ESG in Portuguese M&A: what’s new and what’s expected

Thursday 31 March 2022

Manuel Santos Vitor

Abreu Advogados, Lisbon


Cláudia Isabel Costa

Abreu Advogados, Oporto


Towards a new conception of a company’s purpose

The biggest Portuguese companies are increasingly aware of their new role in the construction of a new Portuguese and European resource-efficient and climate-neutral economy.

Due to the European Green Deal, a broad discussion is taking place in Portugal between companies, law firms and scholars about the purpose of a company and the integration of environmental, social and governance (ESG) factors in their activities.

In European Union legislation, companies are deemed as crucial for the sustainable development of the society on a global scale. According to this concept, companies are entrusted with the duties of:

  • protecting human, worker and consumer rights; and
  • fighting against the climate crisis by reducing greenhouse gas emissions, pollution, biodiversity loss and ecosystem degradation.

Consequently, corporations are beginning to understand that they cannot be governed by pure profit-targeting metrics alone, or by short-term goals that do not consider the above factors. They must reshape their policies, strategies and goals towards reaching or contributing to reach these new ESG demands. In doing so, they will better position themselves to attract and retain talent, to be prioritised as business partners and to benefit from better finance conditions.

Key elements in this transformative process

Several factors are contributing to the intensification of the discussion around the integration of ESG factors in Portuguese companies.

Consumer and investor perceptions regarding ESG

Consumers and investors are becoming increasingly aware of sustainability factors. Consumers are looking for eco-friendly products and services from companies that can position themselves as ESG observant. Investors want ESG-linked financial products, such as green bonds, and to invest in companies which respect the principles and values described above.

Covid-19 and the Russia–Ukraine conflict

Recent events such as the Covid-19 pandemics and even the Russia–Ukraine conflict are pushing companies towards adopting a new global standing in these matters. Around the world, we can see how companies are becoming more proactive in protecting human rights, and fighting injustice and abuses such as:

  • the violation of human rights regarding the employment of children and women;
  • not granting to the workforce reasonable human and economic conditions; or
  • the violation of the rule of law towards their own citizens in countries like Russia and Belarus.

Companies are changing their providers, consumers and the places where they operate – helping countries like Ukraine and punishing countries that do not abide by international rules and law. Companies are assuming a very significant social role in the world – one that is heretofore unheard of. This determination of companies (with significant costs) was not likely to happen perhaps five or ten years ago. The recent wave of large corporations shutting down their operations in Russia overnight (without blinking) is a clear sign of these new times, and of the swift approach of companies to these new principles (even if these will be very costly decisions).

European and national legislation pushing for ESG transformation

European legislation is moving quickly towards the implementation of ESG factors. For instance, on 23 February 2022, the European Commission adopted a proposal for a Directive on corporate sustainability due diligence which will be presented to the European Parliament and the Council for approval. Once adopted, Portugal and the remaining Member States will have two years to transpose the Directive into national law.

According to this proposal, large companies will have to analyse their global value chains. They will have to identify and, where necessary, prevent, end or mitigate adverse impacts of their activities on human rights – such as child labour and the exploitation of workers – and on the environment – such as pollution and biodiversity loss.

Company directors will also have direct obligations to take into account human rights, climate change and environmental consequences in their management.

It is noteworthy to mention the enactment on 31 December 2021 of a new Climate Base Law in Portugal (Law 98/2021). Pursuant to Article 38 of this law, companies are obliged to take climate change into consideration in their corporate governance and incorporate an analysis of climate risk in their decision-making processes. In addition, the duties of care, loyalty and of reporting the management and presenting accounts (incumbent upon managers or administrators and the members of corporate bodies with supervisory functions) will have to include prudent consideration and transparent information about the risk that climate change brings to the business model, capital structure and assets of companies.

Furthermore, companies should assess, in each financial year, the economic environmental and social dimensions and exposure to climate change and the carbon impact of their activity. This assessment is to be integrated in the accounts' management reports, which may define a carbon budget, or establish a total maximum limit on greenhouse gas emissions. Article 64 of the Portuguese Companies Code already provides for the obligation of directors to take into consideration the long-term interests of the shareholders and of other stakeholders, such as the company’s employees, clients and creditors, when discharging their duties.

By complying with these provisions and their principles, potential investors and consumers will be provided with new information allowing them to evaluate the ESG performance of the targets.

Technology advances

New technologies will have a critical role in helping companies, investors and consumers in their decision-making processes – gathering and analysing huge amounts of data and, sometimes, pointing out solutions. This is particularly significant when investors need to confirm whether companies are complying with ESG factors. Artificial intelligence tools can already help in performing such exercise.

