As far as M&A is concerned, environmental, social and governance issues have always been considered when a deal was in the making. However, now more than ever businesses and dealmakers are focusing on value creation opportunities which are ESG related.
What is the reason for this change of heart?
It’s no secret that not only governments but also international institutions have addressed concerns about the ongoing environmental crisis and its long-term consequences. To deal with these matters and to pursue sustainable principles many laws were passed, and numerous deals have been negotiated between countries and supranational organizations. One pact worth of mention is the ‘The Green Deal Industrial Plan’, promoted by the European Commission: it aims to support the transition to climate neutrality by enhancing the competitiveness of Europe’s net-zero industry.
Thus the ‘greening’ of business operations and offerings have been affecting almost every industry, enabling companies to achieve new strategic and financial goals, which are environmentally friendly. Indeed, nowadays companies who do align and act upon ‘green’ principles are most likely to be rewarded, whereas the ones who don’t may be demanded to change by both the market and their stakeholders.
Moreover, M&A have always been a strategic tool for businesses and, given the tighter regulations and the embracing of sustainable standards by consumers, it can be now also used to identify potential competitors with existing green resources that can improve the functioning of the organization. According to a BCG’s report, green M&A represent only 5% of the total amount of M&A operations, but they have significantly grown over time, with some industries increasing at a higher rate than others. For instance, energy and utilities businesses have found these processes to be very helpful in decreasing their cumbersome use of carbon and fossils in their activity. As a proof of this upward trend, the same BCG’s study shows that in 10 years, in particular from 2011 to 2021, that share of environmental-related deals has grew from 20% to 40% in these businesses.
However, Green M&A practices differ in volume even between regions. Surprisingly, emerging markets, in particular Middle East and Asia-Pacific, are the ones with the highest share of green operations in terms of M&A. In 2021, 10% of the total amount of deals in the Middle East were ESG-related, whereas Asia-Pacific (especially China) counted a green deal share of approximately 8% in 2021. The reason for their ‘greener’ attitude is to be found in the disproportionate presence of oil, gas, and petrochemicals companies, which are characterized by the intense use of carbon and fossils. Therefore, green M&A have given these areas the possibility to respond to social pressures in terms of sustainability and to start operating with alternative and clean sources of energy.
On the other hand, Europe has a 5-6% share of green deals, which may seem surprisingly low considering that on a global scale the continent is the leading area in climate action. This apparent lower environmentally friendly attitude is really due to European companies investing larger capital in R&D activities, reducing the need to engage in extraordinary operations such as M&A.
Finally, taking into consideration the number of benefits that can be found in green M&A operations, dealmakers must keep in mind that they are going to face a monetary premium for environmental-friendly companies they aim to buy or merge with. As competition increases, green assets have become increasingly appealing, and the expected growth of sustainable companies is higher than for the companies who ignore and neglect following green principles and ESG standards. Moreover, green M&A is expected to gain even more popularity and only the companies who will be able to act upon sustainability will gain in terms of future value. Businesses will have to align to environmental-friendly values and transition to a cleaner source of energy to fit in the market, respecting consumers and shareholders’ needs. In addition, companies will profit from these acquisitions in terms of a better financial condition and a more valuable brand and identity.Hence, it is very likely that green M&A will stop representing the smaller portion of these operations but becoming the majority.
The challenge for future CFOs and dealmakers will be to identify new patterns for their businesses that can contribute not only to the company itself but can also guarantee a bettering of the environment and ultimately the Planet. What we expect is a possibly brighter and greener future.