In recent years, environmental, social, and governance (ESG) factors have become crucial in the mergers and acquisitions (M&A) arena. A 2021 study from Private Equity International’s LP Perspectives showed that 88% of investors considered ESG factors during due diligence, an increase from 80% in 2020. This upward trajectory underscores the growing significance of ESG in investment decisions, transitioning from a peripheral consideration to a mainstream priority.
To that end, a recent survey from Empira Institutional Trends finds that almost 70% of institutional investors now characterize ESG criteria as “important” or “very important” when making decisions. Economists agree that by 2025, this focus on ESG in M&A decisions will no longer be a trend but a new reality.
ESG will undoubtedly be pivotal in shaping M&A decisions in 2025. Saddock Wealth can help you develop strategies to manage these evolving considerations.
What Is ESG?
ESG refers to non-financial factors like a business’s environmental impacts, social responsibility practices, and corporate governance structure. These ESG criteria, which examine a company’s ethical impact and adherence to environmental and social changes, can significantly influence investment decisions.
ESG’s Impact on M&A Strategies
ESG as a Value Driver
Because ESG is becoming an essential part of the valuation process, having high marks in ESG can organically enhance a company’s value. Surprisingly, according to recent data, companies focusing on ESG practices are in fairly low supply. The good news for businesses that have embraced the evolving landscape and begun implementing ESG practices is that they are well-positioned to meet the growing demand for sustainable and ethical operations.
In addition to supply and demand, ESG also raises a company’s value because it aligns with the value system of current and future consumers. The public is actively seeking to engage with companies that employ the best ethical and environmental practices, which inherently increases a business’ valuation.
How Do We Quantify ESG?
As stated, reviewing ESG factors is becoming standard practice in M&A due diligence, but many companies have challenges quantifying characteristics that do not have a direct monetary value. Luckily, there are guidelines to help pave the way, like the Essential Guide to Valuations and Climate Change or similar publications that serve as a general valuation blueprint.
In addition, more organizations are creating clearly defined metrics to measure ESG, which is another reflection of its growing importance in M&A evaluations. A mergers and acquisitions expert like Saddock Wealth can provide ample guidance in understanding these common metrics and how they may impact a business’s value and bottom line.
Forward-Looking ESG Trends in M&As for 2025
Regulatory Developments
There will be a higher demand for accountability in 2025, likely to encompass new global pacts and regulations requiring greater adherence to strict environmental practices. As such, these regulatory changes may mandate ESG disclosures and compliance with specific rules or thresholds, which will affect M&A strategies and executions for the long-term future.
Investor and Stakeholder Expectations
Stakeholders and investors are increasingly demanding transparency and accountability in ESG matters. This increased demand is most evident in discussions about the future of climate change and Big Tech.
ESG-Driven Value Creation
When two organizations align on ESG factors, it can enhance value after an acquisition. Such alignment fosters collaboration that improves operational efficiency, strengthens brand reputation and customer loyalty, and opens doors to new technologies and markets.
Preparing for ESG-Centric M&As in 2025
Building ESG Competency
Because ESG factors are constantly evolving and don’t have a straightforward monetary value, they can be hard to define and quantify when preparing for the M&A process. As such, companies need to develop internal expertise In ESG matters with the assistance of a professional resource like Saddock Wealth.
Engaging with Stakeholders
Companies can also organically build their reputation and value by engaging with their stakeholders, including investors, employees, and consumers, about their current or imminent ESG initiatives. This also provides an opportunity to collect valuable feedback, which can shape or reshape future ESG strategies.
Accounting for ESG in Future M&As Starts with Saddock Wealth
Integrating ESG strategies and considerations into a mergers and acquisitions framework is not easy. It requires guidance and expertise to ensure that all financial and ESG-related goals are met.
Saddock Wealth can help. Whether you are in the middle of an ongoing M&A or are simply starting to explore your options, contact us today to ensure that ESG remains a solid and value-enhancing foundation of your future M&A strategies.