Sustainability considerations are becoming increasingly central in the mergers and acquisitions dealmaking process, with more than 70% of M&A leaders reporting abandoning potential acquisitions over ESG concerns, and a vast majority saying they would be willing to pay more for targets with strong ESG attributes, according to a new survey released by global professional services firm Deloitte.

For the report, Deloitte surveyed 500 M&A leaders from corporations with at least $500 million in revenue and private equity firms with at least $1 billion in assets under management, across North America, Europe & Middle East and Asia Pacific regions.

The survey found that ESG factors were becoming increasingly integrated into the M&A process, with a growing impact on target considerations, due diligence, final decision making and valuation, particularly as sustainability-related data becomes more readily available, and as companies evolve their understanding of ESG issues.

For example, while 99% of respondents reported that their organizations measure the potential impact of an M&A transaction on their ESG profile, up from 92% in a prior survey 2 years ago, 57% reported that they do so with clearly defined metrics, up from only 39% in the earlier survey. Similarly, more than 90% said that they have a high or very high level of confidence in accurately evaluating a potential acquisition target’s ESG profile, compared to less than 75% in the 2022 survey.

Tanay Shah, M&A ESG Leader at Deloitte, said:

“Advancements in the strategies and tactics used to improve ESG footprints have enabled significant progress in the frequency in which ESG is considered as part of a standard pre-close process for both corporates and PEs.”

The study found that ESG issues were already having a significant, and growing, impact on dealmaking decisions with 72% of respondents reporting that they have decided not to proceed with a potential acquisition due to concerns about the target’s ESG profile, up from less than half of respondents who said this in the prior survey. These results were mirrored by respondents on the sell-side of transactions, with 66% reporting that they have been forced to abandon a divestiture for ESG-related reasons, compared with 33% in the prior survey.

Brooke Thiessen, Partner, Infrastructure M&A, Financial Advisory at Deloitte Canada, said:

“Abandoning a deal is certainly not an easy decision. While commercial or operational concerns are often the main reasons for walking away from a deal, ESG red flags are increasingly being considered with the same level of seriousness to either pause or end deal activity.”

Similarly, the survey found an increasing influence of ESG factors on M&A valuation. 83% of respondents said that they would be willing to pay a premium of at least 3% for an asset with a high ESG profile, or one that improves their organization’s ESG profile, compared to only 62% in the 2022 survey, and only 1% said that they would not pay any premium for a high ESG profile, compared to 8% who reported this in the prior survey. Additionally, 67% said that they would seek a discount of at least 3% due to a negative ESG profile, up significantly from only 27% in the prior survey.

In the report, authors Deloitte Partner Briann Lightle, Managing Director Sarah Corrigan, and Senior Manager Ketiwe Zipperer wrote:

“Overall, ESG appears to be more deeply embedded in the M&A process than ever before, with a greater recognition among leaders that it is a lever for measuring, protecting, and creating value. One reason for this trend is that ESG data is now better defined, captured, and measured, thus, allowing metrics to be more precise and better understood than they were only a few years ago. Understanding ESG data starts with determining material ESG issues, which is another aspect of organizations’ enhanced maturity and sophistication over recent years.”

Click here to access the survey.