There has been a highly perceptible upturn in the profile of all things environmental, sustainability, and governance (ESG) with more and more companies exploring how they can become more green.
We asked Jamie Roberts, the director of corporate finance at Grant Thornton, a global accountancy firm which has worked alongside us to provide support and guidance to clients and businesses in Wales, how he has seen companies add value to their business through ESG themes.
Why ESG is more important than ever for businesses
Consumers are more and more aware of the impact they have on the world, and are actively basing their buying decisions on the sustainability, ethics and environmental impact of the products and services they buy.
Questions such as:
- How or where is something manufactured?
- How is it packaged?
- How is it shipped?
And others are driving huge changes in purchasing decisions, and where consumers’ cash flows.
ESG themes are also having a big impact on B2B-focussed operations, where – for example – tendering processes are significantly affected by a bidder’s ESG policies, practices and track record. In just one example, the recent Queen’s Speech featured an update on the requirement for companies with a revenue of more than £36m to report on what they’re doing regarding modern slavery.
The landscape of ESG and our journey to net zero are unfolding as government policy begins to crystallise, and it’s expected that ESG will continue to have a significant impact on business both in terms of the opportunities it presents and the challenges it poses.
Aligning a business’ operations, supply chains, reporting and business models to comply with ESG requirements and optimise opportunities will rightly continue to draw increased focus from management teams and shareholders.
The impact of ESG on mergers and acquisitions
I’m a corporate financier by trade, and have seen how ESG factors are affecting the deal environment.
At a very high level, when it comes to mergers and acquisitions (M&A), ESG is falling into two buckets.
The first of these is downside focused – it is of increasing importance for buyers during due diligence, and is very much about minimising or reducing downside risk in relation to ESG factors.
The second is focused on adding value, with acquirers keen to either unlock or accelerate the development of revenue or profit streams led by ESG by acquiring and integrating them into their existing operation, to improve service offerings.
The sale of Asset Plus – an energy services businesses which supports organisations on their path to net zero targets – to NYSE-listed Johnson Controls is a good example of this, and we at Grant Thornton advised the vendors of the deal, at the heart of which was the improvement of the acquirer’s net zero client solution.
Deal experience shows that to maximise shareholder value, management teams need robust reporting systems in place allowing them to show the efficacy of ESG-led work.
This has carry-over benefits not just in relation to any future M&A event, but also in terms of the business’ day-to-day customer interactions.
It’s becoming increasingly important for customers that companies can drill down into every element of their supply chains and accurately report their performance against ESG standards and requirements. A recent example of this is PepsiCo launching an initiative to help small businesses in its supply chain get access to renewable energy.
We have also seen some of the larger infrastructure funds coming together to create their own lender standardisation for ESG debt covenants - and seen private equity firms link parts of renumeration schemes to ESG scoring. Developments like these are evidence of the market’s direction of travel and the importance to shareholder value of getting ESG right.
During a time of socio-economic volatility, deal value and volumes continue to endure in the face of challenging headlines.
Many corporate and institutional investors have strong balance sheets and are becoming increasingly selective about the businesses they target.
As ESG climbs higher and higher up both consumer and corporate agenda, we are seeing an established M&A trend where assets genuinely focused on ESG are attracting significant interest and achieving premium valuations in a complex deal market.
Interested in learning more about ESG?
Visit our sustainability page or check out the blog posts below:
