ESG grows in importance for M&A dealmakers
Major developments around ESG disclosure standards and regulations have made it easier for buyers to assess a company’s ESG footprint and compare it to other potential targets. Read More
Corporate and financial buyers increasingly incorporate ESG considerations into due diligence, valuation calculations and post-close activities for mergers and acquisitions deals. New data on global deal making from Deloitte and KPMG highlight trends and best practices for enfolding ESG in dealmaking.
Fifty-seven percent of organizations surveyed in Deloitte’s 2024 ESG in M&A trends survey measure the impact that a merger or acquisitions will have on its ESG profile with defined and standardized metrics, up from 39 percent of organizations in Deloitte’s 2022 survey.
Impact on acquirers’ ESG profile
In 2024, 91 percent of respondents had “high” or “very high” levels of confidence in their organizations’ ability to evaluate an acquisition target’s ESG profile, up from 74 percent in 2022.
Since 2022, several major developments around ESG disclosure standards, frameworks and regulations have made it easier for buyers to quickly and confidently assess a company’s ESG footprint and compare it to other potential targets for acquisition. The European Union’s Corporate Sustainability Reporting Directive, adopted in November 2022, requires more detailed reporting of ESG factors. While the implementation has just begun, many companies have begun working toward a more rigorous, comprehensive and quantitative understanding of their ESG footprint than they previously did.
Finding value in ESG due diligence
KPMG’s 2024 global ESG due diligence study identified four strategies for ESG value creation in mergers and acquisitions used by “mature” ESG investors that have a market-leading approach to ESG due diligence:
Explicitly link to investment thesis. Mature ESG investors identify ESG issues and trends that are likely to have a commercial impact, such as evolving policy landscapes and changes in consumer preferences. These investors don’t treat ESG as a checklist, but rather as a driver of commercial opportunities, and they see synergies between ESG due diligence and commercial due diligence.
Develop Comprehensive baselines. Seventy five percent of mature ESG investors conduct ESG due diligence in the pre-signing stage of a deal and will typically begin baselining during the due diligence process. Often the ESG process reveals that the target company lacks an adequate quantitative baseline that can be used.
Integrate post-closing plans in transformation plans. Mature ESG investors use ESG due diligence findings to inform post-closing 100-day plans. While these are typically drafted pre-closing, working with the company’s management post-closing to ensure alignment and get buy-in is crucial as well.
Leveraging financing expertise. Financial investors can use their access to capital and knowledge of government incentives to enable ESG transformations that the target company could not achieve on its own. Private equity firms can help provide and arrange financing for capital-intensive decarbonization projects. Private equity firms also have the scale and the expertise around government programs in many regions to advise portfolio companies on the best opportunities.
In combination these approaches can create value by de-risking an investment, increasing revenue and decreasing costs.
These value-creation strategies are especially useful when applied to climate solutions, because of the physical and transition risks related to climate change, the revenue opportunities from decarbonization and the cost savings from reduced energy consumption and avoided carbon taxes.
Applying ESG strategies in private equity
Apollo Global Management, an investment management firm with more than $74 billion in private equity investments, now conducts enhanced carbon due diligence for acquisition targets, in addition to its standard ESG due diligence, of its latest flagship fund, told me. The process has been “further refined as we’ve run versions and iterations of it in order to improve it,” said Carletta Ooton, head of responsible and sustainable operations for equity and an operating partner at Apollo, and is key to the flagship fund’s commitment to reduce the carbon intensity of companies it acquires by 15 percent over the hold period.
Ooton’s team seeks to answer “What has the company been doing? How much footprint information do they have?” and “How high fidelity is the information?”
After the first 100 days post-close, “we’re really starting to work on a very detailed decarbonization plan,” including “governance mechanisms we put in place to help the portfolio company really do this and let us check that they’re doing this,” Ooton said, Those mechanisms include reviews of “how are they building their budgets for capital expenditures in order to support the work.”
Most people want to do this work, she said but they lack the “subject matter expertise or the capacity/resources, to do it at the pace we want them to, or even they want to.”
