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Deal or no deal: Why ESG has become the M&A stepping stone

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By Alistair Lester, Global Co-CEO of M&A and Transaction Solutions, Aon

Over the past year, with the reopening of the world economy, we’ve witnessed a resurgence in M&A activity. In line with record breaking deal activity, a number of core trends and priorities have emerged in the c.  

Specifically, we’re seeing increased investment in technology, following the crucial role played by digital solutions in facilitating M&A even at the height of the pandemic. Focus is also increasing on financial due diligence, with buyers becoming more dependent on third-party deal finance in today’s market. as well as the rapidly rising prominence of Environmental, Social and Governance (ESG) standards. 

These focus areas are proving to be crucial for deal makers as they navigate today’s high inflation environment and ongoing uncertainties related to geopolitics, government regulation and COVID-19 pandemic-related disruptions. 

Investment in ESG in particular has become a stepping stone between deal or no deal in the M&A process. According to Mergermarket, 60% of global dealmakers said they have walked away from an investment due to a negative assessment on ESG issues at a potential target. 

Meanwhile, 52% say their ESG investment strategy has had a positive impact on overall investment returns – when done right, ESG investment can have a direct influence on business outcomes. 

Understanding specific ESG requirements for businesses will therefore be one of the most critical areas to get right for dealmakers today. Let’s take a look at why this is so important today. 


Rising ESG scrutiny

The main challenge with ESG is that the space remains incredibly broad – it covers everything and anything. From climate change risk to social issues, ESG considerations will play a role in every M&A transaction moving forwards.

This is why ESG scrutiny in M&A transactions is so critical. It will allow organisations to be appropriately advised on the consequences and opportunities associated with the ESG regulatory environment. Recent research found that a staggering 90 percent of dealmakers predict an increase in scrutiny of deals for ESG implications over the next three years, with almost half believing the increase will be significant. 

A key focus in the near-term will be on how different ESG regulations apply to an organisation. While not every ESG regulation will apply to every business, buyers will increasingly scrutinise a target’s ESG credentials during the due diligence process, homing in on reputational risks as well as regulatory concerns. Organisations will therefore be required to comply in the most effective way and fully understand how they can measure up to those regulations. 

This may also lead to the demise of some firms that are already finding themselves under significant pressure, particularly in today’s high inflation environment. ESG compliance could ultimately be the straw that breaks the camel’s back. 

 

ESG + cybersecurity = ESGc 

Cybersecurity is increasingly being tied into the ESG agenda because of the huge impact it has on a company’s integrity. Firms that hold personal data have an unavoidable societal responsibility to protect that information. 

As a result, it has never been more important to find a balance between risk management and value creation. Organisations must understand the seriousness of cybersecurity and organise all assets with this in mind, in order to be fit for purpose in the current environment. 

As a first step, developing a cyber resilience strategy will help identify any risks that businesses are facing. This ensures they can mitigate any issues and protect sensitive information, which is critical today in the face of tightening regulations.


The full ESG journey  

With rising scrutiny on ESG, there’s a sense of urgency to define pertinent ESG issues in M&A from the start of the deal making process. Pinpointing which relevant regulatory areas need to be considered and addressing them early on will make the due diligence process easier across the board, both for businesses and dealmakers.  

What’s more, with a shift in consumer and workforce demographics, pressures to address social issues are now coming from the bottom up, as well as from investors and regulatory bodies. For future targets or acquirers, ESG must be embedded into the enterprise at all levels. 

Businesses today have no choice but to put time, resources and effort into understanding what is relevant to the industry they’re in and the jurisdictions in which they operate. They must then find effective ways to roll these changes out across the enterprise – such as through behavioural motivations and incentives. 

To help navigate this ESG journey, we’re seeing more organisations hiring experts in the space. This helps to make sure that ESG requirements aren’t overlooked, as this can have major impacts both legally and on the organisation’s value when a buyer takes an interest. 

 

It’s time to act now 

With the growing perception that ESG performance directly correlates to commercial strength, ESG will undoubtedly have a defining impact on dealmaking over the next 12 months. 

Dealmakers are holding companies to a higher standard today. Business leaders must act now to get on top of the ESG agenda and carefully consider relevant regulations to embed specific ESG frameworks successfully into their whole organisation. 

