ESG M&A: investment bubble or generational shift?

Over the last 15 years, investors have propelled environmental, social and governance (ESG) from back of mind to top of table. So much so that ESG was the biggest theme driving global mergers and acquisitions (M&A) activity during the second quarter of 2023, according to research from GlobalData. Meanwhile, our team has seen valuations of ESG consultancy and service providers outperform other sectors.

Is this a bubble near bursting point, or a generational shift?

We put this question to an invited panel and attendees including business leaders, private equity, strategists and political consultants at our inaugural ESG M&A Community event. The panel included:

• Leah McGimpsey, CEO, APEM GROUP
• Nicola Stopps, CEO and Founder, Simply Sustainable
• Beth Houghton, Managing Partner of Palatine Impact Fund
• Lizzie Wills, Senior Partner and Head of Private Equity, GK Strategy

Is ESG bigger than politics?

On 21 September 2023, Prime Minister Rishi Sunak announced that the government would roll back key energy transition dates for electric vehicles and heat pumps. Whether practical or political, the decision surprised the ESG community.

Ford’s UK chair Lisa Brankin publicly criticised the turnabout and the government's failure to provide “ambition, commitment and consistency”. It's an understandable response from a company that has moulded its budget and strategy to meet the 2030 deadline, with nine electric vehicle launches due by 2025, and £430 million being invested in Ford’s UK development and manufacturing facilities. 

Our ESG Community reported that the majority of their clients view ESG as long-term, macro strategy, so will press on regardless of political volatility.

Moreover, they considered the government to be lagging behind the business world’s aspirations on reaching net zero.

ESG: What are the opportunities for consultants in a maturing sector?

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Where commerce and conscience collide

As climate events become more visible, companies are acting on ESG because it's both the right and necessary thing to do. However, there's also a recognised upside to business performance in terms of competitive advantage, compliance, cost savings and staff retention.

Competitive advantage

Increasingly, companies must not only prove their capability to potential clients, but their ESG credentials too. For example, the UK’s Public Services (Social Value) Act requires those who commission public services to think about how they can also secure wider social, economic and environmental benefits.

The related procurement policy requires central government departments to evaluate social value, applying a minimum overall weighting of 10%. Related policies exist for climate change and waste reduction.

There's a resulting demand for ESG specialists to help companies meet these types of requirements and gain a competitive edge in bids.

Increasing compliance

The UK and EU have some of the most complex sustainability rules in the world, with potential for penalties for non-compliance.

Notably, from 2025, the European Union’s Corporate Sustainability Reporting Directive (CSRD) will require a greater number of large and listed companies to report on their ESG practices – including those based outside the bloc that meet certain criteria. Administrative and criminal penalties will be decided on a member state basis.

Meanwhile, the UK's Financial Conduct Authority is poised to publish its Sustainability Disclosure Requirements (SDR) policy statement in Q3 2023.

Constant change in the regulatory landscape will continue to drive demand for advisory services to help businesses report and act on their findings.

Cost savings

Europe has experienced record energy prices and input costs in the past 18 months, prompting businesses to question where they can reduce energy expenditure.

They've turned to specialists to supply energy audits, cleaner technology, and greener facilities management practices.

Staff retention

A company’s impact is also increasingly crucial for recruitment, particularly of younger generations. Studies continuously show that Generation Z, who will comprise 27% of the workforce by 2025, want to work in purpose-driven companies that align with their values. They also want to ensure that their employers take ESG seriously, particularly in areas such as diversity and inclusion.

Making an impact through investing

As the business world emerged from the early-Noughties dot-com crisis, investments focused solely on returns. However, over the next decade, a growing awareness of climate and social issues began to influence investment philosophy. First movers, including the UK’s Palatine Private Equity, launched impact funds.

The purpose of impact investing is to generate positive and measurable social and environmental impact alongside financial return. The movement is significant: the Impact Investing Institute valued the 2020 UK impact investing market at £58 billion, with a further £53 billion of impact-aligned investments. This is no surprise as prominent investors, such as pension funds, now cater to the growing number of customers who are interested in responsible finance.

ESG is growing up

ESG is a relatively immature sector. As a result, several companies founded over the last decade have reached a size where they either need more investment, more skills or more capabilities.

In a highly fragmented industry, founders have a choice to expand through acquisition, grow with financial backing or sell. We expect this to buoy M&A activity in the sector.

What our panel session and wider discussion made clear is that the UK investment community’s attitudes to ESG have undergone a generational shift. While it recognises the strong fundamentals driving the sector’s growth, it's also motivated by the urgency to improve the world for future generations.

For more insight and guidance, contact Nigel Le Bas.