Unleashing the power of environmental, social and governance (ESG) and revolutionising mergers and acquisitions in capital markets
Beyond traditional considerations of financial performance and market synergies, ESG factors are now becoming essential in driving the strategic business decisions of many firms. Major financial institutions are embracing the impact of ESG factors in their strategic choices, revolutionising capital markets and propelling businesses into a dynamic future.
Many executives are keen to embrace sustainable finance, which Forrester defines as “The inclusion of environmental, social, and governance (ESG) criteria in business or investment decisions for the long-lasting benefit of clients, partners, stakeholders, and society.” Because of the roles that they play in the financial ecosystem, financial services firms have a prominent role in this transition to a more sustainable world.
Additionally, in recent years, there has been a notable shift in the way companies are tackling acquisitions and mergers in capital markets.
In this blog, I will investigate the increasing relevance of environment, social and governance (ESG) in corporate acquisitions and mergers, its ramifications for capital markets, and its advantages to businesses and to society.
Igniting due diligence with ESG
ESG factors cover a wide range of environmental, social, and governance criteria that affect a company’s sustainability and societal effect. As such, ESG factors have become a vital part of the due diligence process during any merger or acquisition. Companies must now assess the financial strength of potential targets, their environmental impacts, social responsibility measures, and corporate governance practices.
Through comprehensive ESG due diligence, acquirers can gain invaluable insights into a target company’s risk profile, regulatory adherence and robustness over the long term. This data can assist in pinpointing any possible showstoppers, measuring risks precisely, and assessing whether the ESG values between the acquiring and target companies are compatible.
The vast landscape of ESG considerations is now seamlessly woven into the fabric of due diligence. Companies embarking on acquisitions and mergers now assess the target company’s financial health, environmental footprint, social responsibility, and governance practices. Exploring the complex area ESG due diligence can provide acquirers invaluable insights into the risk profile, regulatory compliance adherence and long-term viability of the target organisation.
Banks and asset managers play an essential role in ensuring that business decisions adhere to ESG standards; they determine where investments are directed; with the prime objective being to achieve profitable returns whilst minimising risks, including those associated with ESG. They can also limit access to funds for industries and companies that break international laws and conventions or that adversely affect climate change.
Investment managers can also choose to channel funds into those areas with a favourable ESG rating or provide influence on an ESG issue. This offers an opportunity for companies in need of new finance to be encouraged to change their behaviour so that they more ESG focused.
Enhanced corporate reputation and risk mitigation
Incorporating ESG considerations into merger and acquisition (M&A) activities strengthens corporate reputation and pre-empts risks. A comprehensive ESG strategy reveals a dedication to responsible business operations, significantly enhancing a company’s credibility amongst stakeholders, investors, customers, members of staff and regulators.
By acquiring or merging with companies that have similar ESG values, businesses can create synergies that bolster their overall reputation and brand. Moreover, proactively addressing ESG risks and challenges helps to prevent potential financial and reputational harm arising from non-compliance or unethical practices in the target company.
Business reputation begins within the walls of corporate headquarters, where companies can exhibit their commitment to sustainability by: monitoring and lessening their carbon emissions, fostering DE&I initiatives in their personnel practices, and giving back to communities through philanthropic efforts. For those organisations subject to potential acquisition endeavours, weaving ESG components into their operations could be very advantageous when seeking a suitor.
Access to new market opportunities
ESG considerations unlock new market possibilities for corporations involved with mergers and acquisitions. As sustainability and corporate and social responsibility become more critical, consumers and business partners prefer companies prioritising ESG values.
By acquiring businesses with strong ESG performance factors, corporations can access new customer bases, extend their market reach, and gain an advantageous position. Customers are increasingly valuing organisations that adhere to ESG principles. In addition, as governing entities and regulatory authorities around the world augment oversight of ESG-related policy, companies implementing ESG into their plans have an improved capacity to address the evolving environment. Combining forces with or acquiring companies focusing on ESG can support firms in staying ahead of evolving regulations and responding to developing market requirements.
Long-term value creation
Incorporating ESG considerations into a merger or acquisition is more than just a path to short-term gain. By prioritising sustainability and responsible business practices, companies can create lasting value for their shareholders, for society, and the environment. Not only that, but ESG-driven mergers and acquisitions also provide an opportunity for innovation, improved operational efficiency and a positive societal contribution.
For example, acquiring a target company specialising in renewable energy could help diversify a company’s portfolio whilst reducing its carbon footprint – aiding the global effort to combat climate change. Additionally, when companies align with their ESG objectives, they are better equipped to attract and retain top talent, since they are more likely to gravitate towards organisations whose purpose embraces sustainability.
By intentionally incorporating sustainability into their business model, companies can reap the benefits of investment in areas such as: promoting innovation, optimising operational efficiency, and contributing to meaningful social impact – whilst reducing their carbon emission levels to make significant strides against the global climate crisis.
We see that sustainability concerns continue to shape the whole market!
ESG factors have become fundamental components of mergers and acquisitions in capital markets. Including ESG in due diligence procedures allows organisations to measure risk, enhance their standing among stakeholders, uncover potential market opportunities and generate long-term value. With ESG principles becoming increasingly prominent in many industries across the globe, businesses that prioritise sustainability and social responsibility will gain an advantage as we progress into a new era, paving the way for a more sustainable and equitable future.
Currently at GFT we are building an ESG accelerator that helps asset management firms to assess and report on their ESG performance; built by applying GreenCoding principles by our GreenCoding certified engineers! Please get in touch if you would like to find out more!
At GFT we are committed to increasing our knowledge and refining our practices in order to enhance our awareness of equality, diversity, and inclusion (EDI), sustainability, and all things ESG related. Below are some useful links to find out more about some of our efforts in these areas.
Sustainability hackathon Link
ESG certification Link
Green coding certification Link