Environmental, social and governance (ESG) matters are becoming increasingly important in the deal market, according to a poll of over 300 professionals conducted by PwC US.
The poll, conducted during PwC's recent webcast, Integrating environmental, social and governance (ESG) issues in deals and valuing their impact, found that 68 per cent of participants who are planning a divestiture, acquisition, merger or IPO in the next 12 months plan to evaluate ESG considerations when planning their transactions.
Investors are increasingly taking environmental, social and governance factors into consideration when assessing the value of a company. According to the survey, 38 per cent noted that investors are the stakeholder group most focused on ESG issues, closely followed by senior management at 36 per cent. Other stakeholders expected to be focused on ESG issues include boards (19 per cent) and bankers (seven per cent).
"Several key issues are making ESG initiatives more pertinent to companies including the rising price of natural resources, urbanisation, global climate events, as well as expansion into emerging markets,” says Scott Gehsmann, a partner in PwC's US deals practice. "Environmental obligations, regulatory and compliance requirements and how ESG strategies impact customers have accounting and reporting implications and can impact deal value."
The goals behind an ESG programme vary according to an organisation's priorities and desired outcomes. When asked to identify the leading areas of ESG focus in their own organisations, poll participants cited several factors. Twenty seven per cent said that regulatory compliance and risk management is their primary focus.
Fifty per cent said they are focused on three areas: regulatory compliance and risk management; operational efficiency and effectiveness; and revenue enhancement and other market-facing initiatives. This is evidence that a growing number of business executives are expecting more from their ESG initiatives.
"We find that most companies begin their initial ESG programmes to focus only on risk and liability assessments. However, savvier companies understand ESG expands beyond risk and they are using ESG to capture key strategic, operational, reputational and financial benefits," says Lauren Kelley Koopman, a director in PwC's US sustainable business solutions practice. "We're working with companies across the full spectrum of ESG – identifying the risks, cost savings opportunities, tax incentives, and generating new revenue."
PwC's poll also asked executives to identify barriers to placing a dollar value on their ESG initiatives. Nearly half (46 per cent) responded that they are facing three barriers, cited as a lack of in-house expertise, lack of methodology, and lack of senior level support.
"A company's ESG strategy, or lack thereof, can have direct and indirect impacts on value, positive or negative. In the deal context, it can be important to identify and measure those ESG factors, whether risks or benefits, that have the most potential impact on value and ROI so that they can then be built into pricing decisions. Identifying risks or benefits that others miss can make the difference in winning an auction or earning the planned ROI for a deal," says Donna Coallier, a partner in PwC's valuation practice.