The ESG (environment, social and governance) strategy, which is being viewed as a positive indicator for long-term revenue growth, justifies higher deal valuations in the Middle East, according to Bain and Company.
In its recent global survey of 281 M&A (merger and acquisition) executives, Bain and Company said 65% expect their own company’s focus on ESG to increase over the next three years.
This view extends to M&A. More than half of surveyed respondents either see ESG leadership as justifying higher deal valuations or expect this to be the case in the future, indicating a need for buyers to appropriately assess and value their targets’ ESG performance.
The survey found that only 11% of respondents say they extensively assess ESG during the deal-making process on a regular basis.
Out of 10 elements of the corporate M&A process, ESG was the least-emphasised dimension. Many are struggling to determine how to embed the process of assessing the ESG implications of an acquisition into their M&A strategy.
Some companies are ahead on this curve, it said, adding by incorporating ESG into their M&A process, they have set themselves up with an advantage in pursuing value creation opportunities and a head start in meeting their ESG imperatives.
Highlighting the need to link corporate ESG strategy to M&A; the survey said success in this arena begins by linking overarching corporate ESG strategy to M&A strategy.
"It means making sustainability a part of each deal thesis. It means using corporate priorities as a benchmark to assess each potential deal and find assets that will advance existing ESG initiatives as well as create economic value," said Akram Alami, Partner, Bain and Company Middle East.
The survey said in the consumer products industry, 68% of the surveyed executives see ESG’s value in helping them gain share by improving their brand image to appeal to changing consumer preferences.
Leaders in the energy sector, meanwhile, more commonly cite ESG initiatives for helping them meet requirements or expectations of investors and financiers to lower the cost of capital.
Across industries, ESG measures can also add value by helping manage costs (waste reduction) or by helping attract and retain top talent — a particularly critical goal in today’s competitive talent environment.
The survey found that the mix of deal type varies across industries. While energy sector executives report that the plurality of deals within their industry are ESG motivated, most other industries see ESG-conscious M&A as far more relevant to their current deal makeup.