ESG: Much more than a responsibility issue for dealmakers

Environmental, social and governance (ESG) issues have been towards the top of the agenda for investors for years now. Putting your money into a non-ethical or non-sustainable business, or one that shows a disregard for social issues or demonstrates poor governance, is not an option for responsible investors and business acquirers. So much so that a recent study found that 60 per cent of investors have stepped away from an investment target that didn’t hit the mark in terms of ESG.

Although the importance of ESG has been clear for a decade or more, investors are starting to talk about the benefits of prioritising ESG from a financial perspective. Previously, it may have been seen as a responsibility issue, as we’ve discussed previously. Some may even have viewed ESG investment as a sacrifice worth making for the greater good, and to protect your reputation of course. However, a new study by Baker Tilly has found that more than half of the investors they spoke to said that their ESG investments had had a positive impact on their investment returns.

So what does this mean for businesses that do and do not fulfil the ESG criteria that investors are looking for?

Why is ESG so important?

Right now, we are entering a unique time in international economic history. Never before have the world’s economies been simultaneously emerging from a shared economic crisis (the pandemic), while trying to deal with a separate, somewhat unrelated crisis that looms large on the horizon (climate change).

As a result of these crises coming together, many economists expect the world’s nations to combine their COVID recovery plans with their environmental and carbon-cutting plans. In this way, environmental issues will take centre stage and become the lead issue when making economic decisions for the first time.

The recent ousting of Donald Trump as president in the US and the election of Joe Biden means that the US will, once again, join the rest of the world’s superpowers in trying to reduce climate change through carbon emission controls.

"Major economies will attempt to integrate their economic recovery and job creation initiatives with longer-term efforts to reduce carbon emissions," explained analysts at Moody’s, cited by Seeking Alpha. They added: "A raft of Biden executive orders has already started aligning the US with international climate objectives.”

The general feeling among economists is that there will be a growing focus on things like boosting board diversity, improving corporate transparency, increasing sustainability standards and a greater emphasis on financial scrutiny and insight. In short, businesses that are not towing the line will find it harder and harder to hide their unethical, socially damaging or unsustainable practices and will struggle to attract investment as we move into the coming post-COVID landscape.

From an investment point of view, its private equity investors who are really jumping on the ESG bandwagon and are reaping the benefits. The Baker Tilly report found that 60 per cent of PE investors said they had seen positive returns from ESG investments. Some 77 per cent said that climate change is the most important ESG issue for them and 83 per cent said they include ESG issues in their due diligence when undertaking M&A investments.

And the old issues of reputation and risk still haven’t gone away. Data science firm RepRisk stated that performing due diligence for ESG issues when embarking on M&A will reduce risk for investors and strategic buyers. They echoed the view that ESG is becoming an increasingly important factor in dealmaking during the COVID recovery period. It also asserted that businesses ignoring ESG factors could exclude Generation Z consumers. Speaking to CIO, RepRisk’s Executive Vice President, Alexandra Mihailescu Cichon, said: “It’s not just about the ethics or philanthropy, it’s about good risk management and driving performance for companies and value creation in the long term.”

What impact will this have on investment and deals?

This increasing focus on ESG is leading to some serious investment in the private equity world. BlackRock, the world’s largest wealth manager, has long advocated ethical investment. It’s CEO, Larry Fink, once stated “sustainable investing will become a core component of how everybody invests in the future.”

To underline BlackRock’s commitment to ESG investment, it recently struck a deal with Baringa Partners to access Baring’s climate change modelling technology. The deal would allow BlackRock to add the tech into its existing Aladdin Climate module and would give Baringa access to this module in exchange.

Sudhir Nair, global head of BlackRock’s Aladdin investment platform, explained: “Through this partnership with Baringa, we are raising the industry bar for climate analytics and risk management tools, so clients can build and customize more sustainable portfolios.”

As the emphasis on and importance of ESG credentials among investors strengthens, so must the regulation of those that measure these credentials. The fear is that investors are using ‘greenwashing’ techniques to appear more environmentally friendly than they actually are. In an attempt to deal with this, the International Organization of Securities Commissions, which overseas securities regulators in Europe, the US and Asia, is reported to be looking at ways to ‘ensure better transparency and clearer definitions.’


In June 2021, US-based private equity firm Ara Partners came together with technical and commercial services company Aksiom Services Group, to buy UK-based solar energy and energy storage firm Anesco for an undisclosed sum.


The deal has been announced ahead of Anesco’s next move to create the ‘next wave’ of subsidy-free solar energy and storage solutions. Ara Partners claims to be a ‘global private equity firm decarbonizing the building blocks of the economy in immediate and tangible ways.’ The Anesco purchase was preceded by the April acquisition of Stockton-on-Tees-based sustainable infrastructure solutions provider px Group.

Deals like these are coming thick and fast right now. Ethical and sustainable businesses, particularly those associated with industries that have traditionally been problematic from an ESG perspective, such as energy, fashion and food, are likely to be drawing huge amounts of attention from private equity investors over the coming months and years. What once seemed like a trend, is fast becoming a permanent change of tack for investors across the globe.

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