In fact, a majority of 400 global dealmakers surveyed by Datasite in 2021, predicted ESG would become increasingly critical to M&A decision-making and that climate change was the biggest dealbreaker to completing M&A that year.
This remains a theme, especially for the UAE, host country for this year's COP 28 meeting. While M&A volume increased by 9% in the UAE and 6% in Saudi Arabia in 2022 compared to 2021, most of that activity was prompted by consumer markets, technology and digital infrastructure, industrials and financial services deals, and not by oil and gas investment. This may reflect the region's increased desire for more diversification as well as the impact of climate change on M&A.
ESG investing popularity declines among UK investors over greenwashing fears
Yet, climate change and other ESG issues provide an opportunity for dealmakers to create value. Some are using M&A as a mechanism to improve sustainability credentials or incorporate ESG-related metrics into valuation models. Changing regulations, including policy transition to net zero, and new technologies, like clean tech, are creating several new opportunities, especially in the energy and power sector. For example, the US Inflation Reduction Act gave the US energy and tech sectors a big boost, injecting a proposed $369bn into climate change and energy security investments, including tax and other incentives. A year since the act was passed, over 270 new clean energy projects have been announced, with investments totalling $130bn.
Still, as climate change causes floods, forest fires and other extreme-weather super events with greater frequency and increasing intensity, special-interest shareholder groups, government agencies and customers are demanding more evidence of ESG compliance. Investors continue to see that companies with higher ESG scores perform better than their peers, and that ESG factors impact an organisation's ability to attract and retain talent, presenting a major threat to a company's reputation, value and growth.
To properly assess and value assets in M&A transactions, buyers and sellers need to incorporate broad ESG risk assessments that include a full climate footprint, supply chain and reputational concerns during due diligence, if risks are to be avoided or opportunities won. Litigation risk, consumer demands and risks to physical assets also need to be considered.
These assessments also need to pay attention to regulations and compliance. Governments in the US, Europe and the UK are driving the net-zero agenda through disclosure requirements and dealmakers need to be aware of how they may impact a deal.
Increased scrutiny of ESG factors and climate commitments have also caused a rise in ESG activism. In 2022, the number of companies publicly subjected to new campaigns by global activist investors rose 6% from a year earlier. Additionally, investors with minimal shares can now raise and leverage sustainability concerns and influence investment decisions, where previously, investors were required to have significant holdings, if not majority shares to make waves.
A key emerging trend is the development of larger activist firms, forming private equity arms to engage in transactions with activist targets. Ultimately, the activist landscape has become far more sophisticated, and ESG activism will only continue to grow.
This means corporate directors need to recognise the changed business environment and plan for any gaps or vulnerabilities that might attract activist attention. For dealmakers, this emphasises just how essential ESG considerations are to robust due diligence processes moving forward.
With COP 28 and ESG activism likely set to gain more momentum, there is room for little scepticism on the value of climate change. Datasite data further supports this, as it shows global M&A deal kickoffs in the energy and industrial sectors swelled in June, a good indication of reinvigorated sentiment for deal-making, particularly in sectors where ESG progress is crucial and must be accounted for if a deal is to be completed.
Ultimately, the importance of an asset's ESG performance and obligations will continue to gain momentum in M&A, creating opportunities for dealmakers to further transform overall value creation.
Merlin Piscitelli is chief revenue officer, EMEA, for Datasite.