In the high-stakes world of mergers and acquisitions (M&A), a non-financial metrics are increasingly making waves, in the form of Environmental, Social, and Governance (ESG) considerations. Once relegated to the sidelines as a secondary consideration, ESG factors are now at the forefront of investment decisions, reshaping the landscape of M&A transactions.
A recent survey by Deloitte revealed a startling statistic: over 70% of companies have abandoned potential acquisitions due to ESG concerns. This dramatic shift underscores the increasing importance of non-financial metrics in the evaluation of investment opportunities.
CEOs across industries are becoming more vocal about the importance they place on non-financial metrics in their consideration of transactions. They recognize that strong ESG performance can enhance a company’s reputation, open new market opportunities, and even drive financial performance. Green funds, particularly in Europe, have placed a high premium on ESG best practices, providing compliant companies with a wider pool of potential funding and investors.
Bringing non-financial considerations up alongside financial metrics highlights the risks and opportunities that arise in transactions. Acquiring a company with a reputation for good governance has the potential to increase the overall rating of the acquirer, if managed well.
Conversely, rushing into a transaction purely on financial metrics may be a disaster waiting to happen. Failure to consider how the company treats its people and stakeholders, the environmental landscape, or whether there are buried governance issues could end up destroying the acquiring company.
The rise of these considerations in M&A is not without consequences. Transaction targets are increasingly scrutinised for their adherence to recognised sustainable and responsible frameworks, with deals potentially falling through if they fail to meet these standards.
Deloitte’s survey found that ESG-related issues were the primary reason for deal termination in 11% of M&A transactions. This trend suggests that ignoring these considerations can be a costly mistake, potentially leading to failed transactions and missed opportunities.
Not only are companies avoiding deals on this basis, but they are also willing to pay a premium for acquisition targets with high compliance to sustainable finance frameworks. This trend reflects the growing recognition of the financial value that strong ESG performance can bring to a company.
A recent Bloomberg article highlighted Australia’s first green bond issuance, which commanded a rare premium after attracting more than the $7 billion issued.
Demand for the issuance was likely driven by Australia’s ambitions and “a relatively scarce pool of green Australian assets,” said Robert Thompson, a macro rates strategist at RBC Capital Markets in Sydney. “Not to mention the increasing of importance of ESG considerations on the investor side, whether specific mandates are strict or not.”
For professional investors considering investing in companies making acquisitions, understanding the role of non-financial metrics in M&A is crucial. As the Deloitte survey suggests, these considerations can make or break a deal. Investors who overlook ESG do so at their peril.
As we move forward, the integration of ESG considerations into M&A strategy is not just a trend—it’s the new normal. And for those who can navigate this new landscape, the rewards could be significant.
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