Sustainability performance can make or break deal-making across regions, with more corporate leaders hesitant to pursue acquisitions with entities that have a poor environmental, social, and governance (ESG) profile, a new report said.
The report from Deloitte, 2024 ESG in M&A Trends Survey: Rising Influence of ESG, found that more corporate leaders would pay a premium for a target with a strong ESG profile and seek a discount on a target with a weaker profile.
The survey of 500 mergers-and-acquisitions (M&A) leaders globally, conducted in January, studied how sustainability performance is gaining traction across industries.
Keeping up with sustainability targets has more financial incentive than it did two years ago. “Almost 83% of M&A leaders surveyed stated that they would pay at least a 3% premium for a target company with a high ESG profile or that would improve their own profile, a 21-percentage-point increase over 2022,” the report said.
Companies with poorer metrics could pay the price. Ninety-six per cent of buyers in both telecommunications and the life sciences and healthcare sector are the most likely to apply a discount to what they are willing to pay if the target entity has a poor ESG profile, the report said.
Buyers in telecommunications (82%) and private equity (80%) are the most likely to abandon those deals altogether.
Leaders’ evaluation of a target entity’s ESG profile is becoming increasingly weighed against the potential remediation costs of such deals on their organisations, the report said.
Taking advantage of new clean energy tax credits is one perk listed for companies, with 59% of respondents citing those as the most beneficial tax provisions of recent ESG legislation.
Reporting confidence has increased
The rising importance of ESG comes as the availability of sustainability data has increased.
Generally, organisations are more confident about deal-making and their own profiles since measurement tools have improved, the report said. Fifty-seven per cent of organisations surveyed said they are now measuring ESG with clearly defined metrics, up from 39% in 2022.
“[Ninety-seven per cent] of respondents expressed being ‘very prepared’ or ‘prepared’ to discuss their own ESG profile as a value driver for their organisation”, an increase of 13 percentage points in two years, the report said. “Respondents expressing a ‘very high’ or ‘high’ level of confidence increased 17 percentage points from 2022 to 91% in 2024.”
Regional perspectives
ESG’s position as a value driver is a perspective that differs across regions. Companies in Europe and the Middle East report greater operational impacts from climate change than organisations in Asia-Pacific and North America.
Evolving climate regulation in Europe and the Middle East also means ESG plays a greater role for companies in those regions. “More than two-thirds (68%) of Europe and Middle East companies say they weigh the potential impact of a deal against their own ESG profile based on clearly defined metrics,” the report said, “whereas only 49% of US respondents made that same claim.”
Consequently, including ESG in M&A strategies has more importance in Europe and the Middle East (64%) than for companies in Asia-Pacific (50%) and North America (46%).
— To comment on this article or to suggest an idea for another article, contact Steph Brown at Stephanie.Brown@aicpa-cima.com.