January 10, 2024
The influence of environmental, social, and governance (ESG) factors is poised to reshape the mergers and acquisition (M&A) landscape in 2024, according to Translink Corporate Finance’s ‘2024 Megatrends Report’. Featuring insights from global Translink CF partners, the report identifies six top trends that will shape the M&A landscape in 2024 and beyond. One of the trends points to ESG no longer being considered a nice-to-have but a sector-wide strategic imperative, making it a crucial determining factor in the attractiveness and value of M&A targets.
ESG market highlights discussed in the report include:
- Funds flowing to greener ventures: A shift is taking place in investment trends, with private equity firms partially reallocating funds from sectors like digital technology towards energy and environment-focused ventures.
- ESG’s impact on valuation and attractiveness: ESG considerations are increasingly crucial in M&A, impacting the valuation and attractiveness of target companies.
- The regulatory effect: Regulations are increasingly incentivising companies to incorporate sustainability practices by imposing ESG requirements, thereby fostering a more responsible and ethically conscious corporate landscape.
- Activism and shareholder influence: A growing tension between immediate financial gains and long-term planetary well-being is increasing global activism that demands purpose-driven initiatives from governments and corporations.
Funds are flowing to greener pastures
Translink CF’s report reveals that ESG will play a pivotal role in determining the attractiveness and value of targets as regulations such as the European Corporate Sustainability Reporting Directive (CSRD) ramp up and the global ‘carbon credit currency’ gains momentum.
Lina Ismail and Tanguy du Chesnay say: “In 2023, France saw some private equity firms reallocating funds from various sectors, including technology, towards energy and the environment. Chasing better returns and promising trends has meant moving capital towards ESG-rated businesses in innovative emerging segments such as ClimateTech, and this capital reallocation is likely to continue in 2024.”
Eyes are on the greener prize
In M&A, the right fit is crucial for the buyer. Translink indicates that ESG will continue to impact target companies’ valuation and attractiveness with ESG considerations examined in stage two of the deal. Integral to this evaluation is whether the target conforms to established regulations and possesses a sustainable ‘carbon balance.’
“This scrutiny extends to the target’s strategic initiatives, including plans for transitioning to best-in-class sustainability practices. A company that needs to make strategic shifts to meet ESG best practices can consider the requisite investment an ‘ESG debt’ to be incorporated into the target price,” add Lina Ismail and Tanguy du Chesnay.
Translink CF says in M&A transactions, companies that establish industry benchmarks attract valuation premiums. For instance, a company boasting a workforce with a significant portion of disabled individuals stands out due to its rarity, enabling it to command a strategic premium from potential buyers. ESG becomes a central factor in the deal, particularly for companies aiming to enhance their ESG standing through acquisitions.
Firms falling behind risk losing out to targets with superior ESG positioning. Hence, it is imperative that companies meticulously evaluate their ESG standing against established benchmarks and strategically plan to outperform the market.
The regulatory effect
Translink’s report highlights the importance of regulation in driving the sustainability megatrend as governments, citizens, consumers, and business counterparts globally, clamp down. A few examples include:
- In the French construction industry and numerous other European countries, all new buildings must integrate measurements of tons of carbon emitted in the building phase, plus how energy-consuming/positive they are. There is now a ‘carbon balance’ threshold that companies cannot exceed. This is pushing construction groups to seek less carbon-intensive solutions and innovative materials.
- Apartments in France are now scored based on energy intensity. Landlords that fail to meet the standard won’t be permitted to continue to rent out their properties, which could contribute to a housing crisis where hundreds of homes are removed from the rental market.
- The carbon credit currency is kicking off globally, creating a ‘subsidised’ system of energy providers and a voluntary ‘trade’ market. In this developing market, the lack of global coordination and bullet-proof methodologies remain an issue because the accuracy of these credits can be challenged.
- The CSRD in Europe directs companies to report on the impact of their activities on the environment and society. It will be a game-changing regulation for corporates across the board.
Translink CF says CEOs must stay ahead of these regulatory shifts, as non-compliance can lead to significant legal and reputational consequences. Globally, there needs to be more accurate diagnosing and measuring of ESG and carbon credits and overall initiatives driven by data and science.
Activism and shareholder influence
Translink CF says there is an ongoing conflict between ‘end of the month’ and ‘end of the planet’ considerations and questions whether people are willing to pay an inflated price for a planet-friendly product.
The escalating global activism is evident as individuals demand purpose-driven initiatives from governments and corporations. Translink’s report highlights how 2023 has seen a record number of weather and climate disasters, with losses exceeding $1 billion. NASA’s and IPCC’s recent reports underscore the gravity of the situation, declaring 2023 as having experienced the hottest summer on record. Ignoring these realities has become untenable, and there is a growing consensus that inaction is no longer acceptable in the corporate landscape.
Lina Ismail and Tanguy du Chesnay conclude, “CEOs navigating the 2024 M&A landscape must proactively embrace ESG principles to remain competitive and sustainable. Key to this journey is benchmarking against industry peers to understand where they stand regarding ESG efforts. Equally crucial is appointing a dedicated ESG champion and assembling a task force, ensuring focused ownership and accountability within the organisation. At Translink CF, we stand at the forefront of this evolution, partnering with our clients to help them identify and capitalise on the emerging trends and position their companies at the forefront of the sustainable business revolution.”