What if your next acquisition comes with hidden human rights risks that directly impact valuation?
As regulatory expectations evolve globally, human rights due diligence (HRDD) is becoming a standard component of responsible business. Yet in M&A, it is still too often overlooked.
As regulatory expectations evolve, and not only in Europe, human rights due diligence (HRDD) is becoming a standard component of responsible deal-making. In M&A, attention is mostly focused on financials, synergies, and growth potential. Increasingly, also employment risks are embedded in the process, although still looking at mainly clear liability risks, such as open litigations. But one critical risk factor often remains under-estimated: human rights. What looks like an attractive acquisition today can turn into a costly investment or even liability tomorrow if the business is built on unsafe working conditions or exploitative labor practices.
Any company pursuing growth through acquisitions should assess the integrity of the target company’s business model through human rights. Initial human rights due diligence (HRDD) led by a professional human rights expert with a clear understanding of relevant international standards and which themes and norms are relevant in particular business contexts, should be part of every M&A due diligence process.
Here are 3 central questions to consider in HRDD for M&A DD:
- Integrity of the business model
- Is the business model based on achieving the lowest possible production costs, and how have those costs been driven so low?
- Is there a risk (for example, due to the country or industry) that low labor costs result from systematic exploitation?
- Are the margins dependent on low labour costs? How would the margins change if labour costs went up?
- Reality of the operations
- Does the safety data align with general industry and location data?
- Have occupational health and safety been sufficiently addressed regarding commonly known risk factors?
- Could seemingly strong safety data simply be the result of good luck?
- Culture and values
- Are values and, for example, Code of Conduct align with reality?
- Do employees, regardless of gender, have equal opportunities to advance, and how is this reflected in the current leadership?
- Is the Code of Conduct merely a list of prohibited activities, or is it a document that genuinely guides behavior and operations?
These issues often only come to light during the integration phase, after the acquisition has already been completed. However, insufficient assessment of aspects such as the business model and occupational safety during the due diligence phase can prove costly later on. Conversely, a thorough due diligence process can justify a lower valuation, for example, if the target company requires significant investments, such as upgrading ventilation systems to improve occupational safety and prevent health risks, or changes in workforce model or remuneration.
The question is not whether human rights belong in M&A, but whether companies can afford to ignore them. This is how to get started:
- Add human rights screening questions to your pre-DD phase in M&A
- Specify red flag items that will directly inform decision making
- Involve human rights expertise alongside legal and financial advisors
- Link HRDD findings directly to valuation and integration planning
Companies that do this well are not only reducing risk, they are making better investment decisions.
For your next M&A case, contact experienced human rights experts:
Miia Hapuoja, Human rights and social sustainability expert
Merja Pentikäinen, Doctor of Laws (LL.D.), Human rights and social sustainability expert