Mergers and acquisitions (M&A) of companies occur more frequently particularly when there are fundamental changes in the regulatory or technological environment – companies are looking for new growth opportunities or hedge risks amid the winds of change. As a strategic tool, M&A allows you to quickly enter new emerging markets, leave fading businesses or close gaps in your competitiveness.
To find out how trends related to sustainability are impacting the transaction market today, KPMG conducted a global survey among more than 150 active M&A market participants in Europe, the Middle East and Africa. We asked them how environmental, social and governance (ESG) factors are incorporated into pre-transaction due diligence and decision-making processes – what works, what does not and what kind of challenges are faced. KPMG’s survey results are summarised in the report “2022 EMA ESG Due Diligence Study: How leading M&A teams are managing ESG DD“, the details of which can be viewed HERE.
Two notable observations emerge from KPMG’s survey. Firstly, ESG is here to stay: 82% of M&A market players say that ESG is important to them and sustainability issues are also a determining factor in their investment decisions. However, the exact manner how ESG impacts transactions is still undetermined for many investors, and the level of maturity of investors varies in this respect.
Another remarkable observation from the survey concerns one of the most pressing issues in the world of sustainability: do ESG-related efforts also increase the value of the company? The answer is ‘YES’ – two thirds of the respondents said they would be willing to pay a higher price if the target company stands out with a high level of ESG maturity with respect to issues that are important to the investor. Half of the respondents are willing to pay 1-5% more and one in five investors even 5-10% more.
Why are investors willing to pay more for a sustainable business? Most believe that there is a positive correlation between sustainable business practices and financial returns in the long run. “We believe that sustainability is good for business. Good ESG indicators reflect good governance and good governance increases the financial value of a company,” said the M&A manager of one of the manufacturing companies that participated in KPMG’s survey. For one private capital fund partner, the issue concerns risk: “ESG will help us reduce beta risk – the systemic risk of our investments.”
It can be expected that conducting pre-transaction ESG due diligence before major mergers or acquisitions will become standard procedure. The results of the survey indicate that the number of investors who intend to apply ESG due diligence procedures ‘very often’ in future transactions has doubled. The number of M&A market players who do not intend to pay attention to ESG falls from 28% to 5%.
ESG due diligence is not carried out simply because the parties to transactions have to do it (e.g. due to regulatory or stakeholder pressure), but the main reason for doing so among survey respondents is the belief that there is a real monetary value in identifying sustainability-related risks and business opportunities before a transaction.
“I haven’t seen a single company that performs poorly in ESG issues and has managed to be commercially sustainable in the long term. We are convinced that ESG is one of the key indicators for assessing commercial capabilities,” said the manager of a private capital fund. “We have experienced it first-hand that today’s ESG-related failures come back to the company later as costs,” noted the M&A manager of an industrial manufacturing company.
ESG due diligence practitioners still face major challenges. Based on KPMG’s survey, there seems to be no consensus in the market today as to the meaning and scope of ESG due diligence. There are also concerns about the availability of data and documentation – this, in turn, makes it difficult to quantify the findings of a pre-transaction analysis in monetary terms when assessing ESG risks or business opportunities. However, this concern should be alleviated by the introduction of a sustainability reporting obligation for large companies in the European Union from 2025 (read more about the CSRD Directive, which will bring significant transparency to the market with regard to environmental, social and governance issues, HERE).
Already today, the practice of progressive M&A market players provides important guidelines on how to make ESG due diligence work to your advantage. Experienced ESG due diligence practitioners establish a very clear link between their own sustainability strategy and the focus of ESG due diligence and pre-transaction analysis. The findings of the analysis are linked to the terms of the transaction (e.g. the company commits to take specific measures by a certain deadline in problematic ESG areas). In the same way, there is a strong emphasis on identifying opportunities for increasing ESG-related value, rather than solely risk mitigation. The best results are achieved by a dedicated team carrying out separate and comprehensive ESG due diligence, instead of fragmenting the ‘E’, ‘S’ and ‘G’ between different work streams.
Based on KPMG’s survey, it can be concluded that companies who plan to make transactions with their businesses and want to be in a strong negotiating position must also have a strong and transparent sustainability (ESG) strategy.
KPMG supports its clients in taking the first steps (mapping the key ESG issues), developing an ESG strategy (establishing activities, objectives and metrics), as well as implementing the roadmap for a specific strategy. We also help companies to achieve transparency and a sustainable image through sustainability reporting.
As leading transaction advisers on the market, we can provide investors with assurance that their ESG due diligence frameworks have the right focus and are effectively linked to the investor’s M&A strategy. We have extensive experience in providing advice on all phases of M&A transactions, including implementing ESG due diligence processes and identifying sustainability risks and opportunities.
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