Is ESG Here To Stay in M&A Dealmaking?

Environmental, social and corporate governance (ESG) gained momentum during the COVID-19 pandemic and has become a driver in M&A dealmaking. It is no longer a "nice to have" for corporate boards.

To learn more, SS&C Intralinks partnered with the Transaction Advisors Institute to publish How Top M&A Professionals Are Embracing ESG in the Deal Process, a report featuring commentary about ESG from top dealmakers.

We spoke with William Jefferson Black from Transaction Advisors to learn more about what M&A dealmakers think about the ubiquitous topic.

SS&C Intralinks: Can you briefly define what ESG is and explain its significance to M&A in 2021?

William Jefferson Black: Environmental, social and corporate governance considerations, what we now call ESG, has become a proxy for good stewardship, which means two things for M&A professionals: First, target companies that embrace ESG are more likely to grow as they connect with customers, suppliers and capital providers with approaches that are in step with contemporary stakeholder standards. Second, target companies that embrace ESG are less likely to have problems that lead to issues with customers, suppliers and capital providers. M&A is about returns on invested capital. If a target company grows, the IRR is better. If the company has trouble and operates in a risky fashion, the IRR will get hurt.

What were you hoping to learn about ESG when you set out to put together the report?

How ESG is considered in practice, not just conceptually. I was interested in hearing from the head of M&A at Hewlett Packard Enterprise that ESG is a screening factor for big deals, but for smaller acquihire transactions it’s viewed as an area that may be able to be addressed post-close.

I was also interested in learning the specific ways capital providers adjust deal terms based on ESG factors: increasing borrowing costs and imposing more restrictive covenants, for example.

You interviewed an all-star roster of M&A dealmakers. Tell us about some of the people you interviewed.

We talked to Ray Cameron, head of investment stewardship for the Americas at BlackRock, which has nearly USD nine trillion in assets under management.  We talked with Kamran Khan, head of ESG for Asia Pacific at Deutsche Bank, who is working on a range of supply chain issues. We talked with Paul Davies, who co-chairs the ESG Task Force at Latham & Watkins in London. We talked to Dr. Zhenyi Huang, from the M&A Research Centre, at The Business School (formerly Cass), City, University of London. And, as I mentioned earlier, we talked with Sonalee Parekh, senior vice president of corporate development and investor relations at Hewlett Packard Enterprise

Kamran Khan gave you an impactful quote when he said, “A disconnect on ESG could be lethal for your deal.” What did you make of that statement?

Kamran talked about ESG due diligence to identify key technical issues (e.g., unflattering baseline of CO2 emissions; health-related effects of a product; operational mistakes made by the target which will have lasting effects (e.g., worker safety record; questionable pricing practices; facilities built on inappropriately acquired land, etc.). He went on to say that some companies are going to be unsellable, no matter how clever the deal structure or indemnification model.

ESG due diligence requires the collection and analysis of massive amounts of data. How can technology help deal teams analyze information more efficiently and avoid risk in a highly competitive market?

For dealmakers, the M&A process will now need to incorporate even more data and a more sophisticated review.

Technology will play an increasingly important role in the analysis of ESG data, from reviewing sensitive personal information in a secure environment during diligence to the application of AI to analyze troves of environmental or workplace data.

Given the speed in which deals are now being pursued and the pressure to secure strategic acquisitions, the addition of ESG-related analysis will need to be tackled smartly. You can’t just work harder.

The adoption of digital platforms like Intralinks for deal management will be a critical factor for the successful embrace of ESG as M&A professionals need to direct their attention to the key value drivers and risk factors associated with the deal.

Is ESG here to stay?

Pat Tucker, managing director at strategic communication firm Abernathy MacGregor, where he heads the M&A and Activism practice said, “Your sources of capital do care about this, and therefore you should too.” BlackRock’s Ray Cameron also said, “The next generation wants to work for companies, buy from companies and invest in companies that embrace ESG. This is not a ’fad.’ This is where the economic demand is going and M&A needs to align with this reality.”