All these factors will change the role of Portuguese companies in the community: their purposes, their cultures, strategies, policies and actions. As a consequence, the M&A market will certainly change as well.

The Portuguese M&A market

In the near future, it is expected that deals regarding Portuguese companies will also be scrutinised on ESG parameters.

M&A as a tool to become more sustainable

Companies that will be able to quickly adapt their policies and strategies to this brave new world will be more competitive, valuable and attractive for investors. As a result, companies are likely to use M&A operations as a trigger to become more sustainable and comply with the new EU law requirements. For instance, they can try to develop or even buy more sustainable businesses, or consider selling businesses that are less ESG-convertible (for cost reasons or otherwise).

A clear example is the energy sector, where we have seen traditional oil and gas companies becoming all-round energy companies: ditching oil, gas and fossil fuel activities and/or embracing renewable energy businesses in their portfolio. We have seen large Portuguese energy companies like GALP deciding not to develop additional oil and gas upstream activities, or only doing so on a reduced scale, and investing heavily in renewable energies such as solar; and EDP ceasing to operate coal generation units and focusing on renewable energies only. Both groups are leading efforts to install large green hydrogen generation units. More recently we have seen new energy groups like Greenvolt – a newcomer to the market – developing an aggressive M&A policy, acquiring interests in different energy projects and companies in Portugal and abroad – provided these are always renewable energy projects.

The effect of ESG on the valuation of companies

Companies aligned with ESG factors will be more sustainable, will have more earning potential and a better reputation. Moreover, they will have privileged access to financing – therefore becoming more valuable. As such, ESG metrics will be incorporated in the evaluation of the businesses.

The Santander bank in Portugal recently announced specific targets regarding the financing of more ESG-compliant companies and more ESG-focused activities such as green building, clean energy, transportation, agriculture and the circular economy. These companies and activities will benefit from specific financing products and better financing conditions with lower spreads. Businesspeople have to wake up and smell the (organic) coffee.

On the other hand, companies underperforming in ESG metrics will be seen as a risk or as costly because it could mean that such companies need restructuring – which attracts costs – to perform better. Alternatively, they may decide not to do so and will underperform even more, decreasing their value.

ESG and due diligence

Due diligence processes will be more robust because potential acquirers will be looking deeper into work conditions, environment, waste, energy and the way they are integrated and creating value. Buyers will not only analyse a target itself, but also these ESG metrics:

  • a company’s value chain;
  • mission statements; and
  • public communications.

According to the new Portuguese Climate Basic Law, management reports will have to include sections regarding economic environmental and social evaluation, as well as exposure to climate change via the carbon impact of their activity. This additional information can help to ascertain the ESG performance of a target.

ESG in share purchase agreements

The evaluation and distribution of ESG risks brings new considerations to the table. As a consequence, it could be difficult to make a correct evaluation of a target or to foresee value changes until the deal is closed.

As a result, sellers and buyers will be contemplating the impact of ESG criteria in their share purchase agreements: for instance, the issue of targeted representations and warranties, indemnities or earn-out provisions. Companies which are more sustainable will (allegedly) perform better in the long run. Buyers will consider this outlook and will want to protect themselves in the event the company is unable to reach such targets or perform as expected. On the other hand, sellers will want to be compensated for the target’s additional future earnings once the company is prepared for its long-term future.

Specifics of the Portuguese market

Currently, large Portuguese companies operating in the energy sector are most aligned with ESG factors. They are trying to be the first ones to shift their culture, strategies, policies and goals to be more competitive and attractive in the market. GALP, EDP and Greenvolt, as well as  banks like Santander, are clear examples of this.

Also worth mentioning is the Portuguese Recovery and Resilience plan, which is being implemented with a view to help the Portuguese economy recover from the Covid-19 pandemic. It is expected that this plan will be a driving force to promote the decarbonisation of the Portuguese economy, with additional commitments in the renewable energy fields and around promoting the use of green hydrogen.


  1. Portuguese companies are more aware of their new role in the construction of a new resource-efficient and climate-neutral European economy. As a consequence, they are trying to be more ESG-oriented.
  2. Some key factors are crucial in accelerating this change, such as the demand by consumers and investors for sustainable businesses, Covid-19 and the Russia–Ukraine war, European and national legislation and technological advances.
  3. M&A operations are a crucial tool that Portuguese companies may use to become more sustainable.
  4. ESG parameters will be extremely relevant in the evaluation of companies, the scope of due diligence, and in the negotiation of certain SPA clauses such as earnouts, specific indemnities or representations and warranties.
  5. The Portuguese energy sector will be very active in the next few years around renewable energy due to the decarbonisation of the economy and the urgent need to become less fossil fuel dependent.