Business

Know Your Business (KYB): Exceeding KYC

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Victor Fredung, CEO at Shufti Pro

 

Money laundering costs the UK more than £100 billion pounds a year, according to the National Crime Agency, emphasising the need for stringent ID verification of individuals and businesses.

ID verification, however, remains a moving target. The UK’s fraud prevention community CIFAS has warned of surging ID theft. The National Fraud Database increased by 11% in the first six months of 2021, with almost 180,000 instances of fraudulent conduct filed in the first six months of the year. This reflected the aftermath of the 2008 financial crisis, which recorded a 32% increase in identity fraud the following year. CIFAS is warning UK businesses and consumers to expect a continuation of the steep rise in identity fraud for 2021 and 2022 as criminals exploit businesses under pressure.

Businesses can respond with resilient Know Your Customer (KYC) software and protocols. KYC establishes customer identity; understands customers’ activities; qualifies the legitimacy of funding sources; and assesses money laundering risks associated with customers. To date, almost 6,000 financial institutions are using the SWIFT KYC Registry to publish their KYC data and receive data from their correspondent banks.

KYC regulations and procedures are appropriate when the customer or consumer is a named individual.  However, it’s not enough to verify the identity of individuals. It is also important to verify the identity of businesses.  Know Your Business (KYB) tools and regulations are designed for cases where the customer is a business or corporate entity. KYB is particularly important as criminals seek to exploit crypto currencies which can thwart verification techniques, such as anti-money laundering (AML) and KYC.

KYB verifies businesses by obtaining official commercial register data via APIs. By using the registration numbers and jurisdiction code of a business, a digital KYB service can collect confirmable information for the business. This enables corporate organisations to determine if they are dealing with authentic businesses or fake shell companies. KYB services particularly help financial institutions handling the funds of a large customer base and corporate entities.  During this process businesses must improve the customer digital enrolment and authentication experience. End-users resist proving their identity through for example, showing scans of their bank account statements and may abandon service providers whose online enrolment processes increase friction.

Usefully, KYB uses access to automated commercial registers through a data-powered business verification service, expedites due diligence and eliminates errors.  With advances in digital technologies and virtual data sets, KYB compliance and verification tools can mark businesses involved in undercover activities, gathering background data on the company including the registered address, status, company type, ultimate beneficial ownership structures, previous names and trademark registration. A financial summary of the company’s operational accounts is also provided by the authentication service, to help validate its authenticity.

Here, Artificial Intelligence (AI) can come into its own, determining the identity of individuals and the financial risk attached to that person with AML Compliance solutions. AML services can check the involvement of an individual company in any watchlist or financial risk database, at scale. Machine learning algorithms can detect forged documents or disguised ownership structures. Nationality verification and geolocation targeting can determine the true country of origin of international clients and the jurisdiction of the company.

However, adoption of KYB processes has been sluggish: last year research undertaken by kompany indicated only 5% of financial institutions (FIs) have an automated B2B or corporate banking onboarding process, with 75% of FIs still relying on Google searches to identify Ultimate Beneficial Owners (UBOs), annual filings and financial accounts. Financial services organisations also struggle to manage the complexity of KYB, and the siloed approach to managing information within an FI can make KYB adoption more challenging.

A further challenge for KYB compliance lies in accessing beneficial ownership information, especially in jurisdictions that do not require companies to submit relevant documentation. A lack of shareholder information makes it harder to investigate money trails and business authenticity. Timely availability of data, across international borders in the right format, is another hindrance, especially as company structures and management change over time. This is why geography and industry specific vendors will be of value to businesses needing to conduct ID checks. It is also why businesses must find the right vendors who can be a one stop shop to manage their KYB adoption and must prioritise the user-experience for frictionless onboarding and regulatory compliance.

Banks have experienced difficulties with KYC verification for their customer onboarding, transaction authentication, and remote banking services. This why they may find it hard to trust a KYB service provider. However, FIs and businesses face a pressing need to determine the ultimate beneficial ownership structure of the corporations they are dealing with. The need for a credible, cross-border KYB provider has rarely been more pressing, and according to Forrester, Know-your-business IDV will ‘make or break Identity Verification players.

Know-your-business IDV can make critical difference in identity verification.  With the increase in B2B commerce it has become more urgent to verify both individuals and organisations and their representatives.

