How ESG Factors Are Driving Deal Activity in Europe

The Real Deal Podcast

ESG is perhaps the biggest corporate trend. Find out how it's shaping M&A activity in Europe.

In this episode, we look at how ESG factors are driving deal activity. Joining host Julie-Anna Needham is Alessandra Castelli, content editor, public M&A and regulatory for EMEA at Acuris. Dealcast is presented by Mergermarket and SS&C Intralinks.

In this podcast, you’ll hear about:

  • The heightened focus on environmental, social and corporate governance (ESG).
  • What's driving ESG for private and public companies.
  • ESG's growing importance in private equity.


JULIE-ANNA NEEDHAM: Welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham. In today's episode, we're looking at how ESG factors are driving deal activity. I'm joined by Alessandra Castelli, content editor, public M&A and regulatory for EMEA at Acuris. Hi, Alessandra.


JULIE-ANNA NEEDHAM: So our focus on ESG is a huge corporate trend we've seen gathering pace, particularly over the past 18 months. From your perspective in Europe, how is that trend prompting deal activity?

ALESSANDRA CASTELLI: Yes, so ESG factors are more and more critical to M&A decisions making. We are seeing corporate values but also reputational expectations that have been key to deal makers, especially when they decide on mandates or when they are advising buyers on specific targets. So while before or traditionally, ESG factors have been considered more at due diligence stage. What we are noticing now is a tendency of making those considerations at the early stage of the M&A cycle, pretty much as soon as a buyer starts shopping around or a target wants to be acquired.

JULIE-ANNA NEEDHAM: And what's driving that trend? Is it coming from shareholders, or is it coming from the companies themselves?

ALESSANDRA CASTELLI: So I think here, Julie-Anna, we need to make a distinction between public and private companies because private-- public companies have shareholders behind, and there has been a lot of increasing regulations with the growing demand from stakeholders to be more responsible investing. And that means that ESG factors are always at the top of agenda of listed entities, or at least they should be. There is always a lot of focus on governance, executive pay, shareholders' rights, board diversity, and the structure of the board, and the structure of audits. What we have seen with the private companies is this growing trend where M&A is actually used to improve their ESG record and to achieve also ESG targets, so there are a matter of ethical and reputations for companies. There are considerations that are being made obviously at both level, public and private.

JULIE-ANNA NEEDHAM: And I guess there's always the chance that the private companies can become public at some point in the future want to make sure they're in a position to do so.

ALESSANDRA CASTELLI: Absolutely, or there is the opposite trend of listed companies going private to avoid being in the public eye.

JULIE-ANNA NEEDHAM: So can you talk us through the two types of deals that are driving this ESG-related deal activity?

ALESSANDRA CASTELLI: Yeah, we have identified these two trends in our analysis. The first sees buyers with low ESG records targeting businesses that have high ESG credentials so to improve their buyer's ESG records, and then we have identified another trend, where we see assets that have not yet reached their full ESG potential. They are being bought, or they are improved internally, and this is typical, for example, of private equity funds that are entering a particular space.

JULIE-ANNA NEEDHAM: And do those private equity funds, do they see this as kind of one of the hottest trends in the market at the moment?

ALESSANDRA CASTELLI: They do. They do. Absolutely, and ESG factors are at the top of their agenda. That's because often they have investors. They are required to disclose what exactly they need-- they want to invest in, or others might have some specific bans on certain sectors, for example, oil, or arms, manufacturing. Others, again, have a preference for social and environmental-friendly assets, and they invest only in this kind of company. So, yeah, to answer your question, definitely. They have. It's at the top of their agenda.

JULIE-ANNA NEEDHAM: So what kinds of activity are you seeing in different sectors?

ALESSANDRA CASTELLI: Yeah, we are seeing a demand. We are seeing demands for ESG data. For example, we have seen Systemalitics that was acquired by Morningstar, or ISS was acquired by Deutsche Boerse. We have also seeing players from emerging markets that are looking for ESG assets in Europe. That was, for example, the case of Mitsubishi that acquired Eneco, a Dutch energy company.

Another trend we are seeing is those of stranded assets. So companies who might have business models, they're becoming obsolete due to ESG issues that are focusing a lot on innovations via ESG. And then we have been told also by advisors in the sector that companies should consider also spinning off their core business, or, as I said earlier, some might also consider going private to avoid the public scrutiny in relation to ESG topics. But, obviously, M&A is not always used to improve the ESG records, or it cannot always be used to improve ESG records. So companies sometimes might form partnerships or consortium to address how they have to navigate ESG issues, and they hire external consultants also to do that.

JULIE-ANNA NEEDHAM: And can you give some examples of both the partnership model and companies that are potentially looking at spinning off their core assets or stranded assets?

ALESSANDRA CASTELLI: Yeah, I think definitely the renewable energy and biotechnology sectors but also the energy sectors is where we are seeing a lot of changes happening at the moment.

JULIE-ANNA NEEDHAM: Great. Thank you. Can we look at multiples and valuation? What types of multiples are you seeing in ESG-driven deals?

ALESSANDRA CASTELLI: What we are seeing is that multiples have increased for companies that are in high demand in specific sectors, for example, the sector of renewable energy or biotechnology. That's because there is this imbalance between supply and demand. There is a high demand for this kind of ESG-friendly companies or companies that are highly active in environmental, social, and governance space, but there is not enough of this type of targets in the market. In particular, for example, we looked at the renewable sector, the multiples there, and we have seen that in past five years, there have been 30 deals announced where the target was active in the renewable sector specifically.

Of these, I think 16 were deals that had taken place between 2019 to today, and the average multiples there were around 14 times EBITDA. While if you compare this to the two years before, 2018, 2017, average multiples were in the range of five times so a huge difference in the last three years for the-- specific to the renewable sector. It's definitely interesting to see how these multiples are skyrocketing at the minute.

JULIE-ANNA NEEDHAM: And how has the pandemic driven this trend, and how are you expecting it to continue or evolve?

ALESSANDRA CASTELLI: I think the pandemic has had quite an impact on companies making them think particularly about whether-- about their ESG profile. Climate change conversations are happening also and also increase in environmental regulations, especially in Europe, have forced the companies to think more seriously about their ESG profile. And I see there are a lot of buyers that are willing, for example, to pay a premium for businesses that have a very good ESG profile. And that's a testament of the fact that there are reputation and reputation factors that come into play as well as a negative publicity they may want to avoid, and so they look very carefully at whether they are meeting the ESG targets or not.

In general, also, I think companies are looking at becoming more sustainable. Sustainability, sustainable in general, there are words that are being used a lot as a synonym of ESG, being ESG friendly, or even going green. But it is also true that if an ESG strategy is not there yet, companies are willing to pay a premium, and they are willing to hire external consultants and been advised on how to increase whether they're a public or private company. So I think this trend will continue because, regardless of the industry, the target company is-- the underlying business will always be affected by ESG considerations.

In this podcast, you’ll hear about:

JULIE-ANNA NEEDHAM: Great. Thank you.

ALESSANDRA CASTELLI: You're welcome. Thank you very much.

JULIE-ANNA NEEDHAM: That was Alessandra Castelli, content director, public M&A and regulatory EMEA for Acuris. Thank you for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast. You can find us on Apple podcasts, Spotify, or look out for your Mergermarket news alert. For more information, check out our show notes. Join us next week for another episode.