Global dealmakers. Deal breakers and opportunity makers: The role of ESG in M&A

Environmental, social and governance (ESG) themes have risen in prominence over the past five years. Businesses are expected to are expected to be committed to these issues.

In the latest Baker Tilly International study, experts set out to determine how the rise of ESG is having an impact on the investment and M&A decisions made by both corporates and private equity investors.

  • To what extent are they taking ESG factors into account when considering potential deals?
  • What drives their ESG policies?
  • How are they adapting due diligence and valuation processes to take account of ESG?
  • And in which markets and sectors are these debates most advanced?

The main findings of the study are clear:

  • While 77% of respondents say they regard climate change as a key issue, the issues of human rights (73%) and business ethics (73%) are cited as key concerns by almost as many
  • TMT sector is widely regarded as a leader on reporting grounds, according to 93% of respondents
  • Regulation is the top driver pushing the ESG agenda in most markets
  • 60% of private equity investors have yielded positive returns from ESG investments, compared to 44% among corporates
  • 83% say they conduct due diligence on ESG issues at investment and M&A targets.

Dealmakers are more focused on ESG than ever before. In large numbers, they confirm that ESG issues are critical both to their own organisations and also to the way they approach potential transactions. Most say they have walked away from at least one deal on ESG grounds; many say their view on valuation has been materially affected by ESG considerations that have emerged during due diligence.

From our Polish perspective, it is worth noting that Eastern Europe is the region that does the least to promote ESG topics. Such issues still do not play an essential role in transaction considerations. However, we have to be aware that sooner or later, this trend will come to Poland and will definitely impact the deal landscape, especially where more prominent international players are involved. This can already be seen in difficulties in raising capital for investments in coal-fired power plants. On the other hand, it gives a clear boost to the developing green energy sector. To sum up, it can be concluded that ESG aspects of running business operations will have to be considered if one plans to obtain financing via capital markets or sell the business” –  summarizes Krzysztof Horodko, Managing Partner, Baker Tilly TPA.

Regulation is a crucial driver of this focus, but many respondents are applying an ESG lens for other reasons too. Reputation and brand management are front of mind – and dealmakers are acutely aware of the importance of ESG to other key stakeholders, including consumers and their own employees. Equally, dealmakers will need to continue to sharpen their skills and processes; many point to significant challenges in evaluating the ESG credentials of potential targets.

Download the report (pdf)


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