- After a down 2023 for mergers and acquisitions experts are expecting a rebound, but see ESG’s role in that bounceback as a double-edged sword, according to a recent report by law firm Norton Rose Fulbright.
- The firm surveyed over 200 senior executives on the topic of mergers and acquisitions and found a quarter of respondents listed ESG-related regulations as a key obstacle to making deals this year. Increased scrutiny is expected globally, though ESG guidelines are expected to be a key driver of M&A activity in Europe, Australia, New Zealand and Canada.
- The report said ESG-driven deals are expected to become a “major feature” of the M&A market this year, making ESG data essential. The report said companies doing due diligence on acquisitions need reliable target metrics to aid their decision-making, and the vice president of a U.S.-based corporation warned that acquirers will likely cancel a deal if “critical ESG information is not provided or unavailable.”
The firm’s Global M&A Trends and Risk report for 2024 found that expectations of increased regulatory scrutiny was a global trend, as 73% of global respondents expect ESG scrutiny to increase this year. Forty-two percent of global respondents expect scrutiny to increase “somewhat,” while 31% of respondents are expecting a significant increase.
While it seems inconsistent that ESG regulations are expected to stifle dealmaking, and ESG guidance is also cited as a driver for the M&A activity, “in practice, one is the solution to the other,” the firm said.
“New regulation creates uncertainty for which guidance is the antidote, providing clarity of application and opening the field for compliant activity,” the report said.
Norton Rose Fulbright had the survey commissioned during Q4 of 2023 and received 100 responses from C-suite and other top-level executives from multinational corporations, 50 from large private equity firms and 50 from major investment banks. All respondents had participated in at least one M&A deal that spanned multiple sectors and continents in the last two years, with 40% from companies headquartered in the U.S. and Canada, 20% from Europe and the Middle East, 10% from Australia and 5% from Africa, according to the report.
The report notes that the topic has become “a political football, especially in North America,” though there is less of an expectation that scrutiny will “increase significantly.” Sixty-six percent of respondents expect ESG regulatory scrutiny to increase in the U.S. this year – as the Securities and Exchange Commission and various states look to regulate the topic. By contrast, just 18% of respondents believe scrutiny will increase significantly, compared to a global baseline of 31%.
While two-thirds of respondents expect a stricter regulatory environment to be the top barrier to M&A transactions in the U.S., that is less about ESG-related concerns and much more about antitrust regulations. Antitrust regulations were listed as a top-two regulatory concern for U.S. deals by 88% of respondents, while just 9% expect ESG rules to restrict M&A activity.
Most U.S. M&A activity will be driven by companies looking to dispose of non-core units, as 46% of respondents listed that as a top-three deal motivation. Additionally, as recession fears and high interest rates start to fade, executives expect to see an uptick in activity by private equity firms after a slow 2023 — where the total value of mergers and acquisitions fell more than 15%, according to PitchBook and Bain & Company.
“Dry powder will be one of the primary reasons for M&A in the U.S.,” the partner of an American buyout firm predicted in the report. “Internal stakeholders will be prepared to conduct more deals in 2024. There is a better understanding of the changing market conditions.”
The report said the European M&A market will be driven this year by companies making acquisitions to comply with the European Union’s strict ESG-related laws, like the Corporate Sustainability Due Diligence Directive, and net-zero targets.
“Companies will find M&A targets to support their net zero commitments, and ESG due diligence will become an important part of the dealmaking process,” the director of M&A at a Swiss corporation said in the report.