings to understand the drivers of scores."

The purported benefit of AI is that it can allow for better informed decision-making by limiting the subjectivity and cognitive bias that may stem from traditional analysis, reducing the noise in ESG data and making use of unstructured data".[9]

As mentioned above, the impact of evolving technology and investors committed to integrating ESG considerations into their M&A DD procedures constitute pivotal determinants. Regarding ESG factors, social factors such as labour rights, working conditions, supplier relations, social impacts on the community and supply chain issues may lead to long-lasting reputational damage if not effectively managed. In particular, high-profiled mediatic M&A deals face intense public scrutiny and potential backlash due to failure to execute ESG factors and public impact about environmental damage, human rights abuses or corporate governance failures. Therefore, companies tend to engage more effectively with their shareholders – investors, employees, customers, and communities – and conduct more effective reporting for the supervision mechanisms and meticulously manage the reputational risks associated with ESG and human rights issues.

Since the impact of ESG on business operations (ie, M&A transactions and investments) in Türkiye is relatively new as mentioned above, efforts are still underway to mainstream ESG in practice across all sectors in general. In a survey conducted by TEİD (Ethics & Reputation Society) in Türkiye involving 44 sectors – with most represented sectors being management consultancy, energy, audit services, organised retail, construction and textile – 89% of business representatives believe that companies neglecting ESG in their priority initiatives stand to lose their reputation.[10] This shows that ESG manners have become a focal point for companies in Türkiye. Therefore, it is foreseen that the inclusion of ESG requirements in company processes will accelerate in the following periods.

ESG in main M&A phases

The approach to ESG may vary from one transaction to another and should be tailored to the specific needs of the industries and geographies covered by the involved parties. In other words, there are different approaches to ESG influenced by factors such as industry, culture, politics, regulation, geography and all stakeholders who play an active role in determining M&A phases.

Negotiation process

It is still not a widespread practice to include extended ESG provisions in M&A deals. However, ESG issues such as human rights and supply chain factors now weigh heavily in the decision-making process, especially at the negotiation stage, where the deal decision is primarily discussed. In fact, 97% of dealmakers stated that they are driven by or conscious of ESG through deal processes since it has a significant impact on brand and reputation, market valuation, operational efficiency and risk mitigation, in a recent data shared.[11] Drafting and negotiating provisions that include ESG factors is imperative for effectively managing the responsibilities and liabilities associated with ESG risks in transactions.

Letter of intent and DD phase

Conducting ESG DDs on every transaction is the best practice for M&A processes. ESG DD aims to assess the main risks concerning ESG (ie, climate change, carbon emissions, diversity, corporate governance and ethics, human rights, labour practices and supply chain sustainability) in a holistic perspective. ESG DD during this phase endeavours to delineate and assess the risk profiles and potential vulnerabilities of the involved companies. In this context, the focus is primarily on:

  • ensuring compliance with relevant legislation;
  • conducting risk assessments;
  • identifying potential opportunities;
  • addressing ESG-related responsibilities and disclosure requirements;
  • aligning with the company's existing policies;
  • managing audit systems; and
  • enhancing the overall governance structure.

Thus, the abovementioned practice areas specifically require a DD process in the M&A procedures due to society's behavioural changes towards sustainable products, employers/companies and investments. The importance of ESG factors in the M&A process, and hence their inclusion in the Letter of Intent (LoI), varies according to each company's business activities and operations. For example, regarding an M&A for companies operating in the chemical industry, the "E" in ESG is more delicate. It must therefore be detailed on main topics like environmental pollution and climate change. In general, the "G" of ESG exists holistically for companies. For instance, in the aforementioned example, although the arrangement of working conditions of employees falls under "social" criteria, its management falls under the "governance" pillar. The requirements, methodologies, operation processes and commitments that ESG standards shall be integrated must be discussed and included in the LoI for the best practices. When conducting ESG DD, it is essential for acquirers to establish a link with their own company's sustainability strategy.

Agreement process

Although ESG topics are still relatively new in M&A practices worldwide and in Türkiye, some points in Turkish legislation are indirectly suitable for including ESG-focused elements in the agreements. For example, as stated in Article 134 et seq of the Turkish Commercial Code, the merger agreement is made in writing. A merger report with the relevant agreement attached should then be drafted. In this context, it is envisioned that ESG-related issues such as the obligations incurred by shareholders due to the new company type, the effects of the merger on the employees of the merged companies and, if possible, the content of a social plan should be specified in the merger report. At the same time, it is important to keep in mind that the parties should always include the relevant provisions in the agreement by conducting DDs on the ESG risks mentioned in this article, especially in the international market, even if one of the parties is of Turkish origin. This is carried out in order to adapt to the M&A trends of the companies in the international arena and to ensure proper transaction practice.

Within this framework, it is advised that representations and warranties of the parties, covenants, indemnities, as well as conditions precedent or subsequent clauses should, at a minimum, incorporate provisions addressing ESG risks tailored to the specific characteristics of the parties' business operations. These provisions must be carefully tailored to align with the unique requirements of the parties involved, as well as the pertinent ESG-related legal and regulatory framework to which they are subject. Furthermore, ESG-related provisions serve to impose obligations on the parties to uphold or enhance their ESG performance.

