The rising importance of ESG-assessed M&A

A powerful combination of environmental, social, and governance demands is driving private equity funds and corporations to urgently transform their core strategies. Considerable shifts in consumer awareness and spending patterns, employee expectations, regulatory frameworks, and industry perception have prompted investors to reassign billions of dollars using ESG lenses.^1,2,3

Businesses must acknowledge this turbulent change by rapidly reshaping strategy and incorporating M&A as a cornerstone for swift and lasting improvements. After assets under management (AUM) in ESG-geared funds crossed the $1 trillion threshold in 2020,^1,2 the following six months saw an unprecedented $103 billion worth of corporate and fund ESG activity³ as businesses jettisoned problematic units and launched bold sustainability acquisitions.

As we move forward in this climate, we believe every deal will be scrutinised on ESG parameters. Private equity funds and corporations will need to embed ESG across all transactions, not only those ostensibly geared to those ends.

But the deal environment is atypical: To win and win right, you need to do it better and faster than the competition. As this report considers, the approaches taken during the deal should reflect relevant frameworks, be backed by robust due diligence and be carried out in a world of evolving expectations.

ESG transforms enterprise value, prompting urgent change

The urgency around ESG investment and the value at stake have a tangible effect on M&A activity. More than 30% of businesses have witnessed operational impacts from climate change,⁴ and in 2019, natural disasters caused an estimated $137 billion worth of losses.⁵ In response to environmental concerns, nearly eight in 10 responding consumers are changing buying habits,⁶ while around half of employees reconsider where they work.⁷

Capitalising on the disruption with M&A

For dealmakers, this voracious appetite for ESG should be harnessed. M&A opportunities include methodically capturing sustainable and ethical value across deals, such as transforming middling ESG performers into disruptors. Government energy tax credits and incentives may also render these difficult prospects viable.

ESG M&A due diligence can look to understand the dangers and opportunities around resources, work conditions, waste, energy and market access, all of which can be managed through careful integration and value creation.

Businesses face stiff challenges mastering the changes

ESG should now be regarded as a key lever of value. Yet it remains highly complex to quantify ESG risks and opportunities and to value targets, complicated by the growing mass of noncomparable data; large areas of ESG are still a Wild West of standards.

Failure to correctly judge merger speed, align strategic ESG priorities, or motivate management can obstruct value creation. In the longer term, businesses must retain sight of their purpose, revisiting deal rationale and testing assumptions.

Creating a focussed end-to-end approach

ESG M&A presents unique opportunities to step into these financial and technological tailwinds. To deal with the multiple complexities related to ESG, Deloitte has developed an end-to-end ESG M&A framework, ESG ValueFocus®. The framework helps guide businesses from strategy and deal origination through to ESG M&A due diligence, announcement, and integration and onto postdeal, long-term value creation. Some considerations are as follows:

Deep value and trust from outstanding ESG M&A

ESG and responsible investment considerations are profoundly reshaping business models. In the coming years, they’ll become intrinsically embedded across M&A. Such change is set to unlock competitiveness, profitability and attraction of capital. But it’s also essential to the trustworthiness of businesses, as customers, investors, employees, societies, and governments all expect companies to play their part in creating a fairer and more sustainable planet.

The companies at the leading edge of this change are already on their way to securing purpose-driven success and rapidly driving their future-ready transformation.

Amplify your ESG M&A initiatives

To create value and thrive in the rapidly changing future will require strategic, strong and committed leadership to incorporate ESG in the end-to-end M&A process. If you’d like to talk more about your company’s ESG and M&A initiatives and how Deloitte can help you achieve its goals, reach out today, and let’s set up a conversation.

Endnotes

1 Financial Times, “ESG funds attract record inflows during crisis,” August 10, 2020.view
2 Mergermarket, “The rise of ESG in the M&A process,” June 29, 2021; McKinsey, The ESG premium: New perspectives on value and performance, February 2020; Deloitte, “Financing a sustainable transition,” accessed August 2021; Deloitte, 2021 Climate Check: Business’ views on environmental sustainability, accessed August 2021.
3 Mergermarket, Morningstar, Blackrock, and Deloitte analysis.
4 Deloitte, 2021 Climate Check.
5 Acclimatise, “Extreme Weather Events Drive Global Economic Losses From Disasters Above 145 Billion Dollars in 2019,” May 6, 2020; Swiss Re Institute, sigma 2/20: Natural catastrophes in times of economic accumulation and climate change, April 8, 2020.
6 Capgemini, “How sustainability is fundamentally changing consumer preferences,” July 2020.
7 Edelman Intelligence, HP Workforce sustainability survey: Global Insights Report, April 2019.
8 Accounting for Sustainability, “A4S Essential Guide to Valuations and Climate Change,” February 25, 2021.