Environmental, social & governance (ESG) issues are playing an increasingly prominent role in M&A activity—both in ESG-driven deals (“sustainable M&A”) and in mainstream transactions that include ESG as part of the due diligence and decision-making process.
We are still in the early days of the marriage of ESG and M&A. According to experts at a recent event held by The Conference Board ESG Center, sustainable M&A currently makes up only 5-9% of global M&A transactions. In addition, companies report that the full range of ESG and stakeholder issues and impacts are not yet well integrated into board decision-making, including in M&A and other capital allocation decisions.
But this picture is likely to change. In the US and globally, CEOs’ number-one priority for growth is to introduce new products and services, which companies can do organically or through M&A—including sustainable M&A. Recent examples of sustainable M&A include Chevron acquiring Renewable Energy Group in 2022 to accelerate progress toward its goal of growing renewable fuels production capacity to 100,000 barrels per day by 2030, and Shell buying Volta Inc. in 2023 to scale up its US public electric vehicle charging network.
In addition, increased disclosure requirements—especially the EU’s Corporate Sustainability Reporting Directive—will bring greater attention to companies’ risks and opportunities across a broad spectrum of ESG issues. This is likely to generate pressure for reporting companies to divest as they seek to improve their ESG profiles, and as in the past, other firms without the same disclosure and stakeholder pressures may be willing buyers of these “troubled” assets.
Moreover, we are already seeing companies incorporate more “E&S” factors such as GHG emissions, DEI, and supply chain responsibility into their due diligence process, adding to their preexisting focus on traditional “G” issues (e.g., antibribery compliance).
In this environment, boards can take these six essential steps to guide transactions at the intersection of M&A and ESG:
Environmental, social & governance (ESG) issues are playing an increasingly prominent role in M&A activity—both in ESG-driven deals (“sustainable M&A”) and in mainstream transactions that include ESG as part of the due diligence and decision-making process.
We are still in the early days of the marriage of ESG and M&A. According to experts at a recent event held by The Conference Board ESG Center, sustainable M&A currently makes up only 5-9% of global M&A transactions. In addition, companies report that the full range of ESG and stakeholder issues and impacts are not yet well integrated into board decision-making, including in M&A and other capital allocation decisions.
But this picture is likely to change. In the US and globally, CEOs’ number-one priority for growth is to introduce new products and services, which companies can do organically or through M&A—including sustainable M&A. Recent examples of sustainable M&A include Chevron acquiring Renewable Energy Group in 2022 to accelerate progress toward its goal of growing renewable fuels production capacity to 100,000 barrels per day by 2030, and Shell buying Volta Inc. in 2023 to scale up its US public electric vehicle charging network.
In addition, increased disclosure requirements—especially the EU’s Corporate Sustainability Reporting Directive—will bring greater attention to companies’ risks and opportunities across a broad spectrum of ESG issues. This is likely to generate pressure for reporting companies to divest as they seek to improve their ESG profiles, and as in the past, other firms without the same disclosure and stakeholder pressures may be willing buyers of these “troubled” assets.
Moreover, we are already seeing companies incorporate more “E&S” factors such as GHG emissions, DEI, and supply chain responsibility into their due diligence process, adding to their preexisting focus on traditional “G” issues (e.g., antibribery compliance).
In this environment, boards can take these six essential steps to guide transactions at the intersection of M&A and ESG:
- Integrate a full range of ESG considerations, not just environmental factors, into transaction assessments. Sustainability-driven M&A currently prioritizes environmental sustainability, according to the experts at our recent event, but companies also need to assess transactions for their broader social and economic effects. Indeed, there are often trade-offs among environmental and social factors: a transaction that may help to reduce GHG emissions may cause social and economic dislocations. Companies should therefore adopt a holistic approach to incorporating ESG factors and stakeholder impacts into their decision-making processes.
- Highlight the company’s business logic for a sustainability-driven divesture. While companies may be tempted to just divest an asset that is environmentally or socially problematic, they wi
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