The Sustainability Imperative for M&A

Determining the impact of environmental, social, and governance (ESG) considerations across a company’s value chain is becoming central to how many companies craft their overall business strategy.

Companies are under pressure from increasing regulation (including the EU Taxonomy, Art. 964 Swiss CO and related ordinance of the Swiss Federal Council), stronger investor and NGO activism and shifting consumer demands. The bar has been raised: executing on an ambitious ESG strategy is now core to protecting a company’s “licence to operate”.

Companies that make rapid ESG progress are seeing increases in their valuation and their business opportunities:

• A simple correlation analysis from 2022 showed over 2x higher EV/EBITDA multiples for Consumer companies with best ESG scores compared to those with the lowest scores;
• More sustainable, inclusive and less carbon-intensive economic models also open up new business opportunities. This drives growth and helps attract high calibre talent, motivated by purpose-led work.

In today’s business environment, attracting external investment, whether from banks, private equity or via an IPO, requires not only myriad non-financial disclosures but also an ambitious ESG strategy and clear evidence of implementation and delivery. Institutional investors are prioritising companies that are transitioning to more sustainable business models, products, and services – not only because they feel they must but also because they see long-term value-creation potential.

M&A should be a central part of the corporate arsenal as a means to manage a company’s sustainable corporate strategy. It can help execute on the value ambition by:

• Securing innovative business models to accelerate the decarbonisation of value chains, in particular of companies operating in hard-to-abate sectors;
• Accessing technological solutions to tackle social challenges, in particular for companies sourcing from conflict-affected and high-risk areas (CAHRAs).

We observe three main trends for Sustainability M&A