The pressure placed on businesses to recognise the importance of their environmental, social and corporate governance (ESG) approach is becoming an increasingly popular conversation between M&A professionals. But vendors are asking “how does this affect the value of my business”?

It could be that when businesses are proven to be more environmentally friendly than they are more attractive to local and overseas investment. In turn, this naturally increases the valuation placed on a business by advisors and this difference has consequently been called a business “greenium”. The precise calculations as to how a company’s ESG strategy increases its valuation is an ongoing debate, but it is, however, much more simple to see how an organisation can financially benefit from a well-structured and systematic ESG approach. Such examples include:

• Increased levels of productivity: Where a social presence is at the core of a business’s operations its credibility increases, this has a strong correlation with keeping employee turnover at a minimum level.
• Cost-saving: A strong ESG strategy would result in lower energy bills.
• Refined compliance: With increasing levels of regulations being placed on emissions, green energy and a business’s carbon footprint, a greener approach will reduce the chance of potential wrongdoing that may result in financial penalties and could affect the reputation of a business.

A recent research study undertaken by ERM Group was focused on how important ESG was when attracting private equity investment. Across the survey, which consisted of 50 private equity professionals it was concluded that the majority of professionals believed that acquiring a business now with a strong ESG approach would become a much more valuable asset in 3-5 years. This was reinforced by results that found that 85% of ESG equity indices outperformed non-ESG equity indices in Q1 2020. The respondents also highlighted that they believed the sectors where a clear ESG approach has previously been implemented that will have the most influence on investment include: Energy, Consumer goods, Healthcare and TMC.

Translink IMA is part of Translink Corporate Finance, an international M&A group with over 600 finance professionals located in 30 offices across the globe. Our offices have closed transactions in every industry and our sector expert groups include IT, SaaS, Healthcare, Food, Automotive, Industrials and Transport. We are focused on providing our clients with deeper insights into global developments and knowledge on targets and bidders in their respective markets.

If you would like to learn more about how Translink IMA may be able to help you with succession planning or growth by acquisition, please do not hesitate to get in touch with one of our advisors via our website at IMA Corporate Finance.

References
50 ERM, Eyes on the prize: Unlocking the ESG premium in private markets

Dealsuite, ESG pays: Harnessing the ‘greenium’ in M&A