Recently, Axios published an article titled: “Why ESG isn’t going away despite all the noise.”1
The headline reflects our perspective as well. At LNW, we remain committed to incorporating ESG criteria (environmental, social and corporate governance) into our investment process even as opposition to ESG considerations has picked up in the past two years, particularly in states with strong ties to the fossil fuel industry.
Despite attempts to politicize ESG, the underlying investment rationale underpinning the integration of ESG has not changed, and there is a relatively quiet but growing effort by corporations (and investors) to use ESG to add value to their decision making.
Given increasing academic research and practitioner evidence, it’s difficult for any investor to credibly deny the financial relevance and materiality of ESG and impact-related risks and opportunities. Climate change, job quality standards and consumer privacy, among many other ESG factors, can affect a company’s operations and be a source of innovation and competitive advantage.
The latest evidence comes from a 2024 survey conducted by consulting firm Deloitte.2 In January 2024, Deloitte surveyed 500 corporate executives and managers at companies with revenue of at least $500 million and private equity funds with at least $1 billion in assets. The survey was global, with a third of companies based in North America, a third in Europe and the Middle East, and a third in Asia Pacific region.
According to the authors of the survey: “Overall, ESG has grown from the occasional area of focus to a more influential and consistent M&A consideration over the past two years… with a greater recognition among leaders that it is a lever for measuring, protecting, and creating value.”
Some specifics:
- Virtually all – 99% – of business leaders surveyed by Deloitte said they consider how their organization’s ESG profile would be affected by a potential acquisition or divestiture.
- 57% said their organizations have defined metrics in place for evaluating ESG.
- More than 60% said an ESG concern caused their organization to walk away from an acquisition, including: 69% in the energy/industrials sector, 72% in consumer goods/services and 80% in private equity.
ESG Being Used in Asset Valuation
As an overwhelming indication that ESG is being used in the corporate valuation process, nearly all of the corporate leaders surveyed (99%) said their organization would be willing to pay some sort of premium (significant to marginal) for an asset with a high ESG profile or an asset that could improve their organization’s ESG profile. (See chart below.)
It’s no surprise then that Ken Mehlmann, global head of public affairs at private equity giant KKR, wrote in a June 2023 note titled “How Sustainable investing can create and protect value”3:
“Our experience has shown us that companies that focus on ESG-related risks and opportunities — where material — can create stronger, better investment outcomes.”
Points of Interest
Why are ESG considerations becoming more prominent in corporate decision-making? It seems likely that this is due, in part, to the availability of better metrics and tools for measuring value creation from ESG. We ourselves have benefited from improving metrics and standards in our own investment analyses.
As the Deloitte report authors point out, “Being able to capture better, more relevant data and measure ESG value and metrics is providing organizations with more confidence in planning and executing transactions. More than three-quarters (78%) of organizations with clearly defined measurement metrics say they have a very high confidence in their ability to evaluate a target’s ESG profile—which will soon be part of their own profile.”
Here at LNW, we have long believed that ESG considerations are essential to developing a full view of the risks and opportunities in a particular investment. We believe asset managers that incorporate impact assessments into their investment process can reduce portfolio risk and enhance returns. ESG issues such as climate change are increasingly relevant to asset pricing, creating many new investment opportunities and risks. And companies that operate in a sustainable manner benefit from less operational risk.
LNW client portfolios benefit from the incorporation of ESG and impact considerations into our investment due diligence process as we seek to maximize the risk-return profile of our investments . In addition, for those clients looking to proactively invest for impact, we identify investment opportunities where an impact strategy drives the fundamental investment thesis.
So we continue to tune out the noise and the political rhetoric and look forward to the day when, as the Deloitte survey notes: “In the future, the ultimate measure of ESG’s growth and impact on the M&A consciousness may be that no one considers its inclusion to be remarkable at all.”
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1 Axios article: https://www.axios.com/2024/07/17/esg-dealmaking-business
2 Deloitte report: https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/role-of-esg-in-deals.html
3 KKR Insights: https://www.kkr.com/insights/how-sustainable-investing-can-create-and-protect-value
