Environmental, social and governance (ESG) factors are now the driving force behind an increasing number of deals and investment decisions, however, dealmakers are still scrambling to understand what that means in practice.

With that in mind, a new guide outlining best practice on incorporating ESG considerations into deal making has been launched by ICAEW’s Corporate Finance Faculty that looks into some of the practical considerations for those involved in transactions.

The guide – ESG in Deals and Investment – is a collaboration between ICAEW’s Corporate Finance Faculty and Deloitte and offers access to the latest thinking and best practice to help businesses, advisers and investors to form and refine relevant ESG considerations. The initiative underlines ICAEW’s growing focus on the importance of ESG in business generally and across corporate finance more specifically.

ESG credentials exert increasing influence over investment and capital allocation decisions and can have a positive impact on business’s decisions in relation to transactions with ESG variables providing the drivers to both investment and disposal activity.

The guideline provides practical guidance drawn from recent experience on how to integrate ESG into the M&A process, identify and quantify its value and impact potential, and ultimately to create value through the transaction and over the holding period. 

The guide sets out evidence showing that ESG and corporate performance are intrinsically linked. Recent studies have consistently highlighted that firms that perform strongly across all the material factors of ESG outperform the market and generate long-term value. ESG should now be regarded as a key driver of value, yet it remains highly complex to quantify ESG risks and opportunities and to value targets, predominantly due to the lack of clear, comparable data. 

As the Corporate Finance Faculty prepares to celebrate its 25th anniversary David Petrie, ICAEW’s Head of Corporate Governance, said that ESG has climbed up the boardroom agenda in recent years, driven by fundamental changes in consumer demand and legislative and regulatory change. 

“It has always been my objective, as Head of the faculty for the past 10 years or so, to make sure that whatever we do is seen as both relevant and worthwhile by our members – whether they are involved in lead advisory work or are themselves investment principals.

“25 years ago, it’s safe to say that the acronym ESG wasn’t in common usage. Environmental reports were something commissioned by buyers during due diligence largely focusing on legislative compliance and sources of potential litigation. But if investors and their financiers are to curtail risks and deliver sustainable value, they will need to embed ESG across all transactions. ESG within M&A will be an important means to create growth, gain a competitive edge, and access affordable capital,” Petrie said. 

Speaking at the guideline launch, Jason Caulfield, Global Head of ESG at Deloitte and guideline author, told an audience packed into the ICAEW’s Great Hall, that dealmakers were scrambling to understand how to assess businesses given the rising importance of ESG for consumers, employees, regulators and investors: “ESG has risen to the top of the agenda particularly over the last three years from what was once perhaps a nice to have and a checkbox approach to something that is central to the deal thesis and driving shareholder value. The meat of the report is around the practicalities of due diligence and how to assess a business both on the buy side and the sell side and some of the practicalities of getting some of the ESG strategies delivered post-deal,” Caulfield said.

The scope and purpose of the guideline were informed by a roundtable discussion between corporate finance experts from across ICAEW’s member firms hosted in January by the Corporate Finance Faculty, and featured in Corporate Financier magazine in March 2022. 

James Hilburn, UK ESG M&A Leader at Deloitte, said the firm was thrilled to have been given the opportunity to work with ICAEW in developing the guideline. “ESG is a disruptive trend that is impacting the path businesses take to create sustainable value for stakeholders. It is creating significant investment opportunities but also risks that need to be assessed and managed. 

“The guideline explores the role that ESG plays across the M&A lifecycle, and provides practical guidance pulled from Deloitte’s own experience supporting clients on M&A transactions, on how to integrate ESG into the M&A process, identify and quantify its value potential, and ultimately to execute on identified levers to deliver positive value through the transaction,” Hilburn added.

The ESG in Deals and Investment guideline is the latest in a series of Best Practice Guidelines published by the Corporate Finance Faculty, which also includes Public to Private Transactions – with PwC, Completion Mechanism with GT, Valuations with KPMG and Debt for Deals with Clydesdale/Virgin Money.

ICAEW’s Corporate Finance Faculty is the largest network of professionals involved in corporate finance. Membership is open to everyone including non ICAEW members.