Frankfurt The issue of sustainability is becoming a determining factor in the future orientation of corporations. At the same time, there will be new impetus for the purchase of companies or parts of a group. This is the result of a representative survey by the management consultancy EY (Ernst & Young) among German companies, which is available to the Handelsblatt.
The responsible managers therefore agree: No other value driver is currently developing more dynamically than sustainability – a full 94 percent assume that this criterion will become increasingly important for the company’s value. Only 68 percent name the strategic direction of the company, and financial figures only 35 percent. The principle of sustainability is known, for example, from forestry. There it says that you only cut as much wood as will permanently grow back.
The optimization of business models from the point of view of sustainability will also fuel business with mergers and acquisitions (M&A) in the future. According to EY, more and more companies are repositioning themselves and separating from business areas or making acquisitions in order to actively control this process.
