Blog: Integrating ESG in M&A

ESG plays a greater role in all areas of M&A

ESG is gaining strategic importance in M&A decisions. It is increasingly considered throughout the M&A lifecycle and as a transaction driver. From an ESG perspective, the motivations for an M&A transaction range from adjusting corporate strategy and entering new markets to mitigating risk.

Whether buying or selling, restructuring, or optimizing a company's financial structure, we provide valuable insights into the importance of ESG factors in transaction decisions, strategic planning, and corporate governance, as well as on the impact of sustainability-oriented regulatory developments on the M&A process.

ESG as motivator for M&A deals

ESG is becoming increasingly important to all market players, including legislators, financial markets, employees, customers, investors, and other stakeholders along the supply chain. Climate change poses a wide range of risks:

• physical risks (e.g., heat waves, storms, floods),
• legal risks (e.g., legal claims for climate damage),
• market risks (e.g., declining demand for fossil fuels),
• transition risks (e.g., rising prices for CO2 emissions),
• technology and competition risks (e.g., outdated environmental technology),
• and reputation risks (e.g., changing consumer preferences, stigmatization of sectors).

However, sustainability offers many opportunities, such as new business oportunities (e.g., green technology), new markets (e.g., solar energy), and enhanced reputation. These opportunities and risks should be integrated into M&A decisions. Our experts have the in-depth knowledge to optimize your ESG investment strategy and support you in M&A transactions and the implementation of sustainability standards and policies. Please read our insights on the blog to learn more.

ESG Due Diligence as an Incremental Component of M&A Deals
 

Component of M&A Deals Sustainability is increasingly vital in M&A deals. ESG Due Diligence (ESG DD) – the examination of environmental, social, and governance aspects of a target – helps to identify risks early on to ensure the success of transactions. Existing sustainability standards and ratings are often overly general, necessitating specific KPIs and expert knowledge. The motto “Buyer beware” applies: Purchasers should be aware of ESG risks preventing costly mistakes and damaged reputations.

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ESG risk and IPO success

Can the chief sustainability officer prevent underpricing? In the search for the answer to this question Deloitte shows, on the basis of empirical research, the extent to which ESG risks (measured on the basis of ESG rating) influence the success of an IPO (represented by the level of underpricing). The results indicate that reducing ESG risk prior to an IPO leads to a significant reduction in underpricing and can thus be of measurable monetary value to a company.

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ESG related clauses in SPAs and post-M&A disputes

Despite the inclusion of ESG factors in compliance, reporting and due diligence, ESG components in transaction documents have been largely neglected. Our blog post provides insight into the importance of ESG within the contractual documents of a deal, in particular the sale and purchase agreement (SPA). An SPA that takes ESG opportunities and risks into account can protect sellers and buyers against time-consuming and costly disputes.

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Beyond compliance: Kicking off sustainable value creation with the CSRD

The upcoming Corporate Sustainability Reporting Directive (CSRD) is not simply about disclosure requirements and meeting the expectations of auditors and other stakeholders. It holds the potential for companies to leverage their CSRD compliance efforts by putting sustainability at the business strategy. Embedding sustainability aspects into strategy enables companies to create value by uncovering sustainability and financial opportunities at their core. 

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Why it matters: Growing ESG supply-chain reporting requirements for German SMEs

The profile of ESG within corporate environments has risen significantly in recent years as stakeholders shift their expectations of corporate behavior from a “shareholder capital” approach popularized by Milton Friedman in the 1970s – which advocated strict focus on profit generation – towards a more holistic stakeholder capitalism approach incorporating the awareness and impact of a business on its broader environment. Many businesses are striving for a sustainable business strategy to cover ESG factors, while at the same time pleasing their shareholders. Another approach business leaders are taking is adapting from a standard ‘bottom line’ to a ‘triple bottom line’ concept: “The triple bottom line is a business concept that posits firms should commit to measuring their social and environmental impact in addition to their financial performance, rather than solely focusing on generating profit. It can be broken down into ‘the three Ps’: profit, people, and the planet.”

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ESG in M&A Strategy

Despite many uncertainties, the sustainability megatrend, which can be quantified through ESG statistics, is gaining popularity among financial service providers worldwide. Therefore, for us at Deloitte, sustainability is not just another megatrend to follow, but rather a key motivator and driver for future M&A activity. The blog post outlines our understanding of sustainability, explains the rationale behind our position, and provides valuable guidance on how to implement ESG strategies in the M&A space.

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Impact of the Supply Chain Act on the M&A process

Global supply chains are facing environmental concerns and geopolitical difficulties. The new Supply Chain Act, which will come into force in 2023, requires companies to prioritize sustainability and resilience in their supplier structure. Good ESG performance is now a critical factor in attracting future collaborations and M&A opportunities. It's time to reassess the importance of supply chain analysis in corporate valuation. Learn more in the blog post.

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Unlocked value – ESG maturity assessments for SMEs

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Small and medium-sized enterprises (SMEs) contribute over 50% of Europe's GDP (European Commission, 2020) and play a vital role in both the economic stability and the transition to sustainability within the European Union. While large corporations are no strangers to ESG reporting, it is likely to pose challenges and missed opportunities for the majority of SMEs. However, addressing company-specific ESG issues can also create value for businesses in a number of ways and act as a catalyst for spill-over effects – provided they implement a forward-looking, integrated ESG strategy to optimize value creation, as our blog post shows.

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Stay tuned for more insights around sustainability, climate and M&A.