Welcome to the future of deal-making!
With environmental, social, and corporate governance (ESG) considerations swiftly emerging as a paramount concern for regulators, investors, customers, and employees alike, companies are increasingly focusing on creating long-term value through responsible business practices and overall strategy, including potential merger and acquisition (M&A) transactions. By embracing sustainability, your company could position itself as not only a market leader but also a pioneer in the movement toward a sustainable future.
Growing pushback reveals concerns that some companies are using ESG for performative actions only, without genuine commitment to the core principles of sustainability. But the approach we discuss here goes beyond following some passing trend—it’s about making a strategic commitment to integrate ESG practices deeply into your business operations.
While only 11% of M&A executives currently engage extensively in assessing ESG factors in their deal-making process, a staggering 65% anticipate a significant uptick in their company’s focus on ESG in the near future. How can your company benefit from this shift toward sustainability practices? How might your commitment to ESG attract potential acquirers? And finally, what proactive steps can your company take to adopt an ESG strategy for the future?
Let’s consider these questions with respect to M&A transactions in a world where strategic expertise meets the imperative for a sustainable future.
How Can ESG Initiatives Benefit Your Company in an M&A Deal?
Given that the point where sustainability meets strategy continues to shift, looking to the future is not about merely mitigating risk, but about seizing opportunities for growth and longevity. A meticulously crafted corporate ESG strategy is now viewed as a beacon of long-term revenue growth and increasing business opportunities and synergies. Carefully considering your company’s approach to sustainability can offer the following benefits:
- Achieve maximum value and valuation. In the world of mergers and acquisitions, ESG integration is a catalyst for driving value and enhancing valuation metrics. Recent analysis from Deloitte’s report “The Sustainability Imperative for M&A” reveals that companies with superior ESG scores command significantly higher enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiples—two times higher, in fact, than market averages for consumer companies. This data highlights the pivotal role of sustainability in maximizing your shareholder value and bolstering a deal outcome that is optimal for all your stakeholders.
- Unlock new business opportunity. Sustainability initiatives also unlock myriad business opportunities. By fostering innovation, companies can thrive in existing markets by offering differentiated products that capture market share and command price premiums. Moreover, sustainability serves as a gateway to untapped markets, expanding growth opportunities and diversifying revenue streams. Embracing ESG practices is about more than compliance—it’s about seizing the strategic advantages that propel your company to success and create a more resilient future.
- Introducing Synergies. In an M&A deal, ESG measures can be a potent force for driving synergies that amplify value creation and operational efficiency for the combined entity. Your company’s sustainability initiatives can offer strategic avenues for cost management, talent attraction, and revenue enhancement. Acquiring companies are increasingly harnessing the strengths of a target company’s ESG strategy to fortify efficiencies, presenting a compelling equity narrative to investors. Whether driving recurring cost savings, overcoming regulatory barriers, or optimizing pricing strategies to improve the cost of capital, your company’s focus on ESG can bring about tangible financial benefits amid a competitive landscape.
How Does Your Company’s Commitment to ESG Bring Value to an M&A Deal?
Many acquiring companies are motivated to pursue deals explicitly to propel their sustainability agenda, particularly in sectors where environmental concerns are paramount. In carbon-intensive industries, for example, mergers and acquisitions serve as a transformative force, driving the shift from traditional energy sources to renewable ones—a shift that is clearly demonstrated in the energy sector’s rapid transition to greener alternatives.
These strategic moves are increasingly supported by external investments from banks, private equity firms, and public offerings, where an ambitious and transparent ESG strategy is crucial. Most institutional investors view ESG practices no longer as obligatory protocols but as avenues for substantial, ongoing value creation, and they prioritize companies that showcase their commitment to a sustainable business model. Private equity firms in particular are funneling capital into sectors that emphasize sustainability, leading to sector consolidation and the expansion of capabilities in emerging ESG-focused subsectors. Innovations in energy storage and generation, electric vehicles, recycling, and sustainable food technology are attracting significant investments, which promises robust growth and further innovation.
Through targeted acquisitions and strategic investments, a company can not only enhance its sustainability credentials but also uphold standards in corporate responsibility and environmental stewardship, paving the way for a more sustainable, equitable, and profitable global business environment. By prioritizing sustainability and aligning your corporate priorities with the ESG considerations of potential acquirers, your company can pinpoint assets that not only advance existing ESG initiatives but also generate substantial economic value for both acquirer and target.
How Can You Incorporate ESG Planning for the Future?
When planning your ESG strategy, foresight and proactive measures should take center stage. Companies are moving beyond a checklist mentality and increasingly focusing on the creation of enduring value through responsible business practices. Planning for the future explores key strategies that pave the way for sustainable growth and resilience in an evolving landscape that includes the following:
- Regulatory readiness. A proactive approach is essential in navigating the complex web of ESG regulations. By staying ahead of regulatory changes and ensuring compliance, your company can mitigate risks and capitalize on emerging opportunities. Anticipating regulatory shifts allows for strategic alignment and fosters a culture of adaptability and resilience.
- Climate services. Amid growing concerns about climate change, integrating climate services into your business strategy is imperative. By leveraging climate data and analytics, your company can assess climate-related risks and opportunities, optimize resource allocation, and enhance your decision-making processes. Embracing climate services goes beyond alleviating environmental impacts to include strengthening your competitive positioning and fostering long-term sustainability.
- Transparency initiatives. Transparency is a cornerstone of effective ESG management, fostering trust and accountability among stakeholders. By implementing robust reporting mechanisms and disclosure practices, your company can demonstrate its true commitment to ESG principles and enhance investor confidence. Transparency initiatives also facilitate informed decision-making, enabling stakeholders to assess—with clarity and precision—the risks and opportunities facing your company.
By proactively addressing these key areas, your company will be taking a holistic approach that strategically positions it for sustained success and resilience in a rapidly changing world.
ESG: An Essential Part of Your M&A Strategy
At the forefront of modern M&A deals, ESG is no longer optional but imperative. Embracing sustainability as a guiding principle throughout every deal will empower your business to navigate the intricacies of a merger or acquisition with confidence, ensuring both financial gain and a positive impact on society and the environment. By integrating sustainability into every facet of the deal-making process, you will be setting the cornerstone of your company’s future success.
For today’s business leaders, the challenge is clear: Seek a careful balance of ESG assessment and a forward-thinking strategy that places long-term value creation at the forefront of business decisions, and ultimately you’ll ensure that every transaction enhances company performance while also supporting a broader commitment to building a resilient, responsible, and environmentally conscious legacy.
Sources
Ericksson, M. “The Sustainability Imperative for M&A.” Deloitte, September 19, 2023.
Arjona, L. “Capitalizing on ESG Synergies in M&A.” Boston Consulting Group, September 27, 2023.
Azuma, T. “The Importance of ESG and Sustainability in M&A.” PwC, September 20, 2022.
Seeman, A. “The ESG Imperative in M&A.” Bain & Company, February 8, 2022.
