Over the past year, with the reopening of the world economy, we’ve witnessed a resurgence in M&A activity. In line with record breaking deal activity, a number of core trends and priorities have emerged in the c.
Specifically, we’re seeing increased investment in technology, following the crucial role played by digital solutions in facilitating M&A even at the height of the pandemic. Focus is also increasing on financial due diligence, with buyers becoming more dependent on third-party deal finance in today’s market. as well as the rapidly rising prominence of Environmental, Social and Governance (ESG) standards.
These focus areas are proving to be crucial for deal makers as they navigate today’s high inflation environment and ongoing uncertainties related to geopolitics, government regulation and COVID-19 pandemic-related disruptions.
Investment in ESG in particular has become a stepping stone between deal or no deal in the M&A process. According to Mergermarket, 60% of global dealmakers said they have walked away from an investment due to a negative assessment on ESG issues at a potential target.
Meanwhile, 52% say their ESG investment strategy has had a positive impact on overall investment returns – when done right, ESG investment can have a direct influence on business outcomes.
Understanding specific ESG requirements for businesses will therefore be one of the most critical areas to get right for dealmakers today. Let’s take a look at why this is so important today.
Rising ESG scrutiny
The main challenge with ESG is that the space remains incredibly broad – it covers everything and anything. From climate change risk to social issues, ESG considerations will play a role in every M&A transaction moving forwards.
This is why ESG scrutiny in M&A transactions is so critical. It will allow organisations to be appropriately advised on the consequences and opportunities associated with the ESG regulatory environment. Recent research found that a staggering 90 percent of dealmakers predict an increase in scrutiny of deals for ESG implications over the next three years, with almost half believing the increase will be significant.
A key focus in the near-term will be on how different ESG regulations apply to an organisation. While not every ESG regulation will apply to every business, buyers will increasingly scrutinise a target’s ESG credentials during the due diligence process, homing in on reputational risks as well as regulatory concerns. Organisations will therefore be required to comply in the most effective way and fully understand how they can measure up to those regulations.
This may also lead to the demise of some firms that are already finding themselves under significant pressure, particularly in today’s high inflation environment. ESG compliance could ultimately be the straw that breaks the camel’s back.
ESG + cybersecurity = ESGc
Cybersecurity is increasingly being tied into the ESG agenda because of the huge impact it has on a company’s integrity. Firms that hold personal data have an unavoidable societal responsibility to protect that information.
As a result, it has never been more important to find a balance between risk management and value creation. Organisations must understand the seriousness of cybersecurity and organise all assets with this in mind, in order to be fit for purpose in the current environment.
As a first step, developing a cyber resilience strategy will help identify any risks that businesses are facing. This ensures they can mitigate any issues and protect sensitive information, which is critical today in the face of tightening regulations.
The full ESG journey
With rising scrutiny on ESG, there’s a sense of urgency to define pertinent ESG issues in M&A from the start of the deal making process. Pinpointing which relevant regulatory areas need to be considered and addressing them early on will make the due diligence process easier across the board, both for businesses and dealmakers.
What’s more, with a shift in consumer and workforce demographics, pressures to address social issues are now coming from the bottom up, as well as from investors and regulatory bodies. For future targets or acquirers, ESG must be embedded into the enterprise at all levels.
Businesses today have no choice but to put time, resources and effort into understanding what is relevant to the industry they’re in and the jurisdictions in which they operate. They must then find effective ways to roll these changes out across the enterprise – such as through behavioural motivations and incentives.
To help navigate this ESG journey, we’re seeing more organisations hiring experts in the space. This helps to make sure that ESG requirements aren’t overlooked, as this can have major impacts both legally and on the organisation’s value when a buyer takes an interest.
It’s time to act now
With the growing perception that ESG performance directly correlates to commercial strength, ESG will undoubtedly have a defining impact on dealmaking over the next 12 months.
Dealmakers are holding companies to a higher standard today. Business leaders must act now to get on top of the ESG agenda and carefully consider relevant regulations to embed specific ESG frameworks successfully into their whole organisation.
