Can M&A play a vital role in transitioning to a sustainable ecosystem?

by Raghu Marwah & Anmol Bansal

Mergers & Acquisitions (M&A) is defined as “business transactions in which the ownership of companies, other business organisations, or their operating units are transferred to or consolidated with another company or business organisation”. An integral part of strategic management and inorganic growth, M&A’s potential to contribute to achieving “net zero carbon” by 2050 is boundless, but subject to the willingness of corporate industry, the right amount of push from governments, and, most importantly, the resilience required to move along the ups and downs of innovation.

In general, M&A activity has always managed to aggregate trillions of dollars, and yet has led to underperformance by acquiring firms. The list of factors run deep, but one in particular is the myopic stance from top management. When management is able to identify synergies in the immediate period preceding a merger or acquisition, these should, ideally, continue over the long term, but often fail to relate to sustained returns. ESG considerations came to the forefront a few years back but few companies acknowledged their existence. Today, ESG has become a critical component of company operations anywhere around the globe. Climate change is real and life-threatening; its effects will have an irreversible impact on everything.

With trillions being cashed out, it is imperative to give importance to ESG-driven M&A. Improved focus towards M&A and its due diligence can mitigate several challenges faced by corporations (more than 30 percent of businesses witnessed operational repercussions and approximately USD 137 billion in losses as a result of climate change). Innovation must drive the transition towards a greener ecosystem, and this in turn is complemented by consumers as they change their spending habits.

At the forefront, M&A allows acquirers to bring about necessary change in strategy, assets, human capital, and technology. By aligning these components, acquirers hope to transform enterprise value. ESG deals amounted to USD103 billion in the first half of 2021 alone, as compared to USD 92 billion in the entire twelve months of 2020. Energy, industrial, and transportation attracted the most dollars, with significant acquisitions in the consumer, finance, technology, and chemical sectors.

Considering the facts and factors above, M&A can potentially play a vital role in the world’s transition from status quo to a sustainable future. Looking back over the past five years, ESG-listed companies have beat the market by 88 percent, and during 2020, there was a 29 percent increase in sustainable loans and bond issuance to USD 732 billion. Businesses that have accounted for ESG in their M&A have successfully avoided the buzz and focused on strategic alignment, due diligence, execution, and value creation.

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