Korea Deloitte Group: "74% of Companies Review ESG Performance During Acquisition Evaluation"

‘2024 M&A Field ESG Trend Survey’ Report
“ESG, a Key Evaluation Metric in Most M&A”

As the importance of ESG (Environmental, Social, and Governance) in the mergers and acquisitions (M&A) market grows, companies are reviewing portfolio investments from an ESG perspective during acquisition processes.

According to the "2024 ESG Trends in M&A Survey" released by Deloitte Korea Group on the 6th, 74% of companies evaluate portfolio investments from an ESG perspective when making acquisitions. This survey was conducted in January among 500 M&A leaders working at companies with revenues exceeding $500 million or private equity funds managing assets over $1 billion in North America, Europe and the Middle East, and the Asia-Pacific region.

The survey results showed that 91% of respondents answered that their confidence in their company’s ability to assess its ESG profile was "very high" or "high," an increase of 17 percentage points compared to two years ago. Trust in their company’s ESG evaluation metrics was higher among general employees than among top executives. 94% of general employees expressed "very high" or "high" confidence in accurately assessing the ESG profile of acquisition targets, whereas only 87% of top executives felt the same.

The greater the impact of climate change on corporate operations, the more significant the role of ESG in M&A strategies. 100% of respondents from Europe and the Middle East reported experiencing moderate to significant operational impacts due to climate change. North America (95%) and Asia-Pacific (88%) followed. The proportion of respondents who considered ESG highly important in M&A strategies was also highest in Europe and the Middle East (64%).

Regional trends were also identified. The percentage of companies that responded they evaluate the potential impact of deals by comparing them to their own ESG profiles based on clear metrics was 68% in Europe and the Middle East, but only 49% in the United States. This is attributed to climate regulations developing faster in Europe and the Middle East than in the U.S.

Private equity funds are also focusing on the importance of ESG and sustainability investments. 72% of private equity respondents said they consider ESG in more than 50% of their deals. 14% said they consider ESG in all transactions. However, regional differences in private equity ESG strategies were observed. Among private equity funds in Europe and the Middle East, 100%, and in the Asia-Pacific region, 94% require some or all portfolio companies to measure and report ESG. In both regions, 67% of private equity firms require all portfolio companies to report ESG metrics.

In contrast, only 30% of private equity funds in North America require all portfolio companies to report ESG metrics. This reflects the growing importance of the availability of sound ESG information in future exit strategies.

With the increasing importance of ESG throughout the M&A lifecycle, 74% of companies reported evaluating acquisition strategies from an ESG perspective. 68% gave the same response regarding divestiture strategies. The ESG premium phenomenon is also notable. About 83% of M&A leaders said they would pay at least a 3% premium for acquisition targets with good ESG profiles or those that can improve their profiles, an increase of 21 percentage points compared to 2022. Among leaders, 14% expressed willingness to pay a premium of 6% or more.

Conversely, leaders are also more likely to demand discounts for acquisition targets with poor ESG profiles. 67% of respondents said they would require at least a 3% discount for negative ESG profiles of acquisition targets, up from 36% two years ago. ESG also affects deal closures. The proportion of companies deciding not to proceed with acquisitions due to concerns about the target’s ESG performance increased by 23 percentage points from 49% in 2022 to 72% this year. Among sellers, 66% reported having to abandon at least one deal for ESG-related reasons, double the figure from 2022.

Meanwhile, among respondents from companies that consider ESG less important in their M&A strategies, 90% had experienced abandoning asset sales due to negative buyer feedback, whereas only 67% of companies that place high importance on ESG had abandoned sales.

Gil Giwan, Head of Management Consulting at Deloitte Korea Group, stated, “As the definition, collection, and measurement of ESG data improve, the accuracy and ease of understanding related metrics have increased. Accordingly, the influence of ESG on M&A evaluations is growing.” The full report is available on the Deloitte website.

This content was produced with the assistance of AI translation services.