Signing and closing process

The compliance of the company's operations, reputation, supply chain operations, internal and external audits, and so forth, with ESG and the fulfilment of disclosure obligations regarding the ESG manners affect the "purchase price" in the M&A process. The importance of this factor is even more evident given that dealmakers expect M&A transactions to almost double across Europe.[12] At the same time, success in the aforementioned topics facilitates the closing by ensuring that the company's signing processes proceed more smoothly. The aim of the entire process carried out up until this phase is to provide the target company's vision and its compliance with the ESG standards in order to ensure a correct and beneficial M&A transaction for the parties with the signed agreement.

Post-closing process

When the ESG indemnities are included in the agreement, the acquirer shall avoid and minimise the unforeseen liabilities related to ESG matters, such as environmental contamination or corporate governance failures. ESG provisions – especially indemnities, representations and warranties – that are included to prevent any corporate breach, failure to fulfil an obligation or potential ESG conflicts (eg, a government communication without regard to a conflict of interest) in the post-closing phase are crucial to prevent companies from losses and, even if losses are incurred, to remedy the damage. In addition, post-acquisition monitoring is vital in order to maintain or improve ESG performance, addressing any data, analysing operational or monitoring risks and engaging with stakeholders to demonstrate commitment.

Particularly in states where ESG focus on transaction agreements is nascent – including Türkiye – the efficiency and success of the post-closing ESG commitments need to be monitored by obtaining feedback from all stakeholders and the society on the ESG performance agreed upon by the involved parties. In this regard, potential risks such as greenwashing, reputational loss or failure to fulfil the warranties related to ESG commitments shall be prevented.


ESG considerations have gained significant importance in the context of M&A transactions over the past years. ESG factors are increasingly being utilised during M&A DD process in evaluating companies' sustainability, social responsibility and corporate governance practices. For individuals or entities considering investments in companies or participating in an M&A process, it is indisputable that the more robust the provisions established during the agreement stage and the thoroughness of the ESG DD conducted, the more effective the post-closing action plans and reputational risk management will be. This, in turn, maximises the potential for financial returns. ESG DD reports have recently become a core tool in potential M&A transactions, ensuring compliance with national and/or international ESG standards or with stricter standards if mandated by the buyer. Effectively conducted ESG-oriented DD reports should be tailored to reflect the characteristics of a company, its size, country of operations, supply chain and the unique dynamics of its industry. It should be noted that ESG-driven investors will not only seek routine ESG reporting, but also expect to see an ESG-oriented corporate culture, senior management support, audit and supervision of ESG-sensitive work streams.

Additionally, it is important to recognise that the parties generally prefer to collaborate with third-party and accredited ESG experts to provide clear and integrated advice on targeted ESG relevant topics before and/or during the potential M&A transactions.

Recent developments indicate that ESG-driven M&A transaction activities shall accelerate in Türkiye. Accordingly, Turkish companies aspiring to attract investor appetite should prioritise the comprehensive integration of environmental, social, and governance standards into their business activities in a holistic manner.

This article was initially published on Lexology’s “Commentary” section powered by International Law Office. You may access the article on Lexology by following this link.


(1) ESG Investing: Practices, Progress and Challenges.

(2) PwC's Asset and Wealth Management Revolution 2022 report.

(3) Directive of the European Parliament and of the Council Amending Directive 2013/34/Eu, Directive 2004/109/Ec, Directive 2006/43/Ec And Regulation (Eu) No 537/2014, as regards Corporate Sustainability Reporting.

(4) Paweł Spławski, Eszter Lukács, What is ESG, 2021.

(5) PwC's Global investor survey: The economic realities of ESG, 2021.

(6) Ibid, p2

(7) Maria Montenegro, ESG Performance drives Corporate Performance, 2023.

(8) ESG Due Diligence in M&A: Clarity on Mergers & Acquisitions, 2023.

(9) OECD (2021), Artificial Intelligence, Machine Learning and Big Data in Finance: Opportunities, Challenges,

and Implications for Policy Makers.

(10) TEİD, Research report on the Effect of Business Ethics and ESG on Reputation, 2022.

(11) Deloitte, An ever increasing focus on ESG is impacting M&A valuations and processes, 2023.

(12) CMS European M&A Outlook 2023.


Further References

Turkey: ESG From The Mergers & Acquisitions And Investment Perspective, 2022.

US Securities and Exchange Commission Fact Sheet: Enhancement and Standardization of Climate-Related Disclosures.

Mark J. Guay, Part Iii: Charting Esg's New Course: The M&A Agreement & Post-Closing, 2023.

International Bar Association, The role of ESG factors in shaping M&A deal value and reputation, 2023.

Deloitte, Analysis: Four ways ESG is reshaping M&A, 2023.

Latham & Watkins, ESG on the Rise in M&A Transactions, 2022.

Raghvendra verma, The potential impact of ESG on M&A and Valuation, 2023.

Nordam Business Partners, ESG due diligence in an M&A world, 2022.