ESG and the rise of sustainable dealmaking

To listen to the Big Deal series offline, click here.

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.”