HORIZONS | BDO'S GLOBAL VIEWOF MID-MARKET DEAL ACTIVITY 03
ESGCOMESOF AGE INM&A
Environmental, social, and governance (ESG) issues are now front and centre in today’s business world. Climate change, modern slavery, indigenous rights, employee health and wellbeing, and diversity and inclusion are but a few of a company’s ESG factors coming under increasing scrutiny by shareholders, investors, and the broader community.
The management and disclosure of ESG factors for public companies has long been considered a necessity from a regulatory and social licence to operate perspective. For private companies, the development and disclosure of ESG credentials presents a significant business opportunity. Early adoption of an ESG- aligned business strategy differentiates a private small-medium enterprise (SME) among competitors and positions them as an attractive option, both from a product/services standpoint and as a prospective investment. HIGHER BUSINESSVALUE A growing body of research points to the positive correlation between a company’s ESG credentials and their financial performance and value creation. A target’s ability to effectively understand and address their ESG risks, and transparently communicate their ESG credentials, provides them with greater certainty of their long-term value, minimising the risk of their valuation being reduced on discovery of ESG liabilities. Acknowledging the risk and impact of ESG factors on financial performance, the assessment of ESG in valuations has shifted from qualitative to quantitative with the attribution of financial values to ESG factors. For example, pricing of greenhouse gas emissions, increased insurance premiums from operations located in areas vulnerable to climate change, increased demand for environmentally and socially sustainable goods, and greater employee retention and productivity.
As communities call for greater transparency and accountability for ESG factors, increasing shareholder scrutiny of ESG performance and the continued rise of shareholder activism are presenting financially material risks and opportunities for companies. The mitigation of these risks and the maximisation of opportunities are key considerations for M&A practitioners. RISE OF ESG INVESTING The recent rise of sustainable investing and the exponential growth of green funds and ESG-linked funding options is invariably transforming acquirers’ investing strategies. To align with a new sustainable investing ethos, acquirers are increasingly looking for companies with strong ESG credentials. This transition to sustainable investing is not only being driven by community sentiment and corporate social responsibility (the ‘right thing to do’ position), but the considerable financial gains and market opportunities available to companies that understand and effectively manage their ESG risks. GREATER TRANSPARENCY AND ACCOUNTABILITY ESG metrics and sustainability reporting present an opportunity for both targets and acquirers in M&A transactions. ESG metrics are being used by targets to determine their business value, while acquirers are using ESG metrics and sustainability reports to identify sustainability-aligned targets and reduce reporting burden. ESG reports provide acquirers with insights into a target’s ESG opportunities, such as operational efficiencies, access to new markets and supply chain resilience.
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