How the green economy will shape business acquisition

Though first coined as a term in 1989, the concept of a green economy - one which serves not only to be sustainable in financial terms, but also in terms of its impact on the environment and on human stakeholders - has entered the public consciousness in the past few years thanks to a renewed focus on global warming, industrial pollution and everything in between.

Fast-forward to a post-Brexit 2018, and Theresa May is expected to readdress the environment following her recent cabinet shuffle. She and Michael Gove have reiterated their commitment to this transition and have promised to publish a new 25-Year Environment Plan early this year that promises to bring in new legally-binding, environmental targets across many industries. As outlined in last year’s Clean Growth Strategy, new targets for carbon emission will be set, as will strict rules for energy, aviation and other sectors.

For those in the market for acquiring a company, the green economy marks something of an opportunity as an industry-spanning disruptor.

Green acquisitions

The prevalence of environmental, social and governance (ESG) factors when making corporate M&A has been well documented so far. According to a PRI and PwC survey of trade buyers, two thirds of respondents said that poor ESG performance had prevented a deal or affected their willingness to complete it. Poor ESG factors can have a “significant negative impact” on a deal’s valuation, while bringing a target company up to a buyer’s standards in terms of ESG is a “significant consideration” in the process, those polled also said.

Given the UK government’s focus on ESG metrics such as carbon emission more important - and legally binding - for companies, business buyers should certainly focus on a target company’s environmental profile. A poor performance could mean running afoul of fines or other regulator intervention, while acquiring a company with existing credentials could mean you are insulated from costs or in the future. These include schemes like the Green Mark, a consultative service which advises your business on how to cut costs with green reforms, then provides official accreditation.

UK businesses are already ramping up their activity on climate action both through setting high renewable energy targets and aligning on science-based targets (SBTs) for their greenhouse gas emissions. Acquiring a company with these targets already set not only serves well for the future, but could inform practices to put in place at other firms in your portfolio. Finding a haulage firm that has already modelled its emissions and prepared to transition to an economy without diesel or petrol-fuelled vehicles, for example, could be a valuable source of business intelligence.

New environments

On the subject of fossil fuel-powered vehicles, 2017 was an important year for making the UK’s roads greener too. For one, there was the government’s proposed 2040 ban on all internal combustion engines - whether diesel, petrol or similar - and long-term plans for phasing out existing traditional engines. This movement is only set to increase as car makers - and companies in related industries - realise they do not have a plan for transitioning to a green economy. This trend could even extend to the freight industry, too, given Tesla’s recent unveiling of electrically-powered semi trucks that have a 500 mile range on a single charge.

With this in mind, the UK government is also expected to promote the country’s potential for manufacturing green transport, with an upcoming strategy document titled “Road to Zero” to be published and consulted on in 2018 and Theresa May set to host a Zero Emission Vehicle Summit.

The opportunities for business buyers are twofold here. First, given the extra environmental pressures on the auto industry there may be more chance of finding a distressed company, or a firm that requires a new direction or strong leadership to realise its full value. Second, companies that create parts for electric cars - motors, circuit boards or other electronic parts, for example - could be a source of strong growth that other acquirers have yet to explore. Exploring a given industry’s supply chain could yield even more opportunities. Third, and perhaps most obviously, picking up a business in an environmentally-minded industry is likely to have plenty of scope to grow. Just be aware that in-sector competition will also be heightened.

Other industries that could be shaken up in the short-term green transition include packaging manufacturers. Michael Gove is taking aim at coffee cups, plastic bottles and other “single-use” packaging in a bid to tackle plastic pollution in the environment and reduce waste. A ban on microbeads in cosmetic products has already gone through parliament, while Gove is currently consulting companies on the potential of a national plastic bottle return scheme, embraced at an early stage by major retailers like Co-Op and Iceland. Many companies are also bracing against a potential tax or charge on single-use plastics, as first mentioned by Philip Hammond in his November Budget.

Keeping on top of these sectoral shifts and potential areas for either buying businesses that are undervalued, or unlocking potential value in sectors ripe for growth, could be lucrative for a business acquirer.

Sustainability as good business

The age of ESG and other environmental factors being undervalued could well be over, however, with several of the world’s largest financial institutions agreeing that they too have a role - and financial interest - in assisting the UK’s shift to a low-carbon economy.

In September 2017, a committee of investors and leading figures from London’s financial giants - chaired by former lord mayor of London Sir Roger Gifford - was assembled to see how investment in the low-carbon economy can grow, with funding schemes planned for green infrastructure, energy and transport.

This January, meanwhile, Barclays Corporate Banking became one of the latest institutions to offer specialised green finance products to fund businesses with a focus on sustainability. These include green loans worth more than £3 million, green innovation finance (backed by the European Investment Fund, specialised for SMEs) and green asset finance.

With such funding available, the extra capability to grow a green business is greatly amplified. If you find the right company or opportunity in a particular sector, there may be additional green finance available to fund expansion, research and development or further acquisitions.

From a bank’s perspective, green lending opportunities will be assessed through frameworks that use ESG research and ratings - in Barclays’ case, these are provided by Sustainalytics - to judge the long-term profitability of a venture. Being prepared with a thorough business plan and a solid sense of the sector and industry your company operates in is, therefore, crucial to securing this added finance.

After all, the green economy is one which prioritises businesses and organisations which have a focus on their long-term profitability, one crucial aspect of which is protecting their surrounding environment and other resources for generations to come.

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