New research suggests that businesses that undertake successful acquisitions are more likely to also see their environmental performance scores improve. Here, we take a look at why this might be, and how the research shows that M&A activity can have an impact on society as a whole.
Some background - why is ESG so important?
Whether you know it as ESG or corporate social responsibility (CSR), the terms basically mean the same thing. It’s all about the policies a business has in place to try to limit their impact on the environment, as well as their approach to social responsibility, including factors like how employees are treated or even the diversity of their workforces.
A previous study by Mergermarket found that over a third of the respondents it spoke to, during a study into how investors and executives view ESG performance, said climate change and waste management were their top concerns. ESG investments are big business and younger investors, particularly, say they are concerned about a business’s environmental credentials when deciding how to invest. Some 23 per cent said that ESG was important when considering their investment portfolio, according to Calastone Research.
Businesses are also aware that building strong ESG credentials can help their bottom line by enabling them to secure better rates on things like business loans, according to a study by Goss and Roberts. Then there’s the fact that consumers are increasingly keen to demonstrate their dislike for firms viewed as ‘unethical’ through boycotts, while preferring to spend their hard-earned cash with businesses with strong ESG policies in place. A 2018 Neilsen study found that 81 per cent of global respondents said they felt strongly that companies should help improve the environment.
How can an M&A deal affect a business’s environmental performance?
Cass Business School’s The Environmental Impact of M&A study has looked into the impact of a deal on an acquirer’s environment performance and they found some interesting results.
Firstly, it was found that the acquirer in a deal usually has a better environmental performance score than a target. This is because businesses that are looking to make acquisitions are usually larger and more established than target businesses and therefore have the economic clout to ‘enable’ them to be greener. The findings suggest that the more money a business has, the easier it is for them to take a responsible approach to things like waste management and climate change management.
The researchers then looked at the average acquirer environmental scores and how these changed from one year prior to an acquisition taking place, to five years following the acquisition. The average score increased from 0.132 a year prior to the deal, to 0.657 five years after the deal.
Perhaps most notably, though, the Cass research found that the better an acquirer performs financially following a deal, the more notable the increase is in its environmental scores.
Maximising the positive impact of a deal on your environmental performance
In light of the study, there are a few measures those acquiring businesses can take to ensure their organisation becomes greener as a result of an acquisition
Give ESG performance the attention it deserves from the outset of a deal
From the very early stages of the dealmaking process, as an acquirer, it pays to consider your own environmental performance and that of your target.
Remember that inorganic growth means higher expectations
As a business grows in size as a result of an acquisition, there will be a greater responsibility on its shoulders to be able to demonstrate sound environmental practices. Consumers expect larger, financially stronger businesses to have similarly strong ESG policies in place and the ability to live up to these expectations could lead to further success and growth.
Managers should ensure that financial success translates to a greener business
Managers need to play an active role post-deal to ensure that combined resources are utilised to ensure that the new, larger version of the business has enhanced ESG performance. This might involve learning new skills that can help to improve the business’s environmental standing going into future deals.
In conclusion, the impact that a successful deal can have on an acquirer’s environmental performance seems undeniable. Those looking to buy a business should bear this in mind when embarking on a deal and should also do what is necessary to ensure that financial success translates to stronger environmental policies post-deal. Not only will you see the difference from a financial and reputational perspective, but you can contribute positively to society as a whole by doing so.
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