Unlocking hidden value with ESG synergies to supercharge M&A deals

Environmental, Social, and Governance (ESG) has been a key factor for mergers and acquisitions (M&A) in recent years.  It has driven firms toward sustainable integration, with the majority of M&A leaders expressing their willingness to pay a premium for a target company with a strong ESG profile or one that could enhance their company’s ESG profile.  

While large firms have increased emphasis on ESG reporting, several problems arise during acquisitions. Larger firms are enhancing their ESG reporting, but varying standards complicate assessment. Meanwhile, mid-sized companies often lack comprehensive ESG data, hindering the identification of valuable acquisition targets. To fully capitalise on ESG synergies, acquirers must integrate ESG factors at every stage of the M&A process — from due diligence to post-merger integration. 

The value of ESG synergies 

Typically, ESG factors have been included in the risk assessment phase of the M&A process. However, recognising the value ESG synergies can create is equally critical. ESG synergies allow acquirers to integrate their existing practices with those of the target company and create new operational models with better efficiencies.

1. Revenue growth
Incorporating ESG principles into a business can significantly increase income and profit margins. As sustainability becomes more important, high brand loyalty is observed towards companies that follow ESG principles. A report revealed that ~50% of global consumers are willing to pay an average of 70% more for brands that prioritise sustainability. This approach can help businesses attract a wider range of customers, strengthen the brand, and gradually boost revenue.

2. Cost efficiency
Companies with strong ESG performance often achieve cost efficiency through optimised supply chain processes like Just-in-Time (JIT) inventory, which minimises stock levels to match demand, reducing storage expenses, waste, and the need for large facilities. Together, these practices help companies reduce costs while meeting environmental goals, creating a resource-efficient and sustainable supply chain.

3. Easier access to capital
Despite a challenging environment, ESG propositions have had a positive impact on equity returns for 63% of the investments. ESG-compliant companies are finding it easier to get funding because they are viewed as safer and more sustainable over time. This change opens more funding options and attracts a wider range of investors, which can help drive growth and improve financial results. Additionally, M&As that consider ESG factors often result in better total shareholder returns.  

Structured approach to ESG synergies 

To unlock ESG value, companies should undertake a structured approach: 

1. Pre-deal ESG due diligence:
   This should be addressed before negotiations start. It’s important to identify the key ESG factors for both the acquiring company and the target. Using data, a thorough assessment of relevant ESG risks and opportunities should be conducted, aligning with the specific sustainability trends in the industry.

2. Post-deal validation of ESG factors:
   Post-deal validation of ESG factors is essential for aligning both companies’ objectives and ensuring their commitments are achievable. This process begins with a clean team analysing sensitive data from both organisations to refine initial ESG assessments and identify specific compliance risks and sustainability opportunities, such as regulatory challenges or sustainability improvements. They set measurable goals, such as carbon reduction targets or responsible sourcing of raw materials. A clear implementation plan lays out the steps needed to bring these goals to life.

3. Close in on the implementation of ESG strategies:
   Upon finalisation of a deal, it’s important to start working on ESG goals immediately to fully benefit from the acquisition. This includes steps such as lowering carbon emissions or enhancing supply chain sustainability, in ways that are both practical and achievable. By tackling these early, companies can build a strong foundation for long-term success. Plans may need to be tweaked depending on the ESG strengths of the acquired company, but collaboration between leadership teams will be key.. Meeting industry-specific ESG goals won’t just boost financial performance, but also strengthen the company’s reputation, making it more appealing to consumers and investors.

ESG is increasingly influencing M&A strategies. Companies need to elevate their approach beyond merely managing risks and following compliance obligations. The objective should be to fully harness the potential of ESG synergies. A report states that 70% of limited partners (LPs) say their organisations’ investment policies include an ESG approach. Thus, it’s clear that overall expectations are shifting. Today, investors and stakeholders want to see businesses prioritising sustainability and long-term value instead of only chasing immediate financial returns and are looking at more than just numbers when evaluating M&A deals.  

Source:- ET edge