The increasingly vital role of ESG in M&A

Tracking the (r)evolution of ESG across the M&A life cycle

Corporate and private equity (PE) leaders have a growing appreciation for the ways environmental, social, and governance (ESG) factors can drive value. With the availability of increased data and the assistance of more precise, consistent measurement tools, mergers and acquisitions (M&A) leaders are better positioned to understand the impact of ESG on valuations, targeting, portfolio management, and other areas across the M&A life cycle. Overall, ESG has grown from the occasional area of focus to a more influential and consistent M&A consideration over the past two years.

In 2022, Deloitte launched its inaugural survey, ESG’s evolving role in corporate M&A decisions, analyzing ESG’s influence on the M&A process across corporate organizations in the United States. The M&A market has continued to evolve, as evidenced in our broader 2024 M&A Trends Survey. To determine updated impacts of ESG in M&A, in 2024, we launched our second ESG in M&A trends survey involving 500 global M&A leaders. The survey was expanded to include respondents from Europe & Middle East and Asia Pacific (APAC) regions as well as various industries and a specific focus on impacts to PE.

Seizing M&A’s ESG opportunity: 3 key trends

Organizations are on an ESG journey, learning how to understand, measure, and act on a set of variables that have emerged as increasingly significant to stakeholders in recent years. This affects M&A strategy and execution as much as it does any other area of strategy or operations, but its influence on M&A is distinct. The results of this survey illustrate the progress M&A leaders are making on this journey.

Observations from this latest ESG in M&A trends survey demonstrate several changes from 2022.

1. As leaders in M&A are increasingly considering ESG and finding new ways to incorporate relevant factors into their M&A strategies, they are supported by advancements in tools and methodologies for measuring ESG commitments and accomplishments.

When Deloitte last surveyed executives in 2022, there was a common disconnect between C-suite leaders and M&A deal teams on ESG. Executives and M&A leaders understood that ESG performance and the M&A process were linked, but they often lacked the processes, data, and tools to quantify or act upon that linkage. Today, thanks to the increased availability of data, improved measurement tools, and a more advanced understanding of the principles involved, dealmakers may find it easier to turn ESG awareness into action when factoring into risk assessments, valuations, and other key M&A processes.

The value that an M&A transaction adds to the buyer generally extends across many familiar areas for consideration, such as quality assets, talent, and reputation. However, now more than ever, ESG’s impact on a potential acquisition or divestiture is becoming a standard consideration as well for dealmakers. More than half of the organizations surveyed (57%) are measuring ESG with clearly defined metrics, an increase from 39% two years ago.

Being able to capture better, more relevant data and measure ESG value and metrics is providing organizations with more confidence in planning and executing transactions. More than three-quarters (78%) of organizations with clearly defined measurement metrics say they have a very high confidence in their ability to evaluate a target’s ESG profile—which will soon be part of their own profile.

Between 2022 and 2024, the survey results identified an increase in confidence to evaluate a target’s ESG profile, while also being prepared to discuss the organization’s own ESG profile. Respondents expressing a “very high” or “high” level of confidence increased 17 percentage points from 2022 to 91% in 2024. Similarly, 97% of respondents expressed being “very prepared” or “prepared” to discuss their own ESG profile as a value driver for their organization, an increase of 13 percentage points over 2022 results.

2. Many organizations highlighted that they do not yet have a defined approach for ESG in post-merger integration (PMI) where much of the value captured by a deal is often realized. Factoring ESG considerations alongside other PMI workstreams may help many organizations further realize value and mitigate risk over the long term.

Only 12% of surveyed leaders said their organizations have a dedicated approach for managing ESG as part of PMI, and 19% said they see ESG as important only in a regulatory context. The rest exist somewhere between those two positions, either working to build ESG capabilities into their PMI, bringing a partial focus to it, or lacking an ESG capability or structure that would be part of a merger.

Among industries, financial services entities are most likely to report having a defined ESG approach for PMI (24%), and PE firms are most likely to say they are working to build one. However, at least some companies in every surveyed industry identified themselves in this “working to build capability” category.

Based upon responses in 2022, the ESG component of PMI was predominantly a cross-functional team effort (58%). Two years later, this year’s respondents say it is more likely to be the responsibility of a dedicated workstream (49%).

3. While ESG factors can influence and even drive M&A processes, the reverse can also be true: M&A activity can help organizations better understand and achieve their own ESG goals.

ESG in M&A strategy is more than just a factor in weighing each potential transaction. Improving a company’s ESG profile has become a rationale that influences which deals to seek out in the first place.

Almost three-quarters (74%) of companies say they have evaluated their portfolios or investments from an ESG perspective when acquiring or searching for acquisition targets, and almost as many (67%) say the same about their divestiture strategies. These percentages are a notable increase over the results reported by respondents in 2022.

From an industry perspective, ESG’s influence on corporate acquisitions is strongest in the financial services industry followed by TMT, while sell-side divestitures feel the influence of ESG more in energy, resources, and industrials and TMT. PE firms have historically been less focused on buying or selling companies to improve their ESG profile, but 82% of PE respondents did state that they have a strategy or are in the process of improving their ESG profile through planned acquisitions and divestitures.

Emphasis on ESG tends to fluctuate based upon the size of the company. Companies with revenues under $1 billion, and between $5 billion and $10 billion, place a higher level of importance on the role of ESG in M&A strategy than companies with revenues greater than $10 billion and between $1 billion and $5 billion.

ESG and sustainable investing is becoming a cornerstone for PE organizations. Many PE respondents (72%) stated that ESG is a topic of consideration in 50% or more of their deals with 14% stating they consider ESG in all deals. In parallel, a growing percentage of limited partners (LPs) are requiring funds to report ESG metrics. PE respondents (44%) reported that more than half of their LPs require reporting of ESG metrics, while the remaining respondents reported that 25% to 50% of their LPs require ESG reporting.

This is only the beginning

ESG appears to be more deeply embedded in the M&A process than ever before, with a greater recognition among leaders that it is a lever for measuring, protecting, and creating value. One reason for this trend is that ESG data is now better defined, captured, and measured, thus, allowing metrics to be more precise and better understood than they were only a few years ago. Understanding ESG data starts with determining material ESG issues, which is another aspect of organizations’ enhanced maturity and sophistication over recent years.

Because ESG is tied into so many other business facets and societal processes apart from M&A, it is easy to envision further progress along the trend lines we have highlighted. In the future, the ultimate measure of ESG’s growth and impact on the M&A consciousness may be that no one considers its inclusion to be remarkable at all.

Let’s talk about the role of ESG in your M&A strategy