Corporate & Securities Blog

How ESG Is Changing the M&A Landscape

ESG has graduated from a reference in the financial statements of major corporations to a barometer for the health and long-term prospects of any business valued by investors

Understanding the growing importance of environmental, social and corporate governance (ESG) in the world of mergers and acquisitions requires looking no further than social media.

Countless posts on these social platforms demonstrate society’s rising concerns around sustain- ability standards and corporate accountability. In fact, Elon Musk’s recent attempt to acquire Twitter is the perfect example of the reach that ESG has in today’s M&A market and the broader business world.

Twitter is the most high-profile acquisition on the rocks right now. While the primary reason Musk has cited for backing away from the deal is his allegation that the social media platform is infected with bots that impact fake news and, ultimately, the company’s valuation, he has pointed to diversity concerns.

“Musk has tweeted frequently about Twitter employing workers who are insufficiently diverse in embracing a wide variety of viewpoints and perspectives,” says Dr. Michael Kraten, an ESG expert and professor of accounting at Houston Baptist University. “Ironically, the lack of diversity that he mentions involves a lack of conservative and libertarian representation.” He suggests Musk’s concerns represent issues around the G in ESG.

The components of ESG that are most in vogue are constantly shifting, but investors and companies alike have moved beyond viewing the standards as just another item to check off in the deal process to something that adds intrinsic value. Politics, ever-changing regulations and even the economic environment may color the way deals are evaluated at any given time. Still, the importance of ESG continues to grow, with the European Union leading the direction for where standards are heading. While countless metrics and organizations specializing in ESG due diligence have sprung up to meet rising demand, a major gap remains in the criteria used to rate ESG for major organizations and middle-market companies. As general partners and limited partners struggle to sift through the myriad components that comprise today’s ESG, one thing is clear: It isn’t going away and social pressures are proving to be the greatest driver of ESG adoption.

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