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In the world of mergers and acquisitions (M&A), environmental, social and governance (ESG) considerations have undoubtedly emerged as critical factors shaping deal dynamics and post-merger outcomes. While firms seek to leverage the social and reputational benefits from such a focus, the pressures for companies to improve their ESG standings are being applied by both retail and institutional investors.
On the retail front, PwC’s Global Investor Survey (2021) indicated that 82% of investors expect companies to embed ESG directly into their corporate strategy. On the institutional front, Aon’s M&A Risk in Review had 96% of corporate and private equity investors suggest they expect ESG scrutiny in deals to increase over the next 3 years.
But what does embedding ESG directly into ‘corporate strategy’ and increasing ESG ‘scrutiny’ really mean? Two Australian deals in industries which have strong tethers to ESG considerations, Pharmaceuticals and Construction, are illustrative examples that have arisen in the first quarter of 2024. Namely, (1) the ‘landmark’ merger between CW Group Holdings (Chemist Warehouse) and Sigma Healthcare Limited (Sigma) valued at A$8.8b and (2) the acquisition of CSR Limited (CSR) by Saint-Gobain valued at A$4.3b.
While there are undoubtedly financial drivers behind both deals, management executives involved in each deal sought to swiftly draw upon contextually relevant ESG matters. On the one hand, CSR chief executive Julie Coates stated that the company’s outstanding asbestos liabilities, which have decreased from A$369m in 2014 to A$187m in 2024, will unwaveringly continue to be paid. On the other hand, Chemist Warehouse’s chief commercial officer Damien Gance proactively offered that the company ‘look[s] forward to building the next chapter of…success for the benefit of our customers’.
Time will tell whether such sentiments are, in the case of our examples, sweet talk or truthful statements. However, it is undeniable that M&A provides the opportunity for companies to improve their ESG standing post-completion. The avenues for such improvement are almost innumerable, but triangulating three such avenues across the E, S and G acronym provides some scope.
E: Offsetting environmental liabilities - companies may purposefully seek firms with high-ranking environmental scores, helping to improve their own standing in commonly scrutinised metrics such as carbon emissions & waste management in the post-merger firm.
S: Strengthening employee and community initiatives - in leveraging combined resources and expertise, post-completion companies may offer more comprehensive solutions while bolstering existing relationships with various stakeholders.
G: Enhancing governance structures - in aligning and integrating governance structures with ESG principles from pre-merger companies, the post-merger corporation may more easily mitigate risks, increase transparency and foster accountability through such realised synergies.
Ultimately, and unsurprisingly, M&A transactions present both challenges and opportunities in redirecting ESG principles in post-completion corporations. As the integration of ESG factors continues to shape business decision-making, fostering a culture of sustainability and corporate responsibility will be increasingly essential for corporations dedicated to driving long-term value creation. While such features will remain perpetually relevant, the regulatory environment surrounding M&A in Australia, and particularly ESG governance, will continue to evolve and, as the aphorism goes, reward the brave.
If you are interested in learning more about ESG, see another SUIIS article: ‘ESG: A red herring painted green?’
