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The double role of M&A during the energy transition: accelerator or green washer

The road to COP26 blog series

The role of Mergers and Acquisitions (M&A) is becoming increasingly visible in the energy transition.

The role of Mergers and Acquisitions (M&A) is becoming increasingly visible in the energy transition. Press rumors are mentioning that traditional oil companies are considering selling large shares of their heavy carbon assets whilst others in the oil industry have already decided to step out of oil and gas through megadeals. These are a few compelling developments which point to the role of M&A in large ‘sustainable transformations’.

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It seems that the pressure of society and shareholders of carbon-emitting companies forces them to make radical decisions to achieve decarbonization. These decisions often involve mergers, acquisitions, or divestments. However, some question whether these transactions achieve the climate impact that we are hoping for. And is there more we can expect from ‘sustainability in M&A’ in the coming period?

It is not easy for large firms to suddenly change course and transform into a new company. How should, for example, an oil conglomerate divest a large part of their (profitable) heavy carbon assets and transform into a ‘new energy firm’ if, on the other hand, there is a lack of large-scale ‘green’ investments generating the same ROI as they are used to in the Oil and Gas industry? A large acquisition opportunity only comes along sporadically and the ‘stringing of beads’ is not fast enough for its stakeholders or society. Therefore, this calls for 'sustainable transformations' in which companies consider how they can move from the current 'Economically driven world' via a 'Sustainability journey' to an 'Impact driven Sustainable world'. The Danish energy firm Ørsted is a good example of a company that has successfully undergone such a transformation. In 2016 Ørsted decided to change course by divesting all of its oil and gas activities and focusing entirely on renewable energy sources, becoming the largest offshore wind energy producer globally. This transformation has improved net results while significantly reducing carbon emissions per sold energy quantity.

All large-scale carbon-emitting firms are impacted by increasing climate awareness and, at some point, they will have to think about their sustainability transformation. Part of a sustainable transformation for companies in the Energy, Resources and Industrials (ER&I) sector is to look at their climate change commitments and move accordingly. M&A can be an enabler in that sense, which comes with challenges of how to value new 'sustainable' businesses that help create 'a more sustainable world', but also via divestitures to mitigate tangible and intangible risks.

It is debatable whether divesting polluting assets has the positive climate effect that we hope to achieve. In the short term, it seems unlikely that emissions will be reduced significantly. Under the guise of "if we don't produce it, competition will", little emissions will be reduced directly. This is something that mainly applies to so-called "hard to abate" sectors which sell commodity products, such as the oil and steel industry. However, given government policies and growing climate awareness, it is likely that in the long run demand for low emission products will increase. Carbon-emitting firms that have built up the right capabilities over time (potentially via an acquisition) will probably benefit from this trend. We might even see that Environmental, Social and Governance factors will impact valuations and drive up prices. Therefore, it is expected that in the long run, we can see a positive impact from divestments of polluting assets, as cleaner energy solutions will become available at lower prices and the options become more readily available. As change never comes easily, government policies and societal pressure remain key for letting companies make the right (sustainable) move.

The global boom in mergers and acquisitions continues unabated due to several factors: not only because of persistently low-interest rates, availability of capital, and financing opportunities but also because of fear of losing out to the competition. The winning strategy for companies in the ER&I sector might be to think less defensively and to seize the momentum by going on the offensive and pro-actively creating their ‘Sustainability Journey’.

 

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