Research And Insight

HOW ESG IS CREATING AN IMPACT ON M&A TRANSACTIONS

HOW ESG IS CREATING AN IMPACT ON M&A TRANSACTIONS

The holy trinity of Environmental, Social, and Governance parameters are now larger stakeholders in the impact of investing. And, this impact can be felt on global industrial Richter scales, though. As a holistic & critical non-financial parameter for the long-term proposition, ESG is receiving deserved attention on the scopes. Recent studies are indicating a trend that ESG is taking both – investment decisions and deal valuation.

Considerations of ESG are creating impacts that are multi-directional on the M&A industry. As per Kearney’s 2022 M&A report, the increased M&A trend of acquisitions is witnessed to support ESG goals. 35% are shifting their portfolio towards ESG, and 75% are divesting businesses unfit for ESG goals.

Key considerations impacting ESG deal-making:

● Target selection, valuation, and risk assessment

Rendering long-term value and allowing capitalization between synergies and compatible ESG-profiled companies. We can see a proportional relation between ESG scores and translated valuations of businesses. Higher the score, lower the systemic risk exposure, and higher the valuation.

Energy efficient/Renewables usage and decreased operating costs by a target with robust processes create an opportunity to attract ESG-aligned investors.

Against clear metrics relating to the reduction of carbon emissions, risk assessment requires the target’s industry performance evaluation, in terms of ESG. Though it is customizable and depends upon the relevant industry in which the target operates.

● ESG-specific due diligence

The focus has risen on ESG-specific (legal/financial) due diligence that involves identifying ESG risks, opportunities, and assessed impact. It’s on corrupt biz practices, (labor) law violations, and grievance redressal processes that form the legal perspective. 

● Inorganic Expansion

Most sectors are working to reduce their carbon footprint and allocate enough capital invested in renewables. It is witnessed that many businesses are fueling their ESG goals and commitments for depolymerization, decarbonization, and increasing biodiversity through organic growth.

What’s the take of a brand creation agency in contributing to an ESG-compliant brand?