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by Baker McKenzie

ESG and the rise of sustainable dealmaking

ESG has moved from fringe to mainstream in global M&A markets

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A staggering 83 percent of business leaders say that ESG (environmental, social and corporate governance) factors will be increasingly critical to M&A decision making in the next 12-24 months. Fuelling long-term value as well as highlighting risks, the growth of ESG brings both opportunities and challenges. 

The rise in regulation along with growing demand from stakeholders for responsible investing has meant that ESG is now a major concern globally for acquirers putting these principles at the core of strategy. While in the US ESG issues mean that some sectors such as non-renewable energy are less attractive to investors, in Asia key strategic drivers still take precedence over some ESG concerns – although it is of the essence in the public market. 

Inevitably, due diligence has become critical. This process can reveal below surface-level risks that, while not stopping a deal being made, can present a challenge. “There is greater scrutiny,” confirms Robert Wright, Partner from the Baker McKenzie Asia Pacific M&A group based in Hong Kong, “which is now driving a push for increased transparency”. 

Growth in social media has brought issues such as environmentally damaging practices, unethical labour and problematic supply chains to public prominence, with younger consumers demanding ethically-driven investments. ‘If a consumer unearths an issue, that issue can go viral in pretty much no time,” points out Alyssa Auberger, Chief Sustainability Officer at Baker McKenzie. “If during the due diligence process, there were really egregious practices that came to light you'd be in a no-go deal zone because there's just too much reputational risk on the line.”

The global pandemic has accelerated this shift, as greater connectivity has led to more interaction with companies and a focus on community from young investors. “We live in really interesting times where you have an entire generation that cares about these issues in a manner that is really different and much more profound than the prior generation,” explains Avinash Mehrotra, Global Head of Activism and Shareholder Advisory & Takeover Defense Practices at Goldman Sachs. “They are the capital providers of tomorrow.”

The way investments are being made in M&A markets is increasingly being influenced by ESG, which will continue to become much more mainstream across markets globally. “Governance and purpose have now become more or less household words,” says Auberger. “So the time is now.”

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The pandemic has stalled activist investors, but for how long?

Ortenca Aliaj

When coronavirus struck the US in March, even a group of investors that has earned the unenviable nickname vulture capitalists were reluctant to publicly attack companies reeling from the effects of the global pandemic. 

Activist investors, who acquire stakes in companies and seek to force them to make changes in order to improve shareholder value, have largely remained on the sidelines this year. 

Prior to the pandemic, activist investors were on track for a record-breaking year with $13.1bn deployed in January and February, but new campaigns fell to a multi-year low in the months that followed, according to data from investment bank Lazard. 

Deterred by the volatility that gripped global markets in the early days of the pandemic and the likely public backlash of trying to capitalise on a global health crisis, activists focused on their own war chests. 

But as the 2021 proxy season approaches, a time during which most companies hold their annual meetings where activists can propose changes for shareholders to vote on, executives once again have to think about who is on their shareholder register. 

The market rout presented an opportunity for activists to build up stakes in companies at cheaper prices following the longest bull run in history. Now that markets have staged a recovery and companies have largely found their feet, it appears activists are once again ready to take centre stage. 

During the third quarter, Trian Partners, the hedge fund run by Nelson Peltz, disclosed three new stakes. The New York-based activist had for months kept its positions a secret while it bought up shares in media conglomerate Comcast and asset managers Invesco and Janus Henderson. 

Within weeks Invesco had agreed to give Trian three board seats and said it was working with the firm to improve performance. 

More recently, hedge fund DE Shaw and Engine No 1, a newly launched activist investor, have called for changes at ExxonMobil, backed by large institutional holders such as the Church of England and the California State Teachers’ Retirement System.

Struggling sectors, such as asset management and energy, are popular with activists who are on the hunt for “shiny objects,” as Allison Bennington, a partner in the strategic advisory practice at PJT, calls them. She predicts that 2021 is going to be a busy year for activist investors. 

“Activist funds, for the most part, have not performed well this year,” she said. “Therefore, there is a lot of pressure from investors in activist funds to make up for lost ground in 2021, which I suspect will lead to more aggressive actions and more of it.”

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