Published on Jul 17, 2024, 3:00 AM
Environmental, social, and governance (ESG) issues have become more deeply embedded in the mergers and acquisitions (M&A) decision-making process than ever before, with a greater recognition among leaders that it can be a lever for measuring, protecting, and creating value, according to findings from Deloitte’s 2024 ESG in M&A Trends Survey.
Five hundred global M&A leaders from North America, Europe, the Middle East, and Asia Pacific regions and across various industries were surveyed to understand how ESG considerations are making an impact on dealmaking. Survey findings show that across the deal life cycle, better data, improved measurement, and a deeper understanding of ESG issues are now key factors in dealmaking decisions for M&A leaders.
“One reason for this trend is that ESG data is now better defined, captured, and measured, which enables ESG-specific metrics to be more precise and better understood than they were only a few years ago,” says Brian Lightle, a Deloitte Risk & Financial Advisory Mergers & Acquisitions Transaction Services partner. “Understanding ESG data starts with determining material ESG issues, another aspect of organizations’ enhanced maturity and sophistication that we’ve seen in recent years.”
ESG’s Increasingly Pivotal Role in M&A
Corporate and private equity (PE) leaders have a growing appreciation for the ways ESG factors can drive value. With the rising availability of more accurate data and the assistance of more precise, consistent measurement tools, M&A teams are better positioned to recognize the impact of ESG on valuations, targeting, portfolio management, and other areas across the M&A life cycle.
Overall, survey respondents report that ESG has grown from the occasional area of focus to a more influential and consistent M&A consideration over the past two years, since Deloitte’s first survey report on ESG’s evolving role in corporate M&A decisions in 2022.
ESG in M&A: 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. 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,” observes Sarah Corrigan, a managing director for Mergers, Acquisitions, and Restructuring Services at Deloitte Consulting LLP.
Findings from the 2024 ESG in M&A trends survey illustrate the progress M&A leaders are making when it comes to recognizing the role that ESG plays in dealmaking, revealing several changes from 2022, including the following three trends:
Advancements in measuring ESG commitments and performance are helping M&A leaders incorporate sustainability into their strategies. “When Deloitte last surveyed executives in 2022, there was a common disconnect between C-suite leaders and M&A deal teams on ESG,” notes Corrigan. Senior leadership 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, factoring it into risk assessments, valuations, and other key M&A processes,” she says.
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. ESG’s impact on a potential acquisition or divestiture is becoming a standard factor 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.
Capturing better, more relevant data for measuring ESG value and metrics is providing organizations with greater certainty about their ability to plan and execute transactions. More than three-quarters (78%) of organizations with clearly defined measurement metrics say they have very high confidence in their capability to evaluate a target’s ESG profile.
Between 2022 and 2024, the survey results identified an increase in buyers’ confidence in the ability 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.
Confidence in evaluating a target’s ESG profile was also seen as a contributing factor to deal abandonment. Respondents who reported having “very high” or “high” confidence in their ability to evaluate a target’s ESG profile reported a higher rate (74% and 72%, respectively) of abandoning deals than those with average confidence (64%).
Many companies lack a defined approach for ESG in post-merger integration (PMI). Only 12% of surveyed leaders say their organizations have a dedicated approach for managing ESG as part of PMI, and 19% see ESG as important only in a regulatory context. The rest exist somewhere between those two positions.
That deficiency could mean a loss of value for companies. “Factoring ESG considerations alongside other PMI workstreams may help many organizations further realize value and mitigate risk over the long term,” says Corrigan.
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%).
M&A activity is helping organizations better understand and achieve their 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,” says Lightle.
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. Nearly as many (67%) say the same about their divestiture strategies. These responses represent a notable increase over the results reported by respondents in 2022.
From an industry perspective, ESG’s influence on corporate acquisitions is strongest in financial services, followed by technology, media & telecommunications (TMT), while ESG considerations influence sell-side divestitures more commonly in energy, resources, and industrials, and TMT.
Emphasis on ESG tends to fluctuate based on company size. Businesses 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.
A New Cornerstone for PE Organizations
PE firms have historically been less focused on buying or selling companies to improve their ESG profile. But 82% of PE respondents state that they have a strategy or are in the process of improving their ESG profile through planned acquisitions and divestitures.
Many PE respondents (72%) state that ESG is a topic of consideration in 50% or more of their deals, with 14% saying they consider ESG in all deals. In parallel, a growing percentage of limited partners (LPs) are requiring funds to report sustainability metrics. PE respondents (44%) report that more than half of their LPs require reporting of sustainability metrics, while the remaining respondents disclose that 25% to 50% s require such reporting.
(Please visit WSJPRO for the entire article)
Comentarios