Unlocking transformative M&A value with ESG

The rising importance of ESG-assessed M&A

A powerful combination of environmental, social, and governance demands is driving private equity funds and corporations to urgently transform their core strategies. Considerable shifts in consumer awareness and spending patterns, employee expectations, regulatory frameworks, and industry perception have prompted investors to reassign billions of dollars using ESG lenses.^1,2,3

Businesses must acknowledge this turbulent change by rapidly reshaping strategy and incorporating M&A as a cornerstone for swift and lasting improvements. After assets under management (AUM) in ESG-geared funds crossed the $1 trillion threshold in 2020,^1,2 the following six months saw an unprecedented $103 billion worth of corporate and fund ESG activity³ as businesses jettisoned problematic units and launched bold sustainability acquisitions.

As we move forward in this climate, we believe every deal will be scrutinized on ESG parameters. Private equity funds and corporations will need to embed ESG across all transactions, not only those ostensibly geared to those ends.

But the deal environment is atypical: To win and win right, you need to do it better and faster than the competition. As this report considers, the approaches taken during the deal should reflect relevant frameworks, be backed by robust due diligence, and be carried out in a world of evolving expectations.

ESG transforms enterprise value, prompting urgent change

The urgency around ESG investment and the value at stake have a tangible effect on M&A activity. More than 30% of businesses have witnessed operational impacts from climate change,⁴ and in 2019, natural disasters caused an estimated $137 billion worth of losses.⁵ In response to environmental concerns, nearly eight in 10 responding consumers are changing buying habits,⁶ while around half of employees reconsider where they work.⁷

Capitalizing on the disruption with M&A

For dealmakers, this voracious appetite for ESG should be harnessed. M&A opportunities include methodically capturing sustainable and ethical value across deals, such as transforming middling ESG performers into disruptors. Government energy tax credits and incentives may also render these difficult prospects viable.

ESG M&A due diligence can look to understand the dangers and opportunities around resources, work conditions, waste, energy, and market access, all of which can be managed through careful integration and value creation.

Businesses face stiff challenges mastering the changes

ESG should now be regarded as a key lever of value. Yet it remains highly complex to quantify ESG risks and opportunities and to value targets, complicated by the growing mass of noncomparable data; large areas of ESG are still a Wild West of standards.

Failure to correctly judge merger speed, align strategic ESG priorities, or motivate management can obstruct value creation. In the longer term, businesses must retain sight of their purpose, revisiting deal rationale and testing assumptions.

Creating a focused end-to-end approach

ESG M&A presents unique opportunities to step into these financial and technological tailwinds. To deal with the multiple complexities related to ESG, Deloitte has developed an end-to-end ESG M&A framework, ESG ValueFocus^®. The framework helps guide businesses from strategy and deal origination through to ESG M&A due diligence, announcement, and integration and onto postdeal, long-term value creation. Some considerations are as follows:

Firms must also consider workers’ rights, diversity and representation, the elimination of corruption, improvement of data privacy, and well beyond. It’s essential to assess and prioritize trends and regulations, pledges from new governments, and relevant agreements. An ESG strategy must also incorporate responsible tax approaches. Companies should consider a combination of defensive and offensive M&A strategies to capture the full spectrum of ESG opportunities.

Proper ESG due diligence involves close assessment of the concerns and the value potential in any prospective deal: outlining key issues and measuring performance against regulations and frameworks. Quantifying ESG credentials is complex, with a proliferation of approaches sowing confusion. To get ESG due diligence right, businesses and institutional investors can access advanced tools, frameworks, and processes and examine sector climate risks and social impacts while also considering how relevant programs are charged to subsidiaries.

Negative considerations here include potential asset impairment and fine liabilities, while positive aspects include improved revenues, cost of capital, and returns. Companies may rank these in order of significance and likelihood, baselining against peers.⁸ Winning the deal involves careful decision-making on premiums and transparent communication of credentials.

Integration complexity hits particular heights where ESG cultures, processes, and policies differ significantly. Variations in buyer and seller profiles in these areas should be met with confident steps that reflect a clear understanding of stakeholder perspectives and priorities, with culture and management divergence approached sensitively.

Businesses must consistently communicate change momentum to all stakeholders, and this includes private equity presentations to potential buyers at exit. It’s essential that companies regularly step back to review their historical acquisitions, applying lessons to all processes.

Deep value and trust from outstanding ESG M&A

ESG and responsible investment considerations are profoundly reshaping business models. In the coming years, they’ll become intrinsically embedded across M&A. Such change is set to unlock competitiveness, profitability, and attraction of capital. But it’s also essential to the trustworthiness of businesses, as customers, investors, employees, societies, and governments all expect companies to play their part in creating a fairer and more sustainable planet.

The companies at the leading edge of this change are already on their way to securing purpose-driven success and rapidly driving their future-ready transformation.

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Amplify your ESG M&A initiatives

To create value and thrive in the rapidly changing future will require strategic, strong, and committed leadership to incorporate ESG in the end-to-end M&A process. If you’d like to talk more about your company’s ESG and M&A initiatives and how Deloitte can help you achieve its goals, reach out today, and let’s set up a conversation.