Corporate executives understandably try to put the best face they can on everything. But one way to gauge what a company truly finds valuable is by looking at what they focus on when considering M&A deals, given the typically high stakes.
In that vein, a rather recent shift in M&A due diligence practices suggests that a potential deal partner’s environmental, social and governance (ESG) profile has emerged as an important element of the evaluation.
More than half (57%) of 500 corporate and private equity M&A professionals surveyed recently by Deloitte said they measure the impact a potential acquisition of divestiture would have on their ESG profile. The increase was most prevalent in the technology/media/ communications, financial services, and consumer sectors.
That result quantified a remarkable change in just two years. In a similar Deloitte survey in 2022, just 39% of participants said the same.
Of course, ESG is hardly new. Credit for coining the term in 2004 usually goes to the United Nations Global Compact, but the elements of the concept have been around for much longer.
Still, while ESG has increasingly driven corporate behavior over the years, and especially now in the last two years, in many circles the “discipline,” if you will, has been engaged in a long, uphill battle for widespread respect that continues to this day.
So, what’s behind ESG’s recent leap among M&A priorities? Unsurprisingly, technology is playing a big role. “Being able to capture better, more relevant data to measure ESG value and metrics is providing organizations with more confidence in planning and executing transactions,” Deloitte said in its survey report.
Indeed, an eye-opening 91% of survey participants said their organization’s level of confidence to accurately evaluate a potential acquisition target’s ESG profile was “high” or “very high.” That compared with 64% in the 2022 poll.
In the same direction, the report noted that 97% of this year’s respondents expressed being “prepared” or “very prepared” to discuss their own ESG profile as a value driver for their organization. That was an increase of 13 percentage points over the 2022 results.
“We are more frequently seeing ESG considerations being mainstreamed and considered alongside other strategic growth or investment levers,” said Rachel Hoffman, a partner for Deloitte Australia.
“For example,” she said, “in the context of a proposed merger between two energy companies, [their] decarbonization strategies were analyzed and considered in the same context as synergies and other potential value drivers.”
In fact, more than two-thirds of survey participants said they’ve decided not to proceed with a potential acquisition because of concerns about the target’s ESG performance.
On a regional basis, M&A professionals in North America reported placing less strategic importance on ESG than did their counterparts in Asia/Pacific and, even more so, in Europe and the Middle East.
Deloitte attributed that partially to a greater sensitivity to climate change in Europe and the Middle East, where 100% of respondents stated that they were seeing moderate to significant operational impacts.
Two-thirds (68%) of Europe/Middle East respondents said they weigh the potential impact of a deal against their own ESG profile based on clearly defined metrics. Just 49% of U.S. respondents made the same claim.
