So how do you embed ESG into your deal making activity and avoid it becoming a box-ticking exercise?

by | 27 Nov 2021 | M&A integration

Impact 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 costs 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.

In a LinkedIn poll conducted recently by KPMG, 54 percent of respondents said ESG is now involved in every or most strategic deal making decision, 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 impact and progress.  The last two M&A integrations I have led both 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.

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 examining both strengths and areas to develop so you can determine where targets may help you accelerate in certain areas.
  • Benchmark ESG performance against international standards, UN Sustainable
  • Development Goals, and peers in your sector.
  • Challenge your M&A team to consider targets that advance the pursuit of ESG goals.
  • Take a broad view on the types of measures to look at. 

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 competitors.
  • Ensure you have access to tools and data to help integrate and analyse a targets ESG credentials.
  • Get a broader set of perspectives on targets – e.g. industry analysts, behavioural economists.
  • Consider how ESG credentials impact your exit potential.
  • Assess how it impacts your value proposition to customers and how to bring ‘best of both’ companies together.
  • Consider your sources of capital to fund deals –  ESG factors are important for unlocking capital (debt and equity).

3, Make ESG a pivotal part of your integration effort

  • Consider how the overall business profile has changed and what are the most material risks and opportunities.
  • Have a dedicated ESG integration work-stream addressing the above areas.
  • Build ESG into your integration playbook and toolkit.
  • Ensure that the credentials you identified in due diligence are not being lost in the integration.
  • Make ESG measures a critical component of your integration scorecard.
  • Use it as an opportunity to improve recording/reporting against ESG criteria, consider how this might need to evolve.
  • Prioritise areas of joint ESG improvement for your corporate scorecard.
  • Make ESG part of integration communications across the business – highlighting the joint benefits to employees and stakeholders.

Based in London and with over 24 years’ global experience, Karen Thomas-Bland is often cited as one of the top M&A integration consultants and coaches in the world. She is a trusted advisor to boards, executive teams and investors, creating sustainable, long-term value for FTSE/Fortune businesses and PE funds. She writes for many publications including The Times, FT, Association of MBAs and Management Today.