February 24, 2023

Strategic Buyers Look to M&A to Improve ESG Profile

When it comes to ESG diligence, my sense was always that ESG considerations could be a deal breaker, but they were rarely a deal driver. In fact, John has blogged here a number of times about ESG due diligence, focused on valuation and risk mitigation in diligence and negotiation, regulatory factors and data gathering considerations.

This Wall Street Journal article suggests that strategic buyers may be thinking about ESG more holistically, based on a 2022 Deloitte survey of public companies with at least $500 million in revenue. 88% of the survey respondents said their company considered or completed acquisitions to improve its ESG profile, and the numbers were similar for divestitures. That may be even higher in some industries. 90% of energy, resources, and industrials respondents indicated they were acquiring companies or assets to add capabilities needed for the transition to a low-carbon future, and 100% of technology, media and telecommunications companies responded that they review their portfolios for ESG-related acquisitions.

But the best intentions seemed to break down a bit when companies actually sought to execute on ESG considerations, and the survey responses related to implementation painted a less clear picture, as summarized in Deloitte’s report:

Our data demonstrates that while there is broad alignment that ESG should be considered in deal-making, there is also broad uncertainty about how best to integrate ESG into M&A decisions and who is responsible for doing so. Our experience in this field suggests companies are struggling with how to incorporate the long-term nature of ESG issues with immediate concerns. Discounted Cash Flow (DCF) is highly sensitive to the first five years, but climate concerns are often based off views of 15-25 years.

Whether your client or company is addressing ESG from the perspective of strategy or risk avoidance, clearly there are some “pain points” associated with considering ESG factors in M&A strategy and execution.

Meredith Ervine