Sustainable deal value

ESG as a driver of value creation

Invest in environmental, social and governance

Shareholders. Employees. Customers. Society. They all look at what your company stands for – your purpose and how you fulfill it. This also applies to investments in environmental, social and governance (ESG), and the scrutiny is even greater during a deal. So how do you help your various stakeholders understand what you are doing with ESG and how do you ensure that your commitment to ESG is clear to all parties to a transaction?

Recognise the growing importance of ESG

Sustainability has an increasing impact on the value of assets. Your company's resilience to the impact of ESG-related issues will be important; private equity is increasingly looking for ‘clean’ assets and investors increasingly expect solid ESG performance. Most, if not all, investors take a critical look at how a company deals with sustainability in various dimensions, including regulation, compliance, strategy, impact and operations. This helps them better understand your company's material risks and potential growth opportunities. Investors want to see net positive trajectories that address both risk and opportunity. A clear narrative about your organisation's purpose - setting priorities, demonstrating investments, acknowledging gaps and highlighting progress - is therefore an opportunity to demonstrate how your ESG initiatives benefit society as a whole and contribute to the growth of your business. And that can be a decisive factor in a potential deal.

Trade from a value perspective

To get the most value for your business, you need to be able to communicate your sustainability approach to potential investors and show them that you have a robust ESG strategy and realistic roadmap for change. When it comes to developing an ESG strategy for your company, also consider assessing priorities and activities from a value perspective. Move beyond the focus on the risks to your business and identify the opportunities your ESG actions can deliver over time.

ESG related value: three categories

Value erosion refers to value that is lost if you do not take specific ESG actions as a company. These include increased input costs, supply chain disruption costs, physical risks associated with extreme weather events, and risks associated with regulatory non-compliance.
Value retention refers to value that you retain as a company when companies take specific ESG actions. Think of planned greenhouse gas reduction, waste reduction and energy efficiency, and planned customer and employee strategy.
Value creation refers to value you create as a company through specific ESG actions over time. Think of new markets, products and services, stronger customer loyalty, lower debt and higher employee retention.

Make your company more attractive to investors

If you want to grow or sell your business now or in the future, there are some concrete steps you can take to make your business more attractive to investors or buyers while supporting the development of a robust ESG strategy.

Evaluate what your company is currently doing with respect to each of the ESG factors: environmental, social and governance. Use this information to benchmark your organisation against key competitors and against existing ESG frameworks and standards, such as the SASB framework, the TCFD framework and the SDG UN Sustainability Development Goals, to identify gaps and opportunities.

Consider your desired ESG outcomes and use them to guide your ESG investment decisions. This can help you prioritise where you want to make specific investments, for example acquiring enabling technologies or financing R&D initiatives. This allows you to achieve the best return while making funding available for long-term ESG initiatives.

Consider how you can use ESG activities more broadly to support and drive the growth of your business. You can do this by incorporating ESG principles into your overarching business strategy, making ESG a fundamental part of how you approach end-to-end operations and engage with stakeholders throughout your value chain.

Investors today are increasingly emphasising ESG factors when evaluating potential companies. But if you want to create long-term sustainable value for your company, think of ESG as a way to serve multiple stakeholders. By embracing ESG and defining a purpose for your business, you will be doing well in the eyes of society and your stakeholders, and building your business for a sustainable and profitable future.

Influence of employees, customers and shareholders

Employees, customers and shareholders play an important role in embracing and advancing your ESG strategy and activities. It is therefore a good idea to involve them in the initiatives that you develop as a company or jointly.

Employees

They are part of the company and have more inside information than shareholders, customers and deal partners: your employees. They can be a difficult audience because they see first hand when and where words represent real action. If not, they may be sceptical. And with so many digital (social) media and other online platforms for candid comments, buyers and sellers now have a good idea of how your company's employees perceive your ESG efforts. Watch out for conflicting information and opinions during a transaction, especially if there may already be uncertainty among your employees. Embrace transparency and encourage honest dialogue about the elements of ESG that matter most to your employees. And then prove you're listening by actually investing. Building that trust results in a stronger company and attractiveness as a deal partner.

Customers

When customers accept and admire a company's ESG approach, it's an opportunity to increase the value of a deal. Through advertising, social media or other branding activities, you can spread the word about your cause and connect with customers who are increasingly focused on sustainability.

Shareholders

Successful companies that are admired are the dream of every shareholder. Loss of value due to high-profile missteps, on the other hand, is a nightmare. If you can't convince your shareholders that you are committed to sustainability, they may question your company and push for major changes, which could lead to further disruption that hinders growth. After all, a deal that is closed under pressure has less chance of success.

Be clear about how diversity in the workplace and leadership, economic inequality, climate change and other issues are key business concerns. Fairly and thoughtfully addressed, these factors can be opportunities to increase shareholder value and improve your company's position as a buyer, seller, or both.