The cost of not adopting KYB technology is dwarfed by the prospect of data breaches, fraud and reputational damage. For financial institutions, legitimacy and verification of the business is key for growth. The software solutions exist and are ready to be implemented.  he National Fraud Database increased by 11% in the first six months of 2021, with almost 180,000 instances of fraudulent conduct filed in the first six months of the year. This reflected the aftermath of the 2008 financial crisis, which recorded a 32% increase in identity fraud the following year. CIFAS is warning UK businesses and consumers to expect a continuation of the steep rise in identity fraud for 2021 and 2022 as criminals exploit businesses under pressure.

Businesses can respond with resilient Know Your Customer (KYC) software and protocols. KYC establishes customer identity; understands customers’ activities; qualifies the legitimacy of funding sources; and assesses money laundering risks associated with customers. To date, almost 6,000 financial institutions are using the SWIFT KYC Registry to publish their KYC data and receive data from their correspondent banks.

KYC regulations and procedures are appropriate when the customer or consumer is a named individual.  However, it’s not enough to verify the identity of individuals. It is also important to verify the identity of businesses.  Know Your Business (KYB) tools and regulations are designed for cases where the customer is a business or corporate entity. KYB is particularly important as criminals seek to exploit crypto currencies which can thwart verification techniques, such as anti-money laundering (AML) and KYC.

KYB verifies businesses by obtaining official commercial register data via APIs. By using the registration numbers and jurisdiction code of a business, a digital KYB service can collect confirmable information for the business. This enables corporate organisations to determine if they are dealing with authentic businesses or fake shell companies. KYB services particularly help financial institutions handling the funds of a large customer base and corporate entities.  During this process businesses must improve the customer digital enrolment and authentication experience. End-users resist proving their identity through for example, showing scans of their bank account statements and may abandon service providers whose online enrolment processes increase friction.

Usefully, KYB uses access to automated commercial registers through a data-powered business verification service, expedites due diligence and eliminates errors.  With advances in digital technologies and virtual data sets, KYB compliance and verification tools can mark businesses involved in undercover activities, gathering background data on the company including the registered address, status, company type, ultimate beneficial ownership structures, previous names and trademark registration. A financial summary of the company’s operational accounts is also provided by the authentication service, to help validate its authenticity.

Here, Artificial Intelligence (AI) can come into its own, determining the identity of individuals and the financial risk attached to that person with AML Compliance solutions. AML services can check the involvement of an individual company in any watchlist or financial risk database, at scale. Machine learning algorithms can detect forged documents or disguised ownership structures. Nationality verification and geolocation targeting can determine the true country of origin of international clients and the off shore status of a company.

However, adoption of KYB processes has been sluggish: last year research undertaken by kompany indicated only 5% of financial institutions (FIs) have an automated B2B or corporate banking onboarding process, with 75% of FIs still relying on Google searches to identify Ultimate Beneficial Owners (UBOs), annual filings and financial accounts. Financial services organisations also struggle to manage the complexity of KYB, and the siloed approach to managing information within an FI can make KYB adoption more challenging.

A further challenge for KYB compliance lies in accessing beneficial ownership information, especially in jurisdictions that do not require companies to submit relevant documentation. A lack of shareholder information makes it harder to investigate money trails and business authenticity. Timely availability of data, across international borders in the right format, is another hindrance, especially as company structures and management change over time. This is why geography and industry specific vendors will be of value to businesses needing to conduct ID checks. It is also why businesses must find the right vendors who can be a one stop shop to manage their KYB adoption and must prioritise the user-experience for frictionless onboarding and regulatory compliance.

Banks have experienced difficulties with KYC verification for their customer onboarding, transaction authentication, and remote banking services. This why they may find it hard to trust a KYB service provider. However, FIs and businesses face a pressing need to determine the ultimate beneficial ownership structure of the corporations they are dealing with. The need for a credible, cross-border KYB provider has rarely been more pressing, and according to Forrester, Know-your-business IDV will ‘make or break Identity Verification players.

Know-your-business IDV can make critical difference in identity verification.  With the increase in B2B commerce it has become more urgent to verify both individuals and organisations and their representatives.

The cost of not adopting KYB technology is dwarfed by the prospect of data breaches, fraud and reputational damage. For financial institutions, legitimacy and verification of the business is key for growth. The software solutions exist and are ready to be implemented.

