It is no surprise that ESG (environmental, social, and governance) has shifted from being something of an afterthought in the M&A world, to a significant consideration both from a portfolio management and investment strategy perspectives.
Increasingly, businesses are embedding specific metrics into their M&A strategies, and leveraging new tools to evaluate the credentials of potential targets, significantly reducing the risk of ‘greenwashing,’ where organisations make unsubstantiated claims about sustainability.
Acquisitive companies now prioritise ethical, sustainable acquisitions that align with their broader strategic goals and brand purpose, making ESG a crucial factor in determining whether transactions proceed. Last year, KPMG said 53% of dealmakers had pulled out of deals due to ESG concerns revealed during the due diligence stage. This year, Deloitte noted that this number has jumped to over 70%, highlighting the rapidly growing influence of ESG in today’s market.
Why ESG is critical for sellers
If you’re considering selling your business, it’s clear that ESG is no longer just a box to tick at the 11th hour. Instead, it needs to be a central part of your strategy from the outset. Here’s why:
- Enhancing your reputation – Businesses with strong ESG credentials are perceived as more trustworthy and forward-thinking. This not only increases the attractiveness of your brand but also builds goodwill among stakeholders and potential investors.
- Risk mitigation – A good ESG strategy also plays a pivotal role in mitigating risks as businesses can identify and address potential vulnerabilities before they escalate into costly issues. This proactive approach reassures investors and stakeholders, signalling that the company is resilient and well-prepared for future challenges.
- Access to capital – As lenders and investors increasingly prioritise sustainability, companies with robust ESG credentials are more likely to secure favourable financing terms and attract funding, opening doors to a broader pool of capital and positioning them for long-term success.
- Boosting valuation – Buyers are increasingly willing to pay a premium for companies with robust ESG strategies. Whether your sale is imminent or still a few years away, having a well-documented ESG framework in place can make a tangible difference to your company’s valuation, signalling long-term sustainability and reducing perceived risks.
- Streamlining the deal process – In an already complex market where buyers face numerous hurdles, a clear and measurable ESG strategy can smooth out negotiations. Demonstrating your commitments with concrete evidence can reduce due diligence timelines, making your business a more appealing and straightforward prospect.
See also: How can ESG be worked into M&A due diligence best practices?
Steps to strengthen your ESG credentials
Improving your ESG profile ahead of a potential sale doesn’t have to be overwhelming. While the specifics will depend on your industry, there are several universal strategies you can consider:
- Take a definitive stance – Identify and document your ESG commitments, whether it’s decarbonising certain processes, or ensuring your supply chain is issue-free.
- Set measurable goals – ESG strategies are only as effective as their implementation, and metrics play a key role here. Clear, measurable goals not only help align your team but also facilitate smoother due diligence when the time comes to sell.
- Share your story – Publicly committing to your ESG efforts can bolster your position as a responsible, forward-thinking business. Beyond numbers, it’s important to articulate the “why” behind your initiatives, using storytelling to connect with stakeholders and prospective buyers.
What does this mean for the future of M&A?
The integration of ESG into M&A activity represents a notable shift in how deals are structured and evaluated. With buyers placing increasing emphasis on sustainable and ethical practices, sellers must proactively address these areas to remain competitive. The days of superficial commitments are behind us; the market now rewards companies that can demonstrate real, measurable impact.
For sellers, this is an opportunity to not only command higher valuations but also position their businesses as leaders in a changing marketplace. And for buyers, a clear ESG strategy signals stability, reducing risks and aligning acquisitions with long-term goals.
In 2024 and beyond, ESG is no longer just a consideration – it’s a necessity. Taking the time to refine and communicate your ESG credentials now can lead to smoother, faster transactions and stronger outcomes when the time comes to sell.
