Live virtual briefing hosted in partnership with Euromoney

Environmental, social, and governance factors are emerging as a powerful and transformative force in APAC dealmaking, according to leading corporate, private equity, and advisory practitioners who discussed the topic during a recent live Euromoney and Datasite webinar.

Over the past couple of years, the strategic importance of ESG factors for most companies across industries globally has risen significantly, fundamentally impacting their business models, operations, and where and what they invest in or divest.

It is a pronounced trend across most countries and regions, and especially in Asia-Pacific, where in the past year ESG factors have become an even greater priority for companies, according to 70% of the executives who took part in our poll during the webinar.

In the main, the efforts of governments to support and promote a more sustainable, low-carbon world through changes to domestic and international policy, are driving the private sector’s response, which, in turn, is influencing dealmaking activity.

Indeed, investment opportunities in APAC abound in some sectors, according to Desmond Chua, head of APAC, Datasite, a leading SaaS platform for the M&A industry. He said that “up to 65% of dealmakers view green energy initiatives as an opportunity in the next five years, followed by infrastructure investment, sustainable farming, and agritech.”

Adding to this, Yong Sin Lin, head of M&A at Daiwa Capital Markets Singapore, said while renewable energy and recycling businesses are seeing competitive bids, it is “almost impossible” to run a process in oil and gas, metals, and mining, and coal-powered generation.

In addition to government and policy driving the rise in importance of ESG factors, customer and employee awareness and expectations are also impacting corporates and their ESG strategies, said Jie Gong, Asia partner at Pantheon Ventures, a private equity and real assets investment firm. She added that ESG is now a board-level initiative and a key driver for entire industries in terms of reputation management, risk mitigation, and driving shareholder returns.

“Not only does it mitigate risk and solve existing problems, but it has become an overlay onto all corporate strategies as a means to creating shareholder value,” said Gong.   

"In addition to government and policy driving the rise in importance of ESG factors, customer and employee awareness and expectations are also impacting corporates and their ESG strategies."
- Jie Gong, Pantheon Ventures

For Chua, this increased importance and interest in ESG is evidenced in the documentation Datasite is seeing in their data rooms, as well as the searches that are being run.

“In 2021, we saw 35% more documentation relating to ESG, and a 24% rise in searches for those terms,” said Chua. “While the ‘E’ in ESG continues to be the biggest factor, the ‘S’ now represents 25% of all ESG-related questions, as compared to 18% a year before.”

On the big question of how to meaningfully measure ESG, Alex Chan, vice president, Asia strategy and development at Amcor, a global packaging company, proposed that companies could report on a quantitative basis, using KPIs and audit processes led by specialist firms.

Part of the challenge with measurement and reporting, however, is ensuring a consistent approach by companies across different industries and geographies, said Robert Wright, a partner at global law firm, Baker McKenzie.

Gong said she is hopeful that some uniformity is emerging in this area, especially around the topic of carbon footprints, led by EU standards such as Sustainable Finance Disclosures Regulation (SFDR).

"While the ‘E’ in ESG continues to be the biggest factor, the ‘S’ now represents 25% of all ESG-related questions, as compared to 18% a year before."
- Desmond Chua, Datasite

Datasite’s Chua added that technology such as AI could present part of the solution and would be key to building a framework connecting “thousands of data points” while ensuring accurate, complete data to encourage collaboration and compliance.

While greater consistency in measuring and reporting ESG metrics is needed, acquirers have options to protect themselves if risks emerge. Indeed, buyers can often structure around perceived ESG shortcomings as long as they have a good understanding of fast-changing regulations, says Wright. Options include carve-outs or buyer protections such as purchase price adjustments, covenants, indemnities, and earn-outs to manage any risks.

"Part of the challenge with measurement and reporting, however, is ensuring a consistent approach by companies across different industries and geographies."
- Robert Wright, Baker McKenzie

Unfortunately, in some situations, acquirers will be forced to back out of deals due to the severity of concerns around a seller’s ESG credentials. While there is a rising incidence of this happening, it’s the challenging macro environment that dealmakers are most worried about over the next 12 months – 33% and 31% of executives polled during the webinar said geopolitics and inflation, respectively, would be the biggest M&A dealbreakers during this period.

Some 11% of executives said that climate change would be the biggest factor impacting deals. And in terms of what corporate development strategies are being considered in response to the climate crisis, most (43%) of the polled executives said partnerships and joint ventures, followed by expansion into new markets (19%) and restructuring (19%).