KPMG Survey Reveals ESG Considerations Impacting M&A Landscape

The integration of Environmental, Social, and Governance (ESG) considerations into the dealmaking process has gained significant traction, with a new survey conducted by global professional services firm KPMG shedding light on the extent to which ESG is shaping mergers and acquisitions (M&A) decisions. The survey's findings indicate that over half of respondents have cancelled deals due to substantive ESG due diligence findings, underlining the growing influence of ESG factors in deal negotiations.

KPMG's survey, which garnered insights from 200 U.S. ESG practitioners including corporate investors, financial investors, and M&A debt providers, underscores the evolving landscape of M&A transactions. A notable 74% of professionals reported that ESG considerations are already an integral part of their M&A agenda. Among the top motivations driving ESG due diligence, 46% of respondents identified the identification of ESG risks and opportunities, followed by investor requirements at 19%, and preparation for impending regulatory mandates at 14%.

Mark Golovcsenk, KPMG U.S. ESG and Climate Services Leader, emphasized the value implications of incorporating ESG into M&A strategies, stating, "The data speaks loud and clear: Companies and investors are increasingly integrating ESG considerations into their M&A strategies, not only because it’s the right and responsible thing to do but also because of the value implications of ESG."

The survey delved into the repercussions of significant ESG due diligence findings. Over half of respondents indicated that red flags in ESG considerations could either halt a deal (51%), impose additional closing conditions (52%), or result in a reduction of valuation (44%). Notably, 53% reported that material ESG due diligence findings have led to the cancellation of deals, while 42% confirmed that such findings led to reductions in purchase prices.

Interestingly, while adverse ESG findings have impacted or terminated deals, the survey brought to light a remarkable trend. More than 60% of investors expressed willingness to pay a premium for targets exhibiting robust ESG maturity and alignment with their own ESG priorities. Significantly, over one-third of these respondents indicated a willingness to offer a premium exceeding 5%.

The survey also offered insights into the anticipated trajectory of ESG due diligence. A substantial 72% of investors expect to conduct ESG due diligence on more than 20% of future deals, a notable uptick compared to the 56% who reported doing so over the past two years. Among them, 27% anticipate ESG due diligence on over 80% of deals, compared to a mere 16% in the previous two-year period.

Key challenges in conducting ESG due diligence were also addressed in the survey. A significant 59% of respondents highlighted the lack of robust data as a significant challenge. Additionally, 56% reported difficulties in defining a meaningful scope for ESG due diligence, while a similar percentage faced challenges in ensuring a comprehensive understanding of ESG due diligence among stakeholders. The quantification of findings presented difficulties for 45% of respondents.

KPMG's Clare Lunn, U.S. Partner, ESG, remarked on the evolving landscape, emphasizing the imperative of sustainable practices in business operations. Lunn stated, "As the world continues to evolve, so do the expectations of businesses. Our latest ESG Due Diligence Survey reveals an undeniable truth: Sustainable practices are no longer just a choice but a prerequisite for resilience and growth."

The survey's findings reflect the ongoing transformation of the M&A landscape, with ESG considerations poised to play an increasingly pivotal role in shaping deal outcomes and driving responsible and value-driven decision-making.