The Growing Importance of ESG in M&A

23 Aug

The recognition that M&A pre-deal analysis must expand to include ESG factors continues to grow. KPMG’s 2024 Global ESG Due Diligence Study is the latest research to highlight the increasing importance of ESG performance in merger and acquisition decisions.

This latest report, which surveyed over 600 active M&A dealmakers identified that:

80%+ are taking ESG factors into consideration, consistent across all global locations.
60%+ of acquirers will pay a premium for high levels of ESG maturity.
50%+ reported encountering ESG-related deal breakers.

With the level of M&A in the AIM and UK small-cap communities, both the cash-rich acquisitive companies whose strategy and investment case is dependent on inorganic growth, and those firms looking to attract prospective buyers for all or parts of their business, should take note of these findings.

Why is ESG increasing up the M&A agenda?

The reason for ESG increasing up the M&A agenda is that ESG strategies, if defined and executed correctly, will underpin the long-term success of a business. Additionally, the increasing significance of the opportunities and risks resulting from evolving ESG macro trends and global regulations means that ESG analysis can provide early insight into the likelihood of the longer-term value of a deal.

Deal participants need to understand the longer-term positive and negative value impact of ESG factors early. The shape of the deal will drive the level and focus areas of an upfront ESG assessment, but simply ticking boxes will not work. Unfounded ESG claims can be easily missed without the right expertise and data to dig below the surface and ensure performance stands up once the deal is complete.

Furthermore, as acquiring companies increase their own ESG maturity, the cost of integrating and aligning ESG performance should also be considered, as both the complexity of this task and the downside impact of not aligning increase.

What should UK small-cap and AIM firms be doing?

Sellers – maximise the value of your business:

Embed ESG in your investment case, ensuring that strengths and future value propositions based on macro ESG trends are well understood and are credible.
Understand and minimise the impact of key ESG risks and issues that may, at best, reduce valuation, and, at worst, block deals.

Acquirers – quickly identify value-impacting issues and ensure the ESG integration and long-term value are appropriately considered:

Minimise the costs of unsuccessful transactions by highlighting potential deal blockers early with a rapid ESG red flag analysis.
Integrate ESG risks and opportunities into deal decision criteria and cost-benefit analysis, including both short-term integration and long-term value, with in-depth ESG due diligence, digging below the surface of claims.

As the leading provider of ESG data and advisory services to the UK small-cap and AIM communities, Addidat can help you maximise value and quickly assess the ESG aspects of any merger or acquisition. Our team of ESG experts, backed by Addidat's market-leading data, can deliver rapid to in-depth analysis with minimal time required from you or your deal team.

Don’t let ESG risks blindside your next M&A deal. Contact Beth Scaysbrook our Chief Client Officer today to learn how Addidat can support your successful M&A strategies.

To discuss further, please get in touch with the team.

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