M&A Dealmakers Ready to Pay Premium for High ESG Maturity: KPMG Survey

A recent survey by KPMG reveals that most M&A dealmakers are willing to pay a premium for companies with high Environmental, Social, and Governance (ESG) maturity. This trend underscores the increasing importance of ESG due diligence in the M&A process, driven primarily by its link to monetary value. The Global ESG Due Diligence+ Study 2024 surveyed over 600 active M&A dealmakers across 35 regions, including Europe, the Middle East, Africa, Asia Pacific, and the Americas.

The survey found that 71% of respondents reported increased importance of ESG considerations in transactions over the past 12 to 18 months, with only 2% noting a decrease. Notably, 82% indicated that ESG considerations are now on their M&A agenda, up from 74% in a similar U.S.-focused survey last year. Despite a political backlash against ESG in some regions and softer M&A activity, the findings show a counterintuitive trend: respondents from the Americas were most likely to report increased importance of ESG in transactions.

Reflecting the heightened focus on ESG, over half of the dealmakers encountered “deal stoppers” during ESG due diligence. More than a third reported that ESG findings led to consequences such as purchase price reductions. Moreover, nearly 60% of respondents expressed willingness to pay a premium for targets demonstrating high ESG maturity. Investors with a more mature ESG due diligence approach were notably more willing to pay higher premiums, with 24% willing to pay over 6% extra, compared to only 10% of their less mature peers.

Looking ahead, 57% of dealmakers expect to perform ESG due diligence on most transactions over the next two years, up from 44% who have done so in the past. Only 6% anticipate not conducting ESG due diligence going forward, a significant drop from 19% historically.

The primary driver for pursuing ESG due diligence is the monetary value of identifying sustainability-related risks and opportunities, cited by 58% of respondents. Regulatory requirements and corporate policies were also significant factors, reported by 44% and 36% of respondents, respectively.

Florian Bornhauser, Director at KPMG Switzerland and report co-author, emphasized the commercial implications of ESG in transactions, noting, “Considering ESG on transactions primarily means understanding the commercial implications that could have a significant deal value impact.”

The survey highlighted the differences between financial and corporate investors. Financial investors were nearly twice as likely to integrate ESG deliberately into their M&A decisions, with 70% describing their approach as market-leading or reasonably mature, compared to only 40% of corporate investors. Financial investors also showed a higher propensity to acquire targets with ESG transformation potential (61%) and those with superior ESG performance (45%) compared to corporate investors (28% and 24%, respectively).

Climate-related factors emerged as top considerations in ESG due diligence, with 67% of dealmakers focusing on targets’ understanding of their carbon footprint, decarbonization targets, and credible plans. Understanding exposure to climate-related risks was also crucial, cited by 66% of respondents. Other key factors included environmental or social product features, ESG controversy screening, and labor practices.

Julie Vasadi, Partner at KPMG Australia and report co-author, highlighted the non-negotiable nature of considering ESG in investment decisions, stating, “The extent and depth to which ESG-related risks and opportunities are being considered has increased significantly over the past 12 months, and leading investors are driving value from it.”