Mitigating Legal Risks and Advancing ESG Due Diligence in M&As: Insights from the Chinese Context

Prior research in ESG has explored the process of how it engages in investment decisions as a non-financial performance factor. As a high-risk investment activity, mergers and acquisitions (M&A) often require meticulous due diligence in the early stages to mitigate risks arising from information asymmetry. The disclosure of ESG-related legal risks is an integral and indispensable part of this process. Furthermore, in today's society where the concept of ESG sustainable development is gaining increasing prominence, China's A-share market is entering an era of mandatory ESG information disclosure. The promulgation of the new Company Law further standardizes the legislative practice of ESG. Nevertheless, the ESG research in the due diligence process of M&A is still in the exploratory stage. Therefore, the extent to which ESG legal risks impact the feasibility of transactions, as well as how to adjust M&A-related decisions based on the identified ESG legal risks, are topics that are under-researched in the field. This study aims to provide a particular view of ESG due diligence in M&A by connecting it to the ESG greenwashing. Utilizing the case study approach as a method within the realm of qualitative analysis, and the data is based on Chinese A-share listed companies with recent M&A activities and ESG legal risk issues. This research argues that M&A companies with ESG greenwashing violations will make the acquirer pay more attention to the subsequent ESG data, which may have a greater weight than financial data in M&A decision-making consideration. Therefore, this article aims to help investors prevent ESG legal risks in the M&A process and provide suggestions and references for third-party organizations to issue more comprehensive due diligence reports.