Investors in the UK are increasingly focusing on sustainability and ESG considerations in their investment process. As a result, ESG due diligence has jumped higher up the M&A agenda. The KPMG 2024 Global ESG due diligence study found 71 percent of respondents reported an increase in importance of ESG in transactions over the last 12 to 18 months.
There are several drivers underpinning this shift. ESG has become an important lever to create value in transactions and dealmakers are seeing higher returns for their investments when there are stronger ESG practices and positioning in place. Investors are also focused on protecting value. With increased regulations, such as the EU Corporate Sustainability Reporting Directive (CSRD), and concern for ethical considerations there are potential reputational risks that could come with non-compliance.
There has also been a significant increase in impact investing. Investors focused on impact seek companies that balance profit with purpose, and are focused on addressing global sustainability challenges, such as the energy transition.
For investors, then, failure to embrace ESG can leave tangible value on the table. It can also minimise the pool of capital, and potentially prevent a deal from closing. UK investors are turning away from some sectors, such as tobacco, gambling and fossil fuels due to ethical consideration and long-term sustainability concerns. According to the survey, more than 50 percent of surveyed investors indicated that ESG was a “deal stopper.”
Investors are also asking more of target companies. With ESG due diligence becoming a strategic, cross-function and commercially focused exercise, investors are looking for greater transparency on their climate-related practices, diversity, equity and inclusion programs, supply chains and more.
This is pressuring sellers to enhance ESG-related efforts, especially as more dealmakers plan to include ESG due diligence in deal strategies going forward. Globally, 57 percent of survey respondents say they expect to perform ESG due diligence on most of their transactions over the next two years.
Even with this rise in activity, investors are looking for greater clarity around the areas to evaluate, specifically in fast-moving deal contexts. Whereas others are looking to advisors to help quantify less tangible ESG factors, such as the impact of reputation risks or long-term environmental impacts on value. KPMG in the UK’s ESG Transaction Advisory services is placed to help, bringing you the experience and insights you need to realise value from ESG in your investments.
