• Fred Silberstein

How ESG Affects M&A Transactions

Environmental, social, and governance (ESG) issues are becoming a more significant concern in mergers and acquisition transactions — buyers and sellers need to be prepared.

Key Takeaways

  • ESG issues are becoming more important in M&A transactions

  • ESG concerns include issues ranging from carbon emissions to labor contracts

  • Investors have an increasing interest in companies with a strong commitment to ESG

  • Sellers should be prepared to explain their ESG stance

  • Many companies are including ESG measures in their reports

  • Strong ESG measures can increase a business's value by up to 20%

Every day, environmental, social, and governance (ESG) issues are becoming a more significant concern for businesses in all industries. Consumers demand sustainability from the businesses they patronize, and businesses that ignore ESG or other sustainability issues risk degrading their brand image and losing market share.


ESG, however, is not just an operating concern. It can also affect your ability to sell your business. If you're considering acquiring a business, you should pay attention to its ESG stance. As ESG becomes a non-negotiable aspect of running a successful company, it will also play a larger role in mergers and acquisitions (M&A).


If you're considering wading into the M&A environment, you should be aware of ESG issues. To help you out, this post explains ESG and explores the relationship between ESG and M&A. Whether you're buying, selling, or merging, you should be aware of the following.


What is ESG?

ESG refers to how a business handles environmental, social, and governance issues. Environmental issues include matters like carbon emissions, pollution, and energy efficiency. Businesses may address these issues with actions ranging from using LED lightbulbs to designing products that use recycled materials.


The social aspect of ESG encompasses the business's relationship with people both inside and outside the organization. Internally, this may include employee engagement, organizational diversity, and labor standards. Externally, social issues include human rights and labor standards of suppliers, customer satisfaction, and community relations. How a business protects customer data can also be considered a social issue.


Governance refers to the standards a company uses in its operations. This can include actions that are obviously nefarious like bribery and corruption. But when someone is assessing the governance of a company, they may also look at executive compensation, which political candidates or lobbyists a company supports, or the structure of its audit committee.


ESG in the plumbing and HVAC industries

HVAC and plumbing companies can both help their clients improve their ESG stance. In particular, they can help their commercial clients reduce their carbon footprint. Commercial buildings are responsible for 40% of the world's carbon footprint, and HVAC makes up 40% of that.


By providing their clients with energy-efficient systems and upgrades, HVAC companies help commercial clients reduce environmental harm. Plumbing companies can play a similar role by reducing water consumption through repairs and energy-efficient products.


However, plumbing and HVAC companies also deal with ESG issues internally. They make decisions about the sustainability of the AC and furnace manufacturers they represent. They also have to ensure their social and governance strategies are ethical and sustainable.


How ESG affects mergers and acquisitions

ESG issues can affect M&A transactions in many different ways. Whether you're considering buying, selling, or merging, you should be aware of the following ways that ESG interplays with M&A:

  • Attracting buyers: Investors are interested in ESG initiatives, and they may be more likely to consider acquiring companies with a strong commitment to these types of values.

  • Reporting: Many companies opt to report ESG initiatives as notes on their financial statements or in standalone ESG reports. Having these types of reports can help sellers gain a competitive advantage in M&A transactions.

  • Due diligence: Buyers should investigate a company's ESG issues during the due diligence process, and sellers should prepare for answering questions about their ESG activities.

  • Valuation: Although it's hard to put a number on ESG initiatives, 82% of institutional investors estimate that a commitment to ESG can increase a company's value by about 20%.

  • Competition concerns: Some ESG initiatives require collaboration with the competition. If a business is working with competitors, that can affect the details of the M&A transaction.

  • Merger clearance: M&A transactions over a certain value require clearance from anti-trust authorities, and as ESG becomes more important, it will complicate the merger clearance process by requiring additional documentation related to these issues.

To assess the ESG of an acquisition target, buyers may need to look at partner contracts, sustainability agreements, and internal and external communications. Investors may decide to focus on specific aspects of ESG, or they may home in on the one or two elements that are important to them. Buyers who want to attract the highest price for their business should be prepared to explain and back up their ESG strategies.

Traditionally, businesses used ESG initiatives to minimize risk. For example, ethical governance reduces your risk of employment lawsuits, and a sustainable supply chain reduces the risk of supply disruptions. While risk mitigation is still a benefit of ESG, savvy businesses are now using ESG to drive value.


There is a link between ESG performance and value creation, and ESG-conscious investors are aware of this link. They prefer to invest in companies that have a strong commitment to these values, and they will want proof of a business's ESG actions. By extension, businesses that have found a way to report their ESG initiatives may be more competitive in the marketplace.


Contact SF&P Advisors for guidance through the M&A process

At SF&P Advisors, we guide clients through the M&A process, and we can help you regardless of whether you want to buy, sell, or merge. To learn more about what an M&A transaction looks like in your situation and the impact of ESG in the M&A environment, contact us today.


We look forward to answering your questions, and we can also provide you with a free valuation of your company.