Profit with purpose: ESG's role in mergers and acquisitions
In a competitive M&A landscape, an effective ESG integration strategy is vital in unlocking value and navigating cultural frictions when organisations combine operations
ESG principles foster future-forward deals. Their positive impact, from enabling organisations to better weather crises to minimising their cost of capital, is well attested. In the last decade, there has been a surge in ESG-related mergers and acquisitions, as deals emphasising ESG initiatives tend to outperform the ones that don’t. Yet capitalising on the benefits that ESG synergies can unlock in an acquisition remains an uphill climb. The key, some experts believe, lies in transforming ESG challenges into value levers.
Entities should think about how they can create long-term value, not whether they will be ticking reporting boxes
M&A execution often exists in a silo, limiting ESG considerations to no more than a risk mitigation and due diligence lens. For ESG factors to yield quantifiable and non-quantifiable returns at every stage of the M&A pipeline, from target selection through to post-merger integration, it shouldn’t be seen as a compliance or reporting exercise, says Alex Edmans, a finance professor at the London Business School. Instead, he says: “Entities should think about how they can create long-term value, not whether they will be ticking reporting boxes.”
From defensive to decisive
Take culture compatibility. A mismatch in social factors, such as people practices, frameworks for diversity, equity and inclusion (DEI) and worker safety, can prove to be an insurmountable issue for potential deals. In one PwC study, nearly two thirds of executives claimed cultural issues hampered value creation and talent retention in their most recent acquisition.
Every M&A deal requires the building of trust and, ideally, a drive to create purposeful, top-down transparency. For the organisations involved, that means communicating ESG requirements and ambitions early – in the pre-close stages, if possible – learning each company’s cultural differences through surveys and feedback platforms and then addressing them.
The key to building a bridge post-close, however, is to deploy a talent retention strategy and offer opportunities for employees on both sides to “come together and find connection points that will help harmonise the integrated groups,” says Francine Katsoudas, Executive Vice President and Chief People, Policy and Purpose Officer at Cisco.
More importantly, the combined entity should view the transition period as a vehicle to create and articulate a more powerful ESG narrative to strengthen workforce productivity, public perception and customer loyalty.
“Taking the time and making the effort to learn about the target acquisition’s culture, support their people and offer clarity at every level of leadership will build a combined culture that is better together, and one that has a stronger ESG approach,” adds Katsoudas.
A planet-first alliance
Similarly, differences in sustainability practices can be a challenge not just in aligning environmental goals, but also for each company’s disclosure frameworks. Overcoming such gaps involves a series of actions, such as harmonising standards, adopting common methodologies for reporting climate-related data and assessing the potential ecological impact of the merged organisation’s operations.
Following the assessment, says Naaguesh Appadu, an M&A researcher at the University of London, an action plan should be created to continuously monitor environmental information, identify areas for improvement and report outcomes to stakeholders. Beyond formal regulations, it’s also vital for the acquirer to establish new and potentially more ambitious ESG commitments as soon as possible, since it signals clear intentions to customers and employees alike.
“This again requires a strong leadership,” says Appadu. “One that wants to invest in employee training and capacity-building initiatives to raise awareness of climate issues, build technical expertise and foster a culture of sustainability across the organisation.”
For the merger’s ESG performance to be more than the sum of its parts – and for the consolidated entity to thrive – its senior leadership should consider reevaluating its fundamental model and adopting rigorous corporate governance procedures. New data-driven processes can capture baseline insights on both organisations’ existing functions and capabilities, informing those teams responsible for steering organisational structure changes and driving ESG objectives.
Governments and regulatory bodies can help by establishing a clearer set of standards related to ESG
In the future, though, the hope is that companies will have a more standardised playbook to meet ESG targets. While industries are already coalescing around preferred ESG frameworks, Cisco’s Katsoudas believes the acronym has been politicised and that this has distracted from streamlining practices.
“Governments and regulatory bodies can help by establishing a clearer set of standards related to ESG,” she says. “Doing so would also help streamline the integration process after a merger or acquisition, bring clarity to investors and stakeholders and encourage accurate information disclosures related to ESG claims.”
The path to a climate-friendly, socially responsible and well-governed alliance is far from being obstacle-free, especially in a competitive M&A landscape. However, taking advantage of ESG initiatives in a more decisive way would not only address its challenges, but also help to build a thriving merged company that is better positioned to adapt to the changing demands of business and society.
