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New drivers of value in M&A transactions?

The classic financial value of a company is driven by the “EBITDA-multiple”. With an increasing focus on climate and sustainability, will we see an uptick in company valuations driven by the softer values of ESG?

What is “ESG”?

Interest continues to grow around Environmental, Social and Governance (ESG) issues. Mindful investors – companies and individuals – are already considering the social impact of investments alongside the routine financial returns required of investments.

A new competitive edge?

Sustainability has become more than a buzzword. Commerce has seen an increased focus on the impact of business on the environment, employees (e.g. mental health) and the well-being of the community in which they operate.

Government and activist pressure has focussed on the environment and climate change, which has undoubtedly inspired private companies to be awake to the footprint left on the wider world around them.

We may well see a competitive edge for investments in the companies who are able to actively demonstrate upholding these values whilst also turning a healthy profit.

A radical shift?

Priorities within businesses have had to shift during the coronavirus pandemic. Technology enabling remote working has become critical. Social networks and investors have celebrated companies who are ‘doing the right thing’ in protecting their employees and communities. And according to the Wall Street Journal this is expected to not be a fad.

During these challenging times, we’ve seen a shift in behaviour of industry and investors. There is a growing awareness that each has an important role to play in driving positive social and environmental change both now and for the generations to come.

Sustainable investment

This summer. the European Commission published six draft delegated acts for consultation as part of their Renewed Sustainable Finance Strategy,

The proposal stood on the shoulders of the 2018 Action Plan on financing sustainable growth and provides a roadmap with new actions to increase private investment in sustainable projects and activities supporting the European Green Deal. It hopes to ensure “sustainable finance” (taking due account of environmental and social considerations when making investment decisions) that will lead to increased investment in longer-term and sustainable activities.

The draft legislation covers three areas – environmental, social and governance. These ESG components are integral parts of sustainable economic development and finance. This focus seeks to clarify the duties and give clear advice with three primary objectives in mind:

  • To shift capital flows away from activities that have negative social and environmental consequences.
  • To better assess and manage financial risks resulting from e.g. climate change and environmental damage.
  • To direct finance towards economic activities that have genuine long-term benefits for society.

Once adopted in law, we speculate that due diligence for investments will increasingly bring into focus ESG issues.

Interestingly, the UK Government has indicated that it will seek to continue to align with these European standards from 2021 onwards. So it is unlikely that UK Plc will stand-alone and ignore ESG initiatives.

Will this affect your company sale?

As ever, the effects will take time to trickle down. Larger corporate firms are already leading the change towards sustainable investment – e.g. BP’s commitment to be net zero carbon emissions by 2050.

For smaller companies, it will inevitably take time – but how long exactly?

Most of our company sale activities involve a large corporate buyer – usually with revenues from £’Million’s to £’Billions. It is these large firms that are rapidly changing their business models to ensure sustainability as discussed above. It is therefore natural that they will seek acquisitions that are a similar cultural fit.

Good news for a longer term view in business and ultimately also good news for the planet? We think so.

Interested in how this could affect the due diligence of your potential company sale? Then book a confidential discussion here.