The increasing importance of ESG
In all aspects of life ESG has become a key focus, driven partly by the multitude of adverse and extreme weather events across the globe and the series of equality movements pushing for social change on topics of race, gender and economic disparity.
This creates a unique challenge for large corporations, with the evolving ESG landscape resulting in increasing regulation and stakeholder pressures.
In KPMG’s 2021 CEO survey, 61% of CEOs stated ESG poses a serious threat to long term growth.
- Environment: Corporations are not only perceived to be a significant contributor to environmental decline, (the IPCC predicts an increase of 4 degrees by the end of the 21st century) but are also ultimately going to be impacted by the resulting societal and economic impacts. Responsibility for improving environmental stewardship ambitions becomes critical to meet not only the increasing consumer and investor demands, but also to support the longer term financial viability of their own business model.
- Social: The corporate response to both environmental and social issues are closely monitored and measured by consumers and investors. Proactive and appropriate actions that align with customer, investor and employee vision and values are key to stakeholder perception and alignment.
- Governance: Across all industries, regulation is increasing with the aim to drive corporate action to improve ESG performance. In the future, penalties and incentives will continue to improve the profitability and business case for transitioning to a more sustainable agenda. This increased focus on disclosures also increases the risk of reputation damage from not engaging in ESG.
This is not only a ‘business as usual’ issue, it’s evident that ESG is also becoming a key driver of M&A activity, with ESG either being the sole rationale for the transaction or being seen as a critical driver
69% of CEOs say defining objective of their business is to embed purpose in everything they do.
- On the sell side, this includes corporations looking to exit assets no longer aligned to their own ESG values, or set-up joint ventures to realise the ESG benefits through strategic alliances. In certain industries, divestments may be the only solution available to reach their committed Net Zero strategy.
- On the buy side, corporations are looking to elevate their own ESG profile, through acquisitions, including buying efficient manufacturing and distribution capability, best practice technology and complementary ‘offset’ assets such as plastic recycling plants.
The ESG impact on Integration & Separation Programs
Incorporating ESG into both sell side and buy side strategy and delivery, will be critical to realise the significant value creation opportunities (including access to green capital) and to manage the increase in operational risks (such as reputational and regulatory impacts).
To do this, ESG considerations need to be rapidly embedded into the transaction approach;
During deal evaluation, deal strategy and target scanning should embed ESG strategy and ambition, to ensure the impact of the deal on corporate ESG agenda is fully understood
It is imperative to consider the ESG profile of vendor, target and buyer during the diligence process; to identify positive areas that may be a source of value in the shorter and longer term, but also recognising any areas of weakness to alleviate any potential impacts. This can help ensure a deal is the right fit, improving the chance of success, whilst also supporting the external perception of the deal
It is critical to measure and track the non-financial benefits through the deal process, capturing and monitoring the ESG implications of the deal to support corporate and deal strategy
A proactive approach to ESG reporting, will ease the pressure in later reporting cycles, capturing the approach to identifying data, metric calculation, risk and controls and the roll-up into both internal and external ESG reporting
As the deal focusses on broader operating model planning and implementation ESG should be at the centre, with the deal acting as a lever for ESG optimisation and transformation
Incorporating the ESG profile and deal rationale into the integration and separation approach is key. This interplay needs to filter down into operational implementation, to allow the effective measurement and tracking of deal success, and the alignment of messaging to all stakeholder groups.
Incorporating ESG into the M&A process is a novel, but important requirement for all transaction programs, given the rise in green finance, regulation, public scrutiny and investor pressure. We see that a well-executed integration and separation program, which embeds ESG at each step of the process, and delivered at deal speed, is going to be critical in order to realise the value upsides, and to mitigate ESG risks.