Mergers and acquisitions have been rising over the past couple of years thanks to robust growth and low interest rates. According to a new EY survey, 60% of U.S. CEOs are actively pursuing M&A, and nearly three-quarters expect an increase in competitive bidding over the next 12 months, suggesting these trends will continue.
Let’s take a look at how ESG could become a significant driving force behind mergers and acquisitions over the coming year.
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M&A Focuses on Sustainability
More than half of CEOs plan to step up their investments and acquisitions in 2022, according to the EY survey, with roughly a quarter saying they would prioritize deals to improve their ESG positioning and sustainability footprint. Surprisingly, ESG rationales surpassed increasing operational capabilities and acquiring new technologies as primary objectives.
CEOs list ESG as a primary motivation for M&A. Source: EY
More than 80% of CEOs see ESG as a value driver to their business over the next few years, and virtually all have adopted a sustainability strategy. These trends mirror existing trends in the European Union, where executives have come to recognize the benefits to their bottom lines and ESG reporting mandates exist across the spectrum.
The sectors that saw the most value in ESG include:
- Consumer Products (85%)
- Life Sciences (85%)
- Financial Services (84%)
While regulations drive some of these trends, nearly three-quarters of CEOs adopted ESG for strategic reasons rather than pressure from regulators. These reasons include competitive differentiation and a lower cost of capital. Climate change also ranked above talent scarcity and cost for risks to their business’ future growth prospects.
Implications for Investors in ESG
The market for ESG investments is rapidly growing. According to Bloomberg, an estimated $120 billion flowed into sustainable investments last year – more than double the $51 billion in 2020. Since 2018, the amount invested in ESG has grown tenfold, with an estimated one-third of all assets containing sustainable investments.
ESG ETF inflows continue to rise. Source: Bloomberg
EY’s latest survey suggests that CEOs are listening to investor demands for companies to meet ESG goals. For example, Engine No. 1 famously installed three new board members at Exxon Mobil to push climate-friendly policies. Meanwhile, ESG funds capture billions in net inflows each year, rewarding companies that meet the standards.
Investors could see the ESG universe increase as a result of these efforts. As more companies meet ESG criteria, ESG funds could expand their portfolio to provide greater diversification. There could also be a greater number of green bond issuances, creating opportunities for investors to participate in ESG-friendly fixed income.
Of course, investors may also need to exercise caution. Greenwashing has made it difficult to separate genuine ESG-friendly companies from those simply seeking funds earmarked for ESG initiatives. Companies making ESG-focused acquisitions could also face an uphill battle when containing costs and realizing an attractive return on investment.
Be sure to check out this article to know more about the dark side of ESG.
The Bottom Line
ESG and sustainability are becoming a priority for many CEOs and businesses for regulatory and competitive reasons. In fact, EY’s recent survey shows that they are both leading drivers of M&A in 2022. These new deals could lead to more opportunities for investors to make their portfolios more ESG-friendly and potentially achieve greater diversification.
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