People, Planet and Profit

Environmental, social and governance (ESG) concerns have increasingly come to the fore in the way businesses choose to conduct themselves. As this trend looks set to continue, it’s logical to ask what impact it might have on deals. In this article, I will outline how a focus on business as a force for good is beginning to influence the decisions of funders, investors and buyers of businesses.

ESG in business

One manifestation of the rise of ESG is the growing B Corp movement. Some readers may have attended a webinar we hosted last year exploring why more and more businesses are going down this route. As a very succinct summary:

• B Corps are companies verified by B Lab as meeting high standards of social and environmental performance, transparency and accountability
• B Corp certification doesn’t just evaluate a product or service – it assesses the overall positive impact of the company
• There are currently over 4,000 certified B Corporations in more than 75 countries

So, more than 4,000 companies have chosen to place a commitment to people and the planet at the core of their business model. Similarly, both SMEs and larger companies have pledged to reduce their contributions to climate change. It was reported in November 2021 that over half of FTSE100 companies are committed to becoming net zero by 2050.This suggests a widespread recognition that businesses have a role to play in addressing the major challenges of our time.

Another key driver is the demand from stakeholders – including employees and customers – for businesses to make a positive impact on society, not just a profit. One of the reasons employers are engaging with this agenda is to recruit and retain staff who feel passionate about these issues. It follows that businesses with strong ESG credentials will be better placed to succeed in future.

ESG in transactions

Not surprisingly, we are starting to see ESG becoming a factor in transactions. For example, during 2021 we saw:

1. Debt products available only to businesses with good ESG credentials, and pricing of debt products linked to environmental performance. The latter is, I think, particularly innovative, and both are indications of where I suspect the market is heading
2. A buoyant market for mergers and acquisitions (M&A) involving businesses engaged in green tech
3. A European buyer focusing on ESG as a reason why a business should choose to be acquired by them
4. A number of businesses transitioning to employee ownership
5. Some specific ‘climate change’ clauses entering model Share Purchase Agreements
6. Private equity houses seeking specialist advice on ESG issues before making acquisitions, as they anticipate this is going to be crucial in the onward sale of the business to potential consolidators.

While our transaction services team has yet to see a specific focus on ESG in the due diligence we are asked to carry out for potential investors and buyers, we are aware that this is an area beginning to be considered by buyers and it seems likely that the prominence of ESG in transactions will increase in 2022.