Demonstrating ESG for deals

Environmental, Social and Governance (ESG) factors are increasingly important for driving higher valuations in M&A and capital raises, at IPO and demonstrating responsible and sustainable procurement practices.

Why is ESG important for deals?

ESG is a set of metrics that can evaluate an entity’s compliance and performance for material environmental and social factors, demonstrating its ability to generate positive, measurable impact.

ESG factors are a way to create long-term value, beyond the deal lifecycle. A strong ESG strategy can support a strong valuation ahead of a material event. 

Global sustainability regulations and reporting frameworks, including the Corporate Sustainability Reporting Directive (CSRD) regulations in Europe, the ISSB (International Sustainability Standards Board) framework and others, mandate ESG compliance in many jurisdictions in the EU and United Kingdom & Ireland. 

Traditionally, investors relied on financial data to determine the suitability of a company for investment. Now, ESG metrics are a measure of value and directly contribute to long-term prospects and investment viability. ESG criteria relate to sustainability, community, and the responsible administration of the organization.

Sustainability considerations for deal-makers

Incorporating ESG into a governance, risk and compliance (GRC) strategy is essential. And when it comes to deal-making, it must be considered alongside the financial metrics. Companies and investors now target acquisitions and investments that align closely with their strategic ESG objectives. 

Due diligence expanded to include ESG

The scope of due diligence for deals will include environmental, social and governance metrics. Potential investors and buyers will look for ESG red flags and risks, and consider how the target company bolsters and enhances existing ESG programs. 

To be ready for a material event, companies must meet regulatory and market expectations with robust ESG credentials. 

Companies must demonstrate: 

• Governance that is robust, including fraud prevention and compliance

• Social metrics like inclusivity, diversity, and addressing modern slavery

• Environmental sustainability, including sustainable supply chain and procurement practices, and a commitment to decarbonization. 

Some sectors have specific metrics and standards for sustainability

Sectors like real estate and materials often have a greater emphasis on decarbonization and sustainability. Commercial real estate demand follows demographic shifts and preference for green building stock. 

Mining, energy, and utilities M&A might focus on a beneficial target with strong ESG. High emitters may prefer a buyer with a strong ESG program who can provide leadership toward meeting net zero commitments. 

ESG can inform access to capital

Investors now look for a strong commitment to ESG throughout policy and practice. Fund managers will assess the impact of investments to ensure that overall portfolios meet sustainability criteria.

How to demonstrate ESG strengths and surface risks in deal-making

Buyers want to avoid overpaying for a target or missing out on an ESG opportunity. 

This means factoring ESG metrics into the initial target valuation and undertaking a rapid risk assessment to identify any risks or opportunities as a pathway to unlocking value. Buyers and investors must understand the context of the local market, which may have greater or lesser sophistication around ESG factors.

Target companies want to maximize valuation by demonstrating an ESG strategy and implementation. 

The best way to establish a baseline for the current state of environmental, social, and governance is to get your documentation in order. With everything in a central, searchable hub, you can establish which ESG practices are already in place and where there are gaps — well ahead of any material event. 

Transact with confidence and unlock value through ESG in deals

As environmental, social, and governance factors play an increasingly prevalent role in driving M&A and investment, due diligence and deal preparation increases in complexity.

Choosing a deal platform with in-built document checklists, seamless organization, AI tools to support the deal process and an intuitive Q&A functionality will enable both sides of a transaction to move forward with confidence.

Questions about ESG and deals

What are ESG deals?

ESG investing focuses on organizations that follow positive environmental, social and governance principles. Buyers and investors look for companies demonstrating positive impacts on society and the environment. 

What is the role of ESG in M&A?

Consideration of ESG criteria in M&A transactions can help to minimize risk and support optimal valuations. Companies that neglect ESG criteria may be subject to regulatory penalties and reputational damage. ESG criteria inform the long-term potential and stability of an entity. 

More on ESG in deals: 

• Energy and mining companies who reinvent themselves through M&A will come out on top

• Commercial real estate sector adapts to behavioral shift 

• Will the clean energy transition drive a late surge in EUMI deals in 2023?