For any organisation navigating post-merger integration (PMI), understanding the rapidly evolving Environmental, Social, and Governance (ESG) regulatory landscape and the potential implications for shaping the future operating model is vital. With the shift towards mandatory reporting and due diligence and more distributed and embedded accountability for ESG in organisations, it is essential to get it right to build resilience, reduce compliance risks, and realise opportunities for people, planet and your profitability. In this blog, we explore what this new ESG landscape means for PMI and how proactively addressing risks and opportunities in the process can set organisations on a path toward sustainable success.
Why the ESG regulation landscape in the EU is changing
As the European Union continues to deliver on its Green Deal, it is setting the stage for a sweeping shift in the way organisations embed sustainability. The ESG (Environmental, Social, and Governance) landscape has predominantly been strewn with voluntary frameworks and initiatives, which are being superseded by an era of mandatory compliance and reporting, with stringent regulations requiring action and accountability across both EU and non-EU actors. This means companies can no longer take a casual approach to sustainable practices; instead, they must integrate them deeply into their day-to-day operations, products, services, and supply chains.
Why is ESG compliance important in post-merger integration?
The stakes are high. Organisations will soon be accountable not only for their own environmental and human rights impacts, risks and opportunities but also for those of their entire supply chain. The consequences for non-compliance? Severe enough to command attention. Fines could reach up to 5% of the net consolidated worldwide turnover of a company or its ultimate parent, and in France they have introduced the potential of up to five years’ jail time for any corporate director who fails to comply with the country’s Corporate Sustainability Reporting Directive (CSRD). To put this into perspective, this exceeds many of the punitive fines imposed under GDPR. The implication is clear: neglecting ESG responsibilities is no longer just risky; it’s a substantial liability.
Looking beyond the penalties, there is significant effort needed to reshape the way organisations manage ESG, with many key pieces of legislation requiring it to be firmly embedded within core processes and governance and not just a siloed activity. Just a few ways this impacts organisations include:
- People: As new reporting and due diligence requirements roll out, roles and responsibilities across functions will shift. Employees will need the skills to adapt and organisations will need to invest in extensive training and development to support them (e.g. finance teams taking ownership of sustainability reporting under the CSRD), or compliance and legal functions incorporating ESG into risk management processes for the Corporate Sustainability Due Diligence Directive (CSDDD)).
- Process: As mentioned above, ESG metrics must be woven into financial reporting and risk management practices. Organisations that prioritise ESG will need proactive processes that reflect the latest industry standards, incorporating ESG as a continuous improvement cycle rather than a one-off project.
- Data: The new era of ESG reporting calls for an immense volume of data collection across operations and supply chains. To make accurate assessments and achieve compliance, organisations will need clear, reliable data at every level of the business (e.g. complete and accurate supplier data for risk assessments under CSDDD).
- Technology: Effective ESG compliance relies on a seamless technological ecosystem capable of collecting high-quality data and supporting informed risk management. Systems must interact smoothly, creating a digital infrastructure robust enough to handle the complexities of ESG reporting.
How does the evolving ESG regulation landscape impact post-merger integration (PMI)?
What are the benefits of being ESG compliant?
New regulations can often act as a catalyst for positive change. Mergers and acquisitions present a unique opportunity to align ESG strategy and reporting during the integration process. By focusing time, effort and resources on harmonising these areas, organisations can proactively prepare for future compliance, reduce risk, and seize opportunities to enhance resilience, streamline governance, and foster a reputation for responsible leadership.
What are the risks of overlooking ESG regulation post-merger?
Waiting or overlooking ESG compliance, however, carries steep risks that could jeopardise the success of the merger itself. Here’s why the changing ESG landscape is critical to PMI:
Key risks:
- Unaddressed changes in materiality of ESG issues: After a merger, the combined entity may face new or different material ESG issues, potentially altering the outcomes of a double materiality assessment. This can bring additional legislative and reporting obligations into scope or leave certain risks and opportunities unaddressed, impacting compliance with CSRD requirements.
