While the talk in M&A circles may be all about a steep drop in deals due to current economic woes, there is, under the surface, another development worth noting: the growing importance of ESG in acquisitions and takeovers.
This week’s big news from Bain & Company, an international consultancy, is that global M&A values dropped considerably in 2022, though many corporate leaders remain convinced acquisitions will be their core strategic move in the coming year.
However, Bain also notes an increasing role of ESG in driving takeover decisions. The Bain report says it is difficult to pinpoint just how many deals are driven by ESG criteria, but it may be a hefty number.
“While it remains difficult to quantify M&A activity under ESG parameters,” the report says, “Bain estimates one in ten deals in diversified industrials now has an ESG component.”
The report says the first phenomena to note is that companies are buying “adjacent businesses” to provide “quick” access to greener and better markets.
Second, companies are seeking out acquisitions that will improve the ESG credentials of their production and manufacturing facilities. Bain says French construction giant Saint-Gobain acquired Chryso, a chemicals manufacturer, to help manage carbon emissions across concrete production.
All of this now means that ESG is also playing a significant role in due diligence. “In addition to market and synergy assessments, industrial players are broadening ESG diligence efforts … to inform acquisition plays and manage downside risk,” says Bain’s report.
Les Baird, head of Bain’s global M&A and divestitures practice, says: “Based on what we know from past economic down cycles, we anticipate ample opportunity in 2023 for well-prepared acquirers to make bold, strategic moves. In our experience, we’ve found that in the face of uncertainty, proactive, deeper due diligence can deliver a competitive advantage in the speed and quality of deals done.”
Create expectations
Bain is not the first to note the impact of ESG on M&A. Corporate finance observers have noted that where ESG was once a “risk mitigation” factor in acquisitions, it has now become a “value creation” element in many sectors.
Experts say ESG is shaping assessments of “strategic fit”, corporate culture and, of course, future growth. Some of this will depend on the information available, especially in corporate disclosures. Jurisdictions without mandatory emissions disclosures will likely complicate the picture for companies seeking an acquisition.
Last year, London law firm Latham noted the increasingly significant role of ESG in M&A, which places a renewed emphasis on reporting. “The movement towards introducing mandatory reporting standards for companies means that dealmakers must continue to consider the impact of ESG issues on deals.” .
One information service, Equity Report, even specialises in providing news on the relationship between M&A and ESG.
James Petrie, head of corporate governance at the ICAEW, a UK professional body for accountants, said in November that ESG will be an important question when raising finance.
“ESG within M&A will be an important means to create growth, gain a competitive edge and access affordable capital,” he said.
With banks having to publish emissions figures in line with TCFD reporting, they will be anxious to ensure the deals they finance will not increase their scope 2 (supply chain) greenhouse gases emissions disclosures.
All of this points to ESG becoming a permanent fixture in M&A, whether deal volumes increase or not.