The climate crisis, social inequality, labour practices and data security – all critical Environmental, Social and Governance (ESG) issues that impact every aspect of business, including Mergers and Acquisitions (M&A).
These factors are not just crucial to both buyers and sellers, but are also prompting renewed M&A activity in their own right. 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. Regulators are also requiring greater disclosure.
The result is a world where a company’s value can be significantly impacted by its own ESG practices.
At Deloitte, we’re helping businesses to develop strong ESG strategies. With clients in ESG sensitive sectors such as consumer goods, energy, resources, industrials and financial services, our teams are supporting M&A due diligence through identifying value and pitfalls, while assessing what needs to be done post-deal to ensure continued effectiveness.
“Understanding fully your supply chain and all actors in it becomes so much more critical with ESG,” James Hilburn, director of ESG in M&A says. “ESG failures in your supply chain can have a massive impact on the reputation and market value of your business.”
Here Jason Caulfield and James Hilburn share advice for companies who want to build ESG considerations into their M&A transactions.
1. Be clear about your strategy
Businesses need a strategy that encompasses their entire ESG agenda that is driven from the top. This means establishing evidence-based priorities and a clear pathway that details how ESG-related M&A aligns within the overall vision for the next five to ten years.
“Nearly one third of companies are struggling to develop a strategy that fits with existing business models,” says Jason Caulfield, global Value Creation Services and M&A Operations lead. “But doing this means they can better meet the growing ESG expectations of customers, employees and investors, and capture the value that this represents.”
2. Look out for false claims and quantify opportunities
‘Greenwashing’ – or making overblown claims relating to environmental achievements – is something to look out for. The same is true for other ESG related claims. “If sellers have made inflated claims or hidden ethical failings deep in the supply chain, careful due diligence and valuations can help to find this out,” says Jason. “So it is important that a robust and fact-based view of ESG performance is developed early in the transaction process.”
Businesses should thoroughly assess both the opportunities and risks of material ESG components within their sector and geography. During the due diligence process, the levers for realising value post-deal should be identified and written into the transaction 100-day plan, along with metrics that should be monitored to track performance. A lever in this context may include carbon reduction initiatives or linking ESG performance to management remuneration.
3. Deliver value from transaction closure
It’s essential that businesses can deliver ESG value, in the form of enhanced risk management, cost savings, improved working conditions or brand enhancement as some examples. From the first day of transaction closure, these will need to satisfy all stakeholders.
“Communicating successes and updates is key,” explains James, “and it should be done in a clear, compelling and transparent way. Giving concrete examples, for instance actual tons of CO2 reduced or improvement in employee diversity targets, will demonstrate commitment and credibility to both current, and future, investors and customers.”
4. Evolve your business to fit ESG transformation
ESG is a dynamic environment and a ‘set and forget’ approach post-transaction could be at odds with stakeholder expectations. “Businesses must remain in tune with the evolving ESG priorities of their customers, employees, investors and regulators,” says Jason, “and ensure these are built into their plans so they can thrive in the longer-term. One priority we don’t see going away is the focus on climate impact and the carbon emissions of a business as well as its up and down-stream supply chain.”
In this environment, our M&A advisors can bring innovative ideas to help clients transform their business at scale.
A record-breaking global M&A boom has created a new landscape for the post-pandemic era.
In the first half of 2021, there were 140 low carbon energy transactions completed globally, each worth more than US $50 million, with the UK delivering 11 of these.
Low carbon M&A enables companies or energy suppliers to move to cleaner fuels and production by acquiring solar, wind and other energy technologies.
“Our tailored end-to-end services help clients define their M&A strategy, access capital, review or reset debt facilities and perform full service due diligence,” says Fenton Burgin, head of the UK Advisory Corporate Finance practice. “We stay with clients throughout the deal to help them capture value and maximise proceeds from divestitures or exit strategies."
For example, Deloitte worked with one client on a successful operational carve-out of a company spanning 60 countries within Europe, Asia-Pacific, North America and Latin America. Our buy-side assistance helped to deliver a standalone business employing more than 6,000 people.
“In this environment, our M&A advisors can bring innovative ideas to help clients transform their business at scale,” concludes Fenton, “and we’re proud to have been recognised in 2020 by Mergermarket as the number one Global and European M&A Financial Advisor.”