Trends in ESG Deals Over the Past Few Years
Deal making had a rough year in 2020. The global pandemic shook economies around the world and made it harder for M&A transactions to occur with the lack of social interaction. As the tides turned, and society had widespread vaccine distribution, businesses wanted to pivot into a new direction. 2021 included a record-breaking year in deals which included many megadeals. Spinning out from the pandemic, the biggest trend in M&A was healthcare, followed by the megatrend in technology, and finally financial services.
Before the pandemic, deal-makers considered ESG factors in their deals, but they did not find it to be important. That is because there is no standard framework to disclose ESG factors. Another issue is that ESG rating is only based on the values that the company puts forward. A company can only talk about their impact on climate change, but will have a bad score because they did not state their overall values. This leads to greenwashing, where a company markets themselves as an ESG focused company, but does not take any initiatives.
Savvy investors aren’t the only one taking notice, the SEC is looking to build a standard framework for regulation to give a better understanding for company’s how to disclose their ESG factors.
Current Situation
Covid-19 was what some say a ‘black elephant’ event, which is a mix between a black swan event that was lurking over society like an elephant in a room. Global society showed its resilience in order to recover from the pandemic and deals were made to better improve our health-care system. Climate change has been a macrotrend that has been glooming over society’s head for quite some time now.
After showing great resilience through the pandemic, it is time to take action to prevent another ‘black elephant’ event where Earth’s atmospheric temperature is consistently rising by 2 degrees year-over-year. ESG deals have doubled since the pandemic which is the tailwind of a megatrend that is only just beginning.
Executives have already started to see returns from their deals with ESG focused companies. This is what Julie Haeflinger from Baker Tilly had to say about ESG focus in M&A,
“Not only are dealmakers focusing on ESG in record levels, but daylight is emerging in the returns of a target with a strong ESG record and one with only mediocre performance. Investors report that ESG investment strategies deliver improved returns and dealmakers say investor pressure is growing. In an increasingly competitive landscape, smart dealmakers are using ESG as a lever to build value and expedite returns.”
Julie Haeflinger, Corporate Finance lead, Baker Tilly
This is evidence that ESG factors in a company can help build or destroy value. Companies who take initiatives to change their values to focus on climate change and diversity within their workforce, will impose less risk for investors. This in itself will drive demand in deals that are focused on ESG.Regulators and policymakers have already begun to incentivize deals that are focused on ESG.
The Joe Biden administration created the build-back-better (BBB) act that will help develop clean energy sources and help slow down climate change. The renewable energy and climate change markets are going to see a boom from the BBB act. This will force companies to innovate their technology, operate in a more efficient manner, and provide a lower cost-of-capital to their investors.
2022 and Beyond
Let’s just say that 2022 is going to be a great year for ESG-focused deal-making. Pitchbook predicted that 2022 would be the year of ESG deals. As the regulatory framework gets put into place and policymakers continue to push the “Green New Deal,” society will conform to the megatrend that is just starting.
This is going to be comparable to the multi-decade megatrend that was technology. What was once considered a façade in society, has now cemented itself in our daily lives. Deal-makers and corporations must work together to mitigate the risks that companies have with ESG factors. Companies are challenged to reduce their carbon footprint or to find ways to have underrepresented groups of people within upper level management.
The social credit that is ESG is going to drive exceptional value for companies that put their best foot forward and will create great returns to their stakeholders.
Deals That Reshaped The Industry
- In July, 2021, Shell, a subsidiary of Royal Dutch Shell plc, reached an agreement with ConocoPhillips, to sell their oil and gas production in the Permian Basin for $9.5B cash. This showed that Royal Dutch Shell plc was making an effort to reduce its carbon footprint and make ESG a big factor within the oil industry.
- Also in July of last year, Blackstone acquired Sphera Solutions for $1.4B. Sphera solutions is a leading provider of ESG data, software solutions, and consulting services around the world. This deal is a remarkable opportunity to standardize the due diligence process in deal-makings that has been so disconnected before.
