ESG can drive value in M&A—if companies will let it

The emphasis on ESG

ESG factors affect consumer preferences, new business opportunities, and the efficacy of existing revenues. To that end, there have been an increasing number of deals with ESG goals as the core of the investment thesis. Even so, while there has been increased interest in ESG frameworks, it’s not yet clear how much companies are considering how they affect decisions, particularly around mergers & acquisitions (M&A) strategies.

M&A strategy and execution can no longer exist in a silo, separate from a company’s ESG efforts and commitments. Even though companies should be changing priorities and behavior in the face of this new reality, it’s not yet clear how many are doing so. Ultimately, to answer many of the questions we had about companies’ approaches to ESG goals and their role in M&A strategies, we decided to simply ask.

The findings

We conducted a survey in June 2022, which consisted of 250 C-suite executives and senior and mid-level leaders at corporations that reported at least $500 million in revenue. The survey did not include private equity, not-for-profit, or private-sector organizations. 

Our findings show that companies appear to recognize and weigh ESG in their M&A decisions; two-thirds of those surveyed say they consider ESG to be of high or very high importance in M&A activity. Moreover, leaders are evaluating their portfolios from an ESG perspective and making acquisitions to address ESG goals. While 88% of respondents indicate that they have evaluated their business portfolio from an ESG perspective, a subset (32%) of companies said they’ve already made an acquisition in order to improve their ESG profile. 

However, the stated importance of ESG goals doesn’t mean that they are consistently part of the conversation during M&A transactions. About 43% of respondents say that ESG topics are occasionally, rarely, or very rarely part of the M&A conversation. Since M&A strategies can be key tools to creating meaningful, substantial changes to a company’s capabilities, the fact that ESG considerations don’t always dovetail with these strategies means that companies are unknowingly leaving opportunities on the table. 

Additionally, companies appear to be split on which group or function within an organization should assess the potential ESG impact of an acquisition; 34% say the business/corporate team is responsible, 28% of respondents name the M&A team, and 25% cite a specialist internal ESG team. This suggests that organizations need to work to embed ESG considerations into M&A strategy because establishing an ESG team and hiring an ESG leader won’t be enough if other teams believe that expertise should remain siloed within that group. Many decisions could affect and be affected by ESG goals, which is why they need to be integrated into the conversation from the start. 

The future: Seeing the stakes

Companies clearly understand the importance of ESG, and quite a few have a sense of how M&A can help them fulfill their strategies. But to thoughtfully capitalize on the opportunities presented to them, companies also need to decide what elements aren’t important to them and rethink, reimagine, and renew their tactics. Just as in M&A, a clear-eyed view of the goals, possibilities, and trade-offs is at the center of a successful ESG strategy. Companies know that acting on ESG commitments can drive business success and create value; the next step is deciding how to move forward with a bolder approach. 

The authors and contributors wish to thank the following individuals for their contributions: Michaela Baca, Sean Cannady, Ralitza Dountcheva, Emma Farrell, Pranjal Gupta, and Charlie Kerhin.