Mergers and acquisitions (M&As) are a powerful tool that companies can use to improve their sustainability performance and generate new business opportunities. However, to maximize the chances of success, it is important to carefully consider the sustainability factors involved in each transaction. Companies that fail to properly assess and manage their sustainability risks may face significant financial and reputational consequences.

M&As and Sustainability Performance

Companies are increasingly using M&As to improve their sustainability performance and generate new business opportunities.

For example, Engie’s acquisition of GDF Suez in 2015 was motivated by its desire to accelerate its transition to renewable energy and energy efficiency. GDF Suez was a leading producer of electricity from low-carbon sources such as nuclear and hydropower. Engie pledged to invest in GDF Suez’s renewable energy assets and to reduce the carbon intensity of GDF Suez’s generation portfolio.

The acquisition has been successful for Engie, which has become a leader in the global renewable energy market, and its carbon emissions have fallen significantly since the acquisition.

Another example is Schneider Electric’s acquisition of AVEVA in 2018. Schneider Electric is a leading provider of energy management and automation solutions, and AVEVA was a leading provider of industrial software.

Schneider Electric’s acquisition was motivated by its desire to expand its digital offerings and help its customers transition to a more sustainable energy future.

The acquisition has been successful for both companies. Schneider Electric has been able to expand its digital offerings and help its customers improve their efficiency and sustainability. In turn, AVEVA has benefited from Schneider Electric’s investment and resources.

Companies can use M&As to improve their sustainability performance in a number of ways:

• Acquire companies in order to shift the portfolio toward sustainable energy production;
• Acquire new skills and processes to transform the production chain;
• Acquire innovative sustainable technologies or resources to become more environment-friendly;
• Create less waste by improving the recycling capability of conventional methods or adopting new methods;
• Reduce exposure to climate-related risks;
• Deploy new technologies in order to use energy more efficiently.

These are just a few ways in which companies can use M&As to improve their sustainability performance. As the demand for sustainable products and services continues to grow, we can expect to see more and more companies using M&As to achieve their sustainability goals.

Importantly, one must not let environmental, social, and governance (ESG) cloud rational decision-making. In order to make informed financial decisions, managers and investors need to understand how sustainability-related goals can impact a company’s future income statement, balance sheet, and cash flow statements.

Even when ESG is the driver for M&A, it is critical that it does not replace a proper analytical business case. In such a business case, one should include sustainability considerations in the quantitative valuation of any proposed investment.

For instance, one should consider how the proposed deal achieves cost reductions, operational efficiencies, revenue uplift, or better access to financing.

Sustainability and Risk Management

ESG factors are becoming increasingly important in M&A transactions. At least since late 2020, many investors have been enquiring about how to assess ESG and sustainability from a due diligence and valuation perspective.

For instance, climate risk factors can affect the likelihood of a deal being closed, and environmental due diligence is necessary for most mergers. In addition, poor performance on environmental indicators can negatively influence the valuation.

It is important to note that sustainability is not a one-size-fits-all concept. ESG factors can have very different implications for different businesses. For example, the environmental risks faced by an oil and gas company are very different from those faced by a technology company. Similarly, the social risks faced by a garment manufacturer are very different from those faced by an insurance company.

Therefore, it is important to conduct thorough due diligence on potential targets to identify and assess material sustainability risks. This should include reviewing the target’s sustainability performance history, sustainability compliance record, and exposure to sustainability risks.

Once an M&A transaction is complete, it is important to develop an integration plan that includes steps to reduce the sustainability impact of the combined company, improve sustainability compliance, and mitigate sustainability risks.

In some cases, value and efficiency can be increased after the deal, by raising the ESG performance of the target assets to the performance level of the acquirer. This requires the integration to focus on improving the ESG factors of the target, with clear milestones and actions, and thus bring its poor ESG performance on par with that of the acquirer.

New risks and opportunities

Sustainability considerations are becoming increasingly important in M&As. Companies that fail to properly assess and manage their sustainability risks and opportunities can face significant financial and reputational consequences.

However, do not bundle E, S, and G into a single number: instead, think carefully about the business model, rationale, and implications of each, and factor sustainability into the business case.

Sustainability brings new risks, but also opportunities to revisit value creation. Successful companies use sustainability as a key driver of business model innovation and value creation, thereby developing and executing sustainable business models that are well positioned to attract customers, investors, and partners.

Nuno Fernandes is professor of finance and governance at IESE Business School, and managing partner of Odgers Berndtson Board Solutions.