A growing imperative: ESG in M&A – A view for the Australian market - Financial Advisory blog | Deloitte Australia has been saved
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Macro trends like climate change, biodiversity loss, digitisation, rising social inequality, poor labour practices and cyber security are fundamentally changing the way we live our lives and driving a new business-as-usual.
However, we are now in an era where businesses recognise the key responsibility they have to drive progress toward a more sustainable future – with investors, consumers, regulators and their very own employees reinforcing the importance of this message.
At the same time, both Corporate entities and Private Equity are increasingly seeing opportunities to maximise value through the consideration of ESG trends and issues, which either have the potential to constrain growth, result in liabilities, or importantly present as new sources of investment.
These factors are not just crucial to both buyers and sellers, but are also prompting renewed M&A activity in their own right. The transition to a global low carbon economy is underway, spurring innovation and growth in an array of technologies, products and services. At the same time, consumers have become more socially and environmentally aware, choosing to spend their money on goods and services that reflect their own beliefs. The same is true of investors and, increasingly, capital is being allocated based on ESG performance and potential. Regulators are also requiring greater disclosure on what constitutes a ‘sustainable’ investment.
The result is a world where a company’s value can be significantly impacted by its own ESG practices and performance, as well as that of its portfolio companies in the case of Private Equity.
Australian companies are finding themselves under increasing pressure to ensure their strategic priorities, core capabilities and business structures align with these global shifts. While this has been the case for organisations with exposure to carbon-intensive operations and value chains for some time now, no sector is immune from this.
“More than ever, there is a greater level of scrutiny being placed on how a company’s M&A activity and broader investment decisions align with their publicly stated ESG commitments and targets,” says Rochel Hoffman, Head of ESG M&A Australia. “At the same time, there is increasing recognition that M&A activity, when done in a responsible manner, will be an important lever for companies to use to thrive in an ESG-conscious world and to drive value.”
“At the moment in the Australian market, we are seeing a number of companies employ defensive M&A strategies in response to ESG trends. We expect to see an increase in offensive strategies as the opportunities associated with climate change, and ESG more broadly, continue to take off” says Rob McConnel, M&A Partner.
At Deloitte, we’re helping businesses to embed ESG considerations into their M&A strategies and across the transaction lifecycle. With clients in ESG sensitive sectors such as energy and resources, consumer business, financial services and healthcare, our teams are supporting M&A due diligence through identifying value and pitfalls, and assessing what needs to be done post-deal to ensure continued effectiveness.
Following on from this, Rochel Hoffman, shares her perspective on the four key points for businesses to consider when looking to embed ESG into their M&A strategies and deal lifecycle.
1. Inform your M&A strategy with an understanding of ESG trends and issues
While many companies have public ESG strategies and targets, there is often a disconnect with the company’s M&A strategy. Ensuring your M&A strategy is informed by ESG trends, and assessing ESG risks and value drivers across each transaction is critical to achieving maximum value. This is equally relevant for both our Private Equity and Corporate clients.
2. Apply the same level of rigour to ESG risks and opportunities as other areas of due diligence
ESG due diligence has historically been done on an ad-hoc basis, with a predominant focus on risk and compliance. However, in an environment where ESG is front of mind, particularly for investors, it is increasingly important to obtain a robust understanding of the ESG performance of the target, both positive and negative, early in the transaction process. This can help uncover any potential issues that could result in financial and/or reputational damage, as well as identify opportunities for increased value to be realised post-transaction.
3. Keep the ESG momentum going post-transaction
While ESG due diligence provides you with the full picture, post-transaction is where you have the opportunity to harness the synergies, set and implement a new or revised ESG strategy, and to capitalise on ESG opportunities. Critical to this is ensuring the right systems are in place to track and measure the full breadth of impacts (financial and non-financial) associated with these activities in a factual manner, which can avoid the risk of “greenwashing”, and can assist with maximising the value of the investment.
4. Evolve your corporate strategy to thrive in a sustainable future
With the focus on moving towards a sustainable future continuing to gain traction, there is no time to stand still. Businesses need to continuously ensure their strategic priorities position them to be resilient to this ever-changing environment and stakeholder expectations, and to drive competitive advantage from the new sectors that have, and will continue to, emerge. Are you ready to seize the opportunities presented by this increasing recognition of the value of ESG?
The authors would like to thank Jason Caulfield, James Hilburn and Sarah Robson for their contributions to this piece.
Rochel Hoffman is leading the Australian ESG M&A team. Prior to this, she was a Director in Deloitte’s Sustainability and Climate Change practice. Rochel has 10 years of ESG experience delivering sustainability advisory services, including ESG materiality assessments and due diligence, stakeholder engagement, sustainability strategy, ESG disclosure development and climate change governance, scenario analysis, risk management and TCFD disclosure development to clients across a diverse range of sectors, including, infrastructure, logistics, mining, waste management and energy. Rochel is known for her high level of client service and deep ESG and sector knowledge.
Rob is a senior M&A partner within Deloitte Financial Advisory with more than 20 years' experience. Rob's experience includes two years in the Deloitte London Private Equity Transaction Services team where he advised on a variety of global transactions across a range of sectors as well as two years working within our Sydney M&A team. He has considerable experience in M&A working with a mix of global and domestic clients including the public sector, large corporate entities, sovereign wealth funds and private equity firms. Rob can assist with transaction advice in a wide variety of roles including acquisition/pre-lending due diligence, vendor due diligence/assist services, sale and purchase agreements and capital market transactions (Investigating Accountant). In his role as Financial Advisory’s Client, Industries & Market Leader, Rob looks to connect our clients to our teams and vice versa.