The Increasing Importance of ESG in M&A Dealmaking

Tuesday, September 27, 2022 | By Thomas Tibbs, Senior Product Marketing Manager, SS&C Intralinks

The Increasing Importance of ESG in M&A Dealmaking

The need to contend with climate change is becoming increasingly apparent, as extreme weather events become more commonplace. Unsurprisingly, this has led to increased interest in investment strategies that place greater emphasis on environmental, social and corporate governance (ESG) considerations. Globally, ESG assets are on track to surpass $53 trillion by 2025, which would account for more than one-third of the projected total global AUM of $140.5 trillion. With Europe leading the way in ESG momentum, we surveyed 150 European dealmakers about their views on how ESG is affecting M&A.

  • ESG is not a fad—The recent acceleration of ESG should not be interpreted as indicating that it is merely a passing fad. In our survey, 76% of respondents said that ESG importance has increased in their organization in the past year, and nearly the same number (73%) said they believe it will continue to increase over the coming year. And it’s not just a matter of seeking out deals that are favorable toward implementing ESG strategies. In fact, 41% of respondents said they have turned down at least one deal over ESG concerns.
  • Regional variations remain within Europe—We noticed that different countries and regions in Europe had varying levels of interest in ESG. For example, three-quarters of respondents in German claimed their most recent acquisition was driven by ESG, while respondents in Iberia lagged behind other regions in ESG interest.
  • ESG due diligence on target supply chains—While ESG due diligence is fast becoming standard practice, due diligence of target supply chains poses an area of opportunity. Currently, less than half of respondents (46%) reported undertaking ESG due diligence on a target’s supply chain. Interestingly, the data revealed that private equity and other financial sponsors performed supply-chain due diligence at a higher rate (65%) than corporates (27%).
  • Room for improvement in ESG data—Respondents indicated that their satisfaction with the quality of ESG due diligence data leaves significant room for improvement. In fact, only 16% of respondents thought the quality and comprehensiveness of ESG data available to them in their most recent deal was “very good,” while 19% thought it was “poor” or “very poor.”
  • Proposed regulation has support despite burden—More than half (59%) of respondents support the proposed Directive on Corporate Sustainability Due Diligence, even as 63% view compliance with the new regulation as being “somewhat burdensome” and 16% stating it will be “very burdensome.”

As society raises its expectations and the regulatory burden mounts, ESG will be an increasingly vital part of the M&A process. To learn more, read the full "Temperature’s Rising: The Growing Importance of ESG to EMEA M&A" report, as well as Q&As with ESG experts.

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