In the past, ESG has often been seen a ‘nice to have’ but it is now developing into a critical element for businesses looking to gain market share and engage with employees as customers become more socially and environmentally conscious. Evidence for this change in customer values can be seen in Bain & Co’s March 2021 report entitled ‘The Expanding Case for ESG in Private Equity’, which stated that 79% of buyers are changing their preferences based on sustainability.
ESG is also being seen more and more within the M&A world with specific ESG or ‘impact’ investment funds being set up by the likes of J.P. Morgan, Bain Capital and Bridges Fund Management, to name but a few. As investors and potential acquirers become more and more concerned with the ESG policy of a potential acquisition target it is clear that this is an area that can add to or reduce the potential value of a sale or investment.
Therefore companies that can show an authentic ESG policy or a meaningful route to implementing one could look to reap the rewards from this when the time comes to look for a potential investment partner or buyer.
It is yet to be seen exactly see how this may create change in the reporting of accounts and how a company’s EBITDA may also be adjusted according to its positive or negative ESG impact. In turn, this will directly affect the world of M&A with company valuations typically using an adjusted EBITDA figure and applying a multiple to it.
An additional effect could be the integration of ESG analysis in the due diligence process with acquirers looking to include the benchmarking of ESG performance against peers and an understanding of the risks or opportunities presented by ESG factors within their due diligence process.
Whatever the impact it is apparent that ESG is here to stay in the world of M&A and could potentially become an even greater consideration in the future.
The next steps
For more information, please contact Andrew Hancock or your usual UHY adviser.