ESG a way to enhance your M&A Exit by 10%?

A recent survey found that investors are prepared to pay a 10% premium for businesses with demonstrable ESG programs.  Two thirds of senior management agree that ESG rather than merely being a risk mitigant, is in fact a value creation opportunity. Indeed, some assets are increasingly attracting interest to burnish an acquiror’s ESG credentials, with ESG being the primary deal motivator. 

Environment, social, and governance (ESG) is an approach to evaluating and operating businesses that goes beyond the sole focus of shareholder return. ESG takes into consideration the ecosystem, both internal and external that businesses operate in and how they affect each other.

Environment relates to the biosphere and ecosystems of our planet, specifically, how human activity affects the natural world. This includes : Greenhouse gases, Air pollution, Energy consumption, Water consumption, Waste output

Social encompasses the factors regarding how businesses treat their human stakeholders – both inside and outside the corporation. This includes: Wages, Diversity and Inclusion, Gender Pay Gap, Employee Engagement, Health and Safety, Human Rights

Governance is about how a corporation operates at the highest-level including decision making, political involvement, and ethics. This includes: 

Executive’s Pay Ratio, Quality of Governing Body, Ethics and Anti-corruption Policy

ESG Due Diligence Considerations  Environmental impact, both internal and external remediation?  Social justice and diversity and inclusiveness - cost to improve?  Sustainability of the supply chain (and value chain) Impact of discontinuing business not aligned with ESG Cost of adhering to proper corporate Governance and anti-corruption

Valuation and Financing Costs of implementing changes needed for any shortfalls or wholesale changes that may be needed to operations or future growth plans S&P and Moodys have already implemented ESG considerations in assessing credit ratings Increasingly lenders are providing optimal terms for transactions with ESG factored into the investment thesis Improved lending terms will improve equity returns further

Increasingly deal success means linking the businesses ESG strategy to its M&A strategy and assessing whether it is accretive on this basis also.  Vendors with poor ESG records may find a lack of willing buyers or the price being adjusted for a variety of ESG remediation work to bring the business up to an acceptable ESG standard.