M&A Trend: ESG Risks in Targets Can be a Dealbreaker


January 18, 2013

This week we found an interesting result from a survey by the United Nations-backed Principles for Responsible Investment Initiative (PRI), reported in AI CIO online. A large majority of corporate buyers of private equity portfolio companies said that poor performance on environmental, social and governance (ESG) factors affected their decisions to buy the company or prevented the entire deal.


The survey shows that over 80% of companies had reduced the valuation of an acquisition target or not gone ahead with a deal because of poor performance on ESG factors, while 75% said poor performance in this area had prevented a deal from taking place.


The majority of companies, 63%, think that there has been a large increase in the influence of ESG factors in transactions in the last three years, and 75% perceive that there will be a large increase over the next three years (see figure below).


The article points out some recent examples of how ESG is affecting PE markets, such as Cerberus Capital Management’s decision to sell its investment in gun manufacturer Freedom Group in reaction to children being killed in shooting incidents during school hours, and CalSTRS decision to sell off investments in manufacturers of firearms that are banned in its home state of California.


The PRI commissioned PricewaterhouseCoopers to conduct a survey of 16 companies to assess the attitudes of trade buyers of private equity companies, evaluating ESG risks and opportunities in their M&A activities. According to the article, the PRI has seen growing interest from private equity companies in ESG issues and now counts over 150 GPs and more than 130 LPs as signatories. You can download the report from the UNPRI site here.

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