- Evolving supplier risk profiles: Merging can change supplier risk profiles, requiring enhanced risk management, improved data quality, and alignment in processes and technology to manage suppliers effectively. This includes updating supplier engagement approaches to ensure compliance and mitigate ESG risks.
- Increased costs from duplication of effort and slow decision-making: Without clear roles, responsibilities, governance structures, and streamlined workflows, duplicated efforts may increase operational costs and complicate ESG compliance efforts across the new organisation.
- Employee experience impacts from changes in culture: Differences in organisational purpose, values and culture on sustainability can impact employees’ engagement with ESG initiatives and may alter how connected they feel to the company’s values and identity, potentially leading to decreased buy-in for ESG goals.
What are the opportunities of integrating ESG post-merger?
Key opportunities:
- Build agility and resilience for future regulatory changes: Integrating ESG criteria into PMI prepares companies to adapt swiftly to evolving regulations and market demands. This proactive approach strengthens resilience by building future-fit capacity and skills that can flex to accommodate new requirements more effectively.
- Redesign ESG processes for efficiency gains from the start: With dedicated integration resources, there’s a prime opportunity to embed ESG into core processes and policies, such as financial reporting and risk management, ensuring compliance and resilience from the start while there is dedicated capacity.
- Optimise data governance for compliance and insight: The merger creates an incentive to enhance data governance practices, improving the efficiency of data collection and analysis for ESG compliance and supporting better, data-driven decision-making across the organisation.
- Enhance brand trust and stakeholder engagement: Integrating ESG early in PMI can enhance stakeholder trust through demonstrating proactive commitment to compliance and sustainability. Investors, customers, and employees increasingly value transparency on ESG issues, which can lead to stronger brand reputation and customer loyalty post-merger.
How to build readiness for ESG compliance in your post-merger integration planning
Embedding ESG into your PMI programme, from establishing a clear understanding of compliance needs to building internal capabilities, positions the new entity to be both resilient and strategically aligned with future regulations, creating a model that not only meets but leverages compliance to unlock broader opportunities. We recommend the following 5-step approach to building a future-fit model for ESG regulation as part of PMI:
- Assess impacts on your materiality: Start by assessing the material ESG issues relevant to the new, combined entity. This ensures that the merger reflects both entities’ financial, social, and environmental impacts and considers any shifts in operational scope that could influence materiality and compliance requirements.
- Establish a future vision based on regulatory and strategic ESG goals: Dedicate time to shaping a unified ESG vision, purpose, and strategy. Define the environmental and social impacts the organisation wants to achieve, aligned with regulatory demands. This foundation guides both compliance and positive contributions to broader ESG goals.
- Understand your readiness to execute on your vision: Evaluate the current state of systems, processes, and technologies in place across both entities. This maturity assessment helps identify existing strengths and areas where capability-building will be needed to meet ESG requirements effectively.
- Shape and embed the change needed to build capability: Develop a clear plan for building ESG capabilities across teams and engaging stakeholders. This includes aligning with suppliers and partners to create shared goals and ensure that ESG commitments are embedded in everyday operations.
- Prepare for assurance and reporting: Test and refine your new processes for compliance with reporting and assurance standards. By iterating early, you can identify gaps and build a reliable, adaptable framework that meets both regulatory standards and internal ESG ambitions.
As you plan for integration, keeping ESG at the forefront will ensure your organisation isn’t just compliant but is set up to thrive in a marketplace where sustainability is increasingly non-negotiable. While PMI is a time of transformation, it’s also a unique opportunity to shape an organisation that’s ready for the future: agile, compliant, and committed to a positive impact on both the environment and society. By acting now, you can protect your organisation from risk, build trust with stakeholders, and create a lasting foundation for sustainable growth.
If your organisation is navigating the complexities of post-merger integration, get in touch with us to streamline ESG compliance and align with evolving regulations. Let’s ensure your PMI journey builds a foundation for sustainable success.