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Addressing the ongoing global pilot shortage issue

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By Bhanu Choudhrie, Founder of Alpha Aviation

 

The Covid-19 pandemic brought the aviation industry to a halt, causing vast market disruption and putting the future of many key players at risk. Now, just as airlines were getting back on track, staffing shortages are causing new complications – and part of this issue is a growing pilot recruitment problem.

So, where does the sector go from here and what steps need to be taken to mitigate pilot shortages?

The root of the issue

Even before the pandemic, there was a global shortage of pilots, with people flying more due to a rise in more affordable airlines and falling fuel costs. In fact, the 2020-2029 CAE Pilot Demand Outlook suggested that the global civil aviation industry will require more than 260,000 pilots by the end of the decade.

However, when demand for air travel dropped across the globe, airlines were quick to offer early retirement packages to reduce immediate outgoings. Whilst this approach helped some airlines stay afloat during the slowdown, a wave of early retirements has left them on the back foot.

Bhanu Choudhrie

Now demand is coming back much faster than expected. In the US alone, the Bureau of Labor Statistics is expecting 14,500 openings for commercial and airline pilots each year until 2030, and this imbalance is already having a detrimental impact on the aviation industry. With flights being cancelled, travellers left stranded, and some airports losing service altogether, it is crucial that the larger aviation ecosystem comes together to work out a solution to effectively address this pilot shortage crisis, so that it can once again meet capacity demands.

Re-directing efforts to rebuild pilot pools

With vast swathes of pilots put on furlough during the pandemic – and therefore unable to maintain their license requirements, the damage isn’t just in the ongoing pilot shortage, but also in the decades of experience the industry has lost. In response to this narrative, last month a Senator in the US introduced legislation to raise the mandatory retirement age of commercial airline pilots from 65 to 67 – and the US are not alone in this shift. Last week, Air India announced that it will be raising their retirement age for pilots from 58 to 65. Now we need to see other countries and airlines follow suit to help retain the talent that can help guide and mentor the next generation of cadets.

Moreover, training schools and airlines will need to work together to challenge industry stereotypes and empower more women to pursue a career in the cockpit. Currently, just 5.1 per cent of the world’s commercial pilots are women. This means that for every twenty flights taken, only one of them will be piloted by a woman. Unfortunately, this gender imbalance has become a long-established trend within the aviation industry and, stereotypically, pursuing a career as a pilot has been considered a male occupation, with women type cast to cabin crew instead. Therefore, if we are to make proactive strides towards addressing the current pilot shortfall, finding a way to shift that percentage is essential.

The cost of training to be a pilot is also a key barrier the industry needs to address, and at pace. On average, the cost to train as an air transport pilot can exceed $100,000 – making a career in the cockpit unattainable to many. One way for the industry to help narrow the gap and mitigate what is often seen as a considerable financial risk, is to make bursaries more accessible. There are already a number of programmes in place, to support both aspiring pilots and those who need to maintain their licenses, however, now the industry needs to work on championing and expanding these support systems.

The industry also needs to start to embrace alternative approaches to alleviate this substantial outlay. For example, at Alpha Aviation, we have started running the the Multi-Crew Pilot License (MPL). This is a shorter, more simulator-focused way of training that not only opens up opportunities for prospective cadets from less privileged backgrounds, but also offers a more flexible training programme and quicker route to qualification – reducing the financial expenses for cadets to cover.

Technological innovations can also play a crucial role in advancing the training process to help support a consistent employee base. For example, e-learning programmes can enable airlines to expand cadet class sizes. No longer restricted by the physical capacity of training centres, e-learning programmes have the potential to significantly open up access to becoming an aviator and will ensure airlines can recruit the best talent, irrespective of locality. In addition to this, pilots still need to clock up over 1,500 flying hours to receive their ATP certificate. Therefore, investing in simulator training facilities is now pivotal in supporting cadets to keep on top of the legal requirements and improve their skills set at a significantly quicker pace, alongside supporting existing pilots to retrain on new aircrafts when necessary.

Looking ahead

The pressure on the aviation industry shows no signs of abating any time soon. Therefore, while it is great to see passenger numbers returning to near pre-pandemic levels, the industry needs to take this as a significant wakeup call and re-assess its pilot recruitment process.

At the end of the day, there is no quick fix – training top of their class pilots takes time, investment and enthusiasm. However, addressing the ongoing chaos and driving the sector out of this turbulent period is essential to the economic revival of the nation. Therefore, decisive action is needed – and it is needed now.

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