Wealth Management
HOW TO EMBED ESG INTO YOUR M&A DEAL
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mpact investing has been around for a long time – people putting money into businesses doing good things. Investing in ‘doing good’ often creates value, through increased market share or operational benefits in terms of cost reduction, as well as reducing risks. Less attention has perhaps been paid to date on the role of Environmental, Social and Governance (ESG) in M&A deals, but it’s starting to gain momentum.
international standards, UN Sustainable Development Goals, and peers in your sector.
In a LinkedIn poll conducted recently by KPMG, 54 percent of respondents said ESG is now involved in every or most strategic deal-making decisions, with only 18 percent saying ESG wasn’t part of their key criteria. I have witnessed first-hand businesses becoming increasingly aware of ESG metrics in terms of valuation, risks and value creation opportunities. Buyers are switching on to the fact fast that a business’s future earnings will be impacted by ESG. The last two M&A integrations I have led have had ESG front and centre as opposed to what I have seen in the past, which is it’s a component part to be managed.
o Environmental measures: eg carbon emissions, sustainability of resource use, management of waste
So how do you embed ESG into your deal-making activity and avoid it becoming a box ticking exercise? There are three areas of focus and my learnings in each.
1. Deal scan with your own ESG strategy in mind • Start with your own ESG strategy (as part of your broader corporate strategy), examining both strengths and areas to develop so you can determine where targets may help you accelerate in certain areas. • Benchmark ESG performance against 32
• Challenge your M&A team to consider targets that advance the organisation’s pursuit of ESG goals and make it a key part of your acquisition criteria. • Take a broad view on the types of measures to look at. These may include:
o Social measures: eg supply chain risks, product safety and quality, labour practices, diversity and inclusion o Governance measures: eg fraud and corruption, fair trade, business ethics and governance and transparency
2. Make ESG an integral part of your deal due diligence • Find targets that help improve your ESG profile in areas where you have the largest gaps to close. • Screen targets for their ESG credentials and assign financial values to ESG factors. Price ESG factors into determining the valuation. • Benchmark a targets ESG credentials against their closest competitor set - there is to date no standard to identify the relevant metrics to measure each and every ESG factor, but a combination of different measures can be pulled together. • Ensure you have access to tools and data to help integrate and analyse a targets
