Posted: 31 Jan. 2022 4 min.

ESG - a value driver in mergers and acquisitions

Emne: Economics

Sustainability – or more specially ESG (environment, social, governance) – is changing the fundamentals of mergers and acquisitions (M&A). That poses new challenges to buying and selling companies, but it could also point to attractive business opportunities.

Shareholder capitalism used to rule the world, but today we are witnessing the rise of stakeholder capitalism. The now widespread stakeholder model places sustainability at the centre, and businesses are pressured by consumers, employees, regulators, financial partners, and suppliers to integrate sustainability into their strategy and operations in ways that makes business and sustainability go hand in hand.

The consequence for M&A is clear: if you do not integrate ESG in your due diligence you increase the risk that the deal will fail, as you risk merging or acquiring a company that has lost its license to operate in the future and destroyed its market value.

That is why ESG is now becoming a major part of the valuation and the risk calculations in M&A. While some sectors and businesses are currently more impacted than others, in our view this is expanding to include all sectors and no business can afford to ignore this megatrend in the future!

The challenges

Adapting M&A practices by embedding ESG in due diligence requires new skills, insights, and considerations. Sharp quantification of risks and opportunities is imperative, but also comes with several challenges that must be addressed. In essence, most of the challenges springs from a need to assess and value both tangible and intangible assets and achievements in a transparent and methodological sound manner. This raises questions like how to value intangibles and avoid double counting, and how social topics and the governance impact can be included in the business case.

By incorporating ESG in the M&A cycle from deal origination, to strategy, due diligence, valuation, integration, and of course – long-term value creation, most of the challenges can be overcome.

The opportunities

Recognizing the challenges that ESG imposes on the due diligence, we firmly believe that new business opportunities occur as well. When asking the question “can the company survive as it is in a future where sustainable behaviour is a given and a customer requirement” in an M&A process, the answer can naturally be two-fold: “yes” or “no”.

If it is a yes, M&A can add tremendous value to your company and its sustainable profile, if ESG is thoroughly and professionally integrated in the due diligence process lying ahead. We recommend taking a bottom-up view of key ESG measures and consider the factors relevant to the given business, sector, and potential investors. By doing so, one creates a baseline of – for instance - environmental intensity and potential choices for new owners, covering net-zero, waste, and greenhouse gas emissions, including third-party raw materials, factories, and deliveries. These indirect “scope 3” emissions are challenging to measure, but they are nevertheless critical to estimate, as they represent more than 90 percent of a company’s footprint. This an example of how a close assessment of a target’s sustainable “shape” is vital to assess.

If, on the other hand, the answer is a “no” the new owner should consider withdrawing from the transaction and looking for new targets, using what they have learned from the process. Yet, before walking away from the deal, they should explore whether the company can be transformed to unleash its hidden potential. This may be by merging or acquiring a new company, or by transitioning it from dirty to clean to earn the upside in value improvement and reputational benefit. Naturally, the risks of failing in the transition should be carefully considered, along with all other parts of the due diligence, and whether the necessary resources to make such a turnaround are available.

A noticeable way that ESG is transforming M&A is by enforcing a more long-term perspective on an investment. This improves stakeholder relations and gives legitimacy, which is just what businesses should focus on in this era of stakeholder capitalism.

Businesses might feel they have to balance the need to build trust with stakeholders and create shareholder value at the same time, but if they want to remain successful and prosper, they need to embed ESG into their long-term growth strategies.

Forfatter spotlight

Majbritt Skov

Majbritt Skov

Partner & Head of Deloitte Economics and ESG M&A

Spørg mig om: Samfundsøkonomi, økonomisk modellering og ESG i et kommercielt perspektiv Majbritt er partner i Deloitte og leder af Deloitte Economics. Hun har mere end 15 års erfaring med udarbejdelse af mikro- og makroøkonomiske analyser for både den private og offentlige sektor. Majbritt er en efterspurgt økonomisk rådgiver i strategiske beslutningsprocesser om optimering og effektivisering. Majbritt er ekspert i at beregne organisationers impact og kan sætte kroner og ører på bæredygtighed. Ydermere bistår hun virksomheder og investorer med at værdisætte ESG-relaterede risici og muligheder i både et kommercielt og samfundsøkonomisk perspektiv - blandt andet i relation til M&A. Besøg Majbritts blog her Ask me about: Socio-economic impact, economic modelling and ESG Majbritt is a partner in Deloitte and Head of Deloitte Economics. She has more than 15 years of experience with conducting micro and microeconomic analyses for both private and public sector clients. Majbritt is an experienced economic advisor in strategic decision-making processes focusing on optimization and effectivization. She is an expert in the valuation of non-market goods and supports companies and investors in assessing their impact and the value of sustainability and ESG-related risks and opportunities from both a commercial and societal perspective - in relation to M&A amongst others. Visit Majbritt's blog here

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