Dealmakers are starting to look closer at what companies preach in their corporate cultures, including their commitments to ethics and sustainability. After all, whether a potential acquisition has a healthy one in place could affect the amount of risk surrounding the target. Dealmakers need to know whether the current management team will conduct itself responsibly.
In order to understand the importance of ESG and corporate culture principles as they relate to M&A deals, as well as the challenges of integrating and evaluating such principles, Mergermarket on behalf of Toppan Vintage spoke with six dealmakers with experience in the field.
Toppan Vintage question: What effect do you think a company’s emphasis on sustainability and ESG issues has on its attractiveness to acquirers, if any? Leading industry experts weigh in...
Nick Martin, Sustainability Practice Leader, Antea Group says: Through our practice and work with various clients, we see sustainability driving value in three different ways. The first, and most critical, is reducing risk and avoiding costs, as a company or facility focused on sustainability has likely reached a certain level of maturity and has proactively managed risks, liabilities, and baseline compliance responsibilities. That kind of facility has its house in order more so than one that has never considered sustainability.
The second way is monetary and natural resource savings, as these facilities or companies are likely to be more efficient. We've found that sustainable companies start out optimizing their own operations because they fully control them. They tend to focus on reducing their energy consumption, saving water, managing their waste water, minimizing waste, etc., which adds up to a leaner company.
The last bucket is about growing revenue and reputation. For example, by acquiring an up-and-coming sustainability brand, the buyer might get a reputational enhancement. Or if they acquire a more sustainable product within a certain category, they may be well-positioned for the long run.
So yes, I would think an emphasis on ESG and sustainability would make a target more attractive, although that is not the case across the board. There are still investors who do not fully appreciate sustainability, or do not feel it's critical. It really depends on the investor who's trying to make the acquisition, what they are trying to do with it, and their investment horizon.
Andrea Bonime-Blanc, CEO, GEC Risk Advisory adds: The answer depends on how enlightened and emotionally intelligent the leaders involved in M&A activity are. Sadly, many private equity firms and venture capitalists, as well as other acquirers of companies, focus almost exclusively on the financial aspects of an acquisition, failing to understand the importance of culture in post-acquisition value creation and destruction. As such, they don’t do nearly enough due diligence around a target’s culture.
Sara Bernow, Partner, McKinsey & Company weighs in: There are two aspects to this. First, academic research shows that in more than 90% of cases, there is a positive or neutral link between ESG performance and financial performance. This means that to the extent the emphasis on sustainability issues translates to real positive impact on sustainability performance, it may result in stronger financial performance. Secondly, we are seeing investors increasingly believing that ESG factors contribute to long-term performance. As such, companies’ decisions to emphasize these issues may resonate well with those investors. In addition, providing investors and other potential acquirers with transparency on sustainability efforts and performance could have a positive impact.
Melissa Sawyer, Partner, Sullivan & Cromwell weighs in: It doesn’t have a big impact on attractiveness from an M&A perspective, but could have more of one for a company planning to go public. The largest passive institutional investors have been very clear that they are looking for their portfolio companies to raise the flag on ESG-type issues. However, when it comes to an acquisition target, many buyers have their own ESG practices, which they will impose on the target once they've completed the acquisition.
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The New Importance of Corporate Culture and ESG
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