How the ESG Movement is Driving Value in Private Company M&A

July 6, 2021

At a glance:

  • ESG gains steam: The ESG topic has dominated headlines recently in light of the events of the past year.
  • Create a tangible impact: Below we explain what ESG means to your business and how you can incorporate it into your M&A and investment decisions to drive value.
  • ESG expertise matters: Aprio’s experts can help you incorporate ESG into your investment and acquisition strategies and your own business practices.

Schedule a free consultation today

The full story:

You have likely seen the term ESG (an acronym for environmental, social and governance) used in the news lately. The buzz is real — in response to the pandemic, climate change and social unrest, companies are stepping up to the plate and playing a larger role in creating a more fair, equitable and sustainable world.

But how exactly should we define ESG, and how can your company incorporate it into your investment and merger and acquisition (M&A) decisions? Let’s start with the basics:

What is ESG?

From a business perspective, ESG allows companies to make a greater, positive impact on the world while generating excess returns, or “alpha,” for their shareholders by taking all stakeholders into account — including customers, vendors, employees, their community and the environment.

There isn’t one comprehensive list of all ESG factors and subcategories companies can consider. There is a wide range of ESG factors spanning a variety of topics, including but not limited to the following examples:

  • Environmental: Biodiversity, carbon emissions, clean energy, waste management and water management
  • Social: Customer satisfaction, employee engagement, human capital management, gender diversity, fair labor practices and standards, and racial diversity
  • Governance: Board composition, executive compensation, lobbying efforts and political contributions

This list is far from exhaustive, but these examples show how ESG factors are interlinked. If you drew an  ESG Venn diagram, there would be a lot of overlap with topics impacting multiple areas.

In addition to defining ESG topics, there is no standardized approach to data aggregation and the calculation and presentation of metrics. Several institutions dedicated to the ESG framework — such as the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI) and the Task Force on Climate-related Financial Disclosures (TCFD) — are working to form standards and define metrics to facilitate how companies incorporate these factors into the investment process.

Why should you care?

Momentum has increased exponentially in the ESG space. Many public shareholders, hedge funds, private equity funds and limited partners are requiring companies to account for ESG factors in their investment decisions, prompting greater transparency on companies’ ESG policies and performance.

According to a recent McKinsey study, in 2018, 33% of the largest funds’ investments were allocated to companies in accordance with ESG criteria.[1] As competition for labor becomes more intense, ESG factors are top of mind for candidates when choosing employers. McKinsey’s Gen Z and Millennial Survey reveals that 26% of millennials and 31% of Gen Zers (expected to possess about 60%, or about $40 trillion of spending power by 2030) are willing to pay a premium for products that have the least negative impact on the environment.[2] What’s more, 76% of consumers are willing to reject products or services for ethical reasons. Further, inflows into sustainable funds hit a record high during the fourth quarter of 2020, up 88% to $152.3 billion.[3]

While empirical research is still in the nascent stages, there is increasing evidence that ESG factors and financial performance may be positively correlated.

How can you take advantage of this emerging trend?

There are five steps you can take today to capitalize on ESG in your business:

  1. Incorporate ESG into your standard acquisition due diligence, alongside financial, tax, legal and HR due diligence.
  2. Shift portfolio companies to report and improve on ESG-centric metrics, such as those published by SASB for your industry group.
  3. Become a certified B corporation.
  4. Communicate your ESG message to customers, vendors and employees.
  5. Work with your supply chain to increase vendors’ ESG compliance and your customers’ wallet share as they look to maximize their spend with ESG-compliant customers.

The bottom line

Aprio’s team of experts can help you incorporate ESG into your investment and acquisition decisions as you look to the future. We can also white-board how your current operating business can best take advantage of ESG to increase financial performance.

Related Resources

Schedule a free consultation with us today and get started.

[1] McKinsey Global Private Markets Review 2021, “A year of disruption in private markets”, April 2021, accessed June 2021.

[2] Ibid, 1.

[3] Simon Jessop and Elizabeth Howcroft, “Sustainable fund assets hit record $1.7 trln in 2020: Morningstar,” Reuters, via Morningstar®, January 28, 2021, accessed June 2021.

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