Environmental, social, and governance (ESG) factors are becoming pivotal in mergers and acquisitions (M&A) decisions. According to a new Deloitte survey, over 70% of M&A leaders have abandoned potential deals due to ESG concerns. Additionally, a considerable majority are willing to pay a premium for targets with strong ESG attributes. This reflects a significant shift towards sustainable investing, demonstrating the growing importance of ESG criteria in the corporate world.
Two years ago, a similar survey by Deloitte showed that only a smaller fraction of M&A leaders considered ESG factors critical enough to abandon deals. The past survey indicated less confidence in evaluating ESG profiles accurately. The evolution from then to now highlights a progressive understanding and integration of ESG considerations into M&A strategies.
Interestingly, historical data from other sources suggest that ESG was a secondary concern in M&A processes a few years ago. Companies primarily focused on financial and operational metrics, often overlooking sustainability factors. The current trend underscores a paradigm shift, where ESG metrics are as scrutinized as financial health.
Increased ESG Integration
Deloitte’s report surveyed 500 M&A leaders from corporations and private equity firms across various regions, including North America, Europe, the Middle East, and Asia Pacific. The findings revealed a significant increase in the integration of ESG factors into the M&A process. Notably, 99% of respondents measure the ESG impact of potential transactions, up from 92% two years ago. Moreover, 57% use clearly defined metrics for this assessment, a marked improvement from the previous 39%.
Confidence in evaluating ESG profiles has also risen. Over 90% of participants expressed high or very high confidence in accurately assessing a target’s ESG profile, compared to less than 75% in the prior survey. This heightened confidence reflects advancements in ESG data availability and the evolution of corporate understanding of sustainability issues.
Impact on Deal Decisions
The survey highlighted the significant impact of ESG considerations on deal decisions. Approximately 72% of respondents reported abandoning potential acquisitions due to ESG concerns, an increase from less than half in the earlier survey. On the sell-side, 66% of respondents indicated they had to forgo divestitures for ESG-related reasons, compared to 33% previously. This marked shift shows the increasing weight of ESG factors in M&A transactions.
Furthermore, ESG factors are influencing valuations significantly. A notable 83% of respondents stated they would pay a premium for an asset with a strong ESG profile, compared to 62% in 2022. Conversely, 67% would seek a discount for a negative ESG profile, up from 27%. This trend indicates that ESG attributes are becoming critical determinants of asset valuation in M&A deals.
Key Inferences
– ESG factors are now crucial in M&A decisions, influencing deal-making processes significantly.
– There is a growing willingness to pay premiums for targets with strong ESG attributes.
– Confidence in evaluating ESG profiles has markedly increased among M&A leaders.
ESG considerations are no longer peripheral in M&A processes but have become central. The growing integration of ESG metrics into deal evaluations reflects an enhanced maturity in corporate strategies. This shift is driven by better-defined and more readily available ESG data, allowing companies to make more informed decisions. The willingness to pay premiums for strong ESG profiles and seek discounts for negative ones underscores the financial materiality of sustainability issues. For investors and companies alike, understanding and integrating these factors is crucial for long-term value creation.
