The conversation about ESG’s impact on investment activity has yet to provide insight on how the industry’s changing priorities could influence M&A. Until now. SRS Acquiom is out with a survey of M&A professionals weighing in. Among the findings: Target company brand and reputation are expected to be more prominent than external pressure from regulators or shareholders in driving an ESG-related M&A strategy. Here’s more:
Respondents expected brand reputation (52.9 percent) to be more impactful than future financial results (45.9 percent), internal pressure from employees or the board (28.2%) or bylaw compliance (8.2%) as a driver of M&A, in a survey in which multiple responses were allowed. The finding harkens back to a growing body of evidence linking socially conscious companies with higher performance. And suggests private equity could increasingly look to niche brands with ESG-friendly marketing to meet their stated goals.
Consider the question of governance in tech. “The tech sector has lost trust from consumers,” said EY global technology, media & entertainment, telecommunications leader Barak Ravid at a media roundtable last week. “Regaining that trust is a massive opportunity, some of that maybe forced through political and regulatory avenues, but there’s a massive opportunity [through providing customers’ increased] transparency, opting in and out, showing consumers how data is used.”
The consumer sector presents another opportunity to rebrand a parent company’s commoditized offerings, say through a niche, health food acquisition. The “parent” can drive reverse integration such that the values and positioning of the fresh-focused target permeate the wholeco, driving organizational change without the price tag and legacy assets of a larger deal, Kearney UK and Ireland consumer practice leader Bahige El-Rayes told Mergers & Acquisitions last month.
The trend is already translating into an appetite for acquisitions. Only today, Blackstone announced plans to acquire Sphera from Genstar in a $1.4 billion case study in the market’s appetite for ESG-related services. The company uses data, consulting services, and software as a service to help clients manage risks including environmental and sustainability issues.
The market for ESG data provision might well play into SRS Acquiom’s findings that buyers could encounter additional steps in due diligence (51.9 percent of respondents) and another filter to analyze deals (29.1 percent) through the M&A process.
It’s important to put these figures in context. While most M&A professionals pay lip service to ESG goals, the survey confirms that actual commitment to change remains muted. Such factors are actively considered in due diligence rarely or never according to 30.6 percent of respondents, and only occasionally “when topic is relevant” by 47.1 percent of respondents. Just over 9 percent of surveyed dealmakers consider ESG “on all deals.”
Meanwhile, the link between social responsibility and profitability continues to be determinative of investor commitment. Asked if they would sacrifice a deal’s economics to support ESG, a resounding 42.4 percent noted they would not. Only 17.7 percent said they would either materially, or somewhat sacrifice value to hit ESG goals.