The 2024 ESG in M&A Trends Survey from Deloitte has revealed a significant shift in the role of environmental, social, and governance (ESG) factors in mergers and acquisitions (M&A).

Compared to 2022, ESG considerations now permeate more stages of the M&A process, driven by enhanced data availability and a deeper corporate understanding of ESG integration.

In portfolio assessments, nearly three-quarters (74%) of companies have evaluated their portfolios or investments from an ESG perspective when acquiring or searching for acquisition targets. Similarly, 67% of companies have integrated ESG considerations into their divestiture strategies.

From an industry perspective, ESG has been shown to influence corporate acquisitions most prominently in the financial services industry, followed by technology, media, and telecommunications (TMT).

On the sell-side, sectors such as energy, resources & industrials, and TMT show significant ESG impact. Private equity (PE) firms, although historically less focused on ESG, are now increasingly prioritising it. In fact, 82% of PE firms report having a strategy or are in the process of improving their ESG profile through acquisitions and divestitures.

Tanay Shah, M&A ESG leader at Deloitte, said: “Advancements in the strategies and tactics used to improve ESG footprints have enabled significant progress in the frequency in which ESG is considered as part of a standard pre-close process for both corporates and PEs.”

The impact of ESG on valuation is also becoming more pronounced. 83% of M&A leaders are willing to pay at least a 3% premium for targets with strong ESG profiles, a 21 percentage point increase from 2022.

Additionally, 14% are prepared to pay premiums exceeding 6%. Conversely, about 67% of respondents seek discounts of at least 3% for targets with poor ESG profiles, up from 36% in 2022.

The Deloitte survey also demonstrated that ESG considerations are influencing not only strategy and valuation, but also the execution of deals.

Concerns over ESG performance have led 72% of organisations to abandon potential acquisitions, a significant rise from 49% in 2022. On the sell-side, 66% of respondents have abandoned deals due to negative ESG feedback, doubling the figure from 2022.

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Brooke Thiessen, partner, infrastructure M&A, financial advisory at Deloitte Canada, said: “Abandoning a deal is certainly not an easy decision. While commercial or operational concerns are often the main reasons for walking away from a deal, ESG red flags are increasingly being considered with the same level of seriousness to either pause or end deal activity.”

The strategic importance of ESG is further highlighted by the differing impacts on companies based on their emphasis on these factors. Organisations that place high importance on ESG in their M&A strategy are less likely to abandon divestitures due to negative feedback (67%) compared to those with low ESG emphasis (90%).

Confidence in evaluating a target’s ESG profile also plays a significant role. High confidence in ESG evaluation correlates with a higher likelihood of deal abandonment, indicating that leaders are acting decisively on ESG findings like those found in Deloitte’s survey.