ESG: The Power Play for Business Owners and Partners 

Recent years have seen a growing awareness of the importance of Environmental, Social and Governance (ESG) factors in business decision-making. ESG criteria have become a key consideration for investors, including private-equity firms, when evaluating potential acquisition targets. These considerations are also important to customers and to employees, as they can boost a company’s brand reputation and help attract top talent. As such, owners and partners should prioritize social and environmental responsibility and view all transactions through an ESG lens.  

What is ESG? 

ESG criteria are non-financial factors used to evaluate the sustainability and ethical impact of a business. The environmental aspect focuses on a company’s impact on the environment, such as its carbon footprint, waste management and resource consumption. The social aspect considers a company’s impact on its stakeholders, including employees, customers, suppliers and the communities in which it operates. Finally, the governance aspect looks at a company’s leadership, structure, and processes, including transparency, accountability, and risk management. 

Beyond Profits: Why ESG Matters in Business 

There are several reasons why ESG considerations are becoming increasingly important in private-equity transactions.  

1. As investors now recognize, companies that prioritize ESG are more likely to be financially sustainable over time. A recent Harvard Business School study identified companies that prioritize ESG in their business practices outperform their peers in the long term. Analyzing companies with high ESG ratings versus those with low ESG ratings over 18 years, the study revealed that high ESG-rated companies consistently outperformed their peers.¹ By considering ESG factors, then, investors can identify risks and opportunities that may not be immediately apparent through financial analysis alone. 

2. Demand is growing from customers, employees, and other stakeholders for companies to prioritize ESG. As they become increasingly conscious of the environmental and social impacts of products and services, customers are more likely to support companies that demonstrate a commitment to sustainability. Sixty-four percent of global consumers now make purchasing decisions based on a brand’s stance on societal issues.² Consumers choose, switch, avoid or boycott brands based on their beliefs. Likewise, employees are more likely to be attracted to companies that prioritize social and environmental responsibility and may be more engaged and productive as a result. 

3. Regulatory and legal frameworks are increasingly mandating ESG compliance, with many countries introducing new regulations that require companies to report on their ESG performance. From the EU to Japan, Australia to Canada, international companies have acquiesced to the trend of rating their environmental, social and governmental commitments.  

Unlocking the Triple Bottom Line: The Advantages of Prioritizing ESG 

For business owners, prioritizing ESG can bring a range of benefits, including increased revenue, improved brand reputation and reduced risk. Seventy-one percent of institutional investors consider ESG factors in their decision-making process, according to a survey by PwC.³ The survey further reveals that 59 percent of investors are willing to pay a higher price for shares in a company that demonstrates good ESG practices. Fifty-five percent of online customers report that they would pay extra for products and services that came from a company with a high ESG rating.  

As this survey demonstrates, companies can differentiate themselves from competitors and attract both customers and employees who share their values by implementing sustainable and socially responsible practices. The survey indicates that by 2025, 60 percent of the workforce will be millennials who prioritize employment with companies that have high ESG ratings. As a result, companies that prioritize ESG will be better positioned to attract the best employees. 

Additionally, by minimizing their environmental impact and ensuring good governance, companies can reduce the risk of regulatory and legal action and improve their long-term financial sustainability. According to a report by the Governance & Accountability Institute, the percentage of S&P 500 companies in the US that published sustainability reports increased from 20 percent in 2011 to 90 percent in 2019.⁴ These reports help companies identify potential risks and improve their ESG performance, thereby reducing the risk of regulatory and legal action. 

Do you want the help of a full-service advisory team to reach your merger and acquisitions goals? Contact the Gertsburg Licata Acquisitions Team today!

Better Valuation in Private Equity Deals 

In a private-equity transaction, ESG considerations can inform the success of the deal. Private-equity firms increasingly look for companies that prioritize ESG, as they recognize the long-term benefits and value these companies provide. According to the PwC survey, market value can increase by 3.5 percent just based on a company’s demonstrated ESG practices. In this way, business owners can attract more favorable valuations and terms and may increase their ability to secure funding from private-equity firms. 

Colin O’Donnell is the Director of Mergers and Acquisitions at Gertsburg Licata Acquisitions. If you need assistance in mergers or acquisitions or have any questions about the content of this article, please contact Colin at [email protected] or (216) 573-6000 x 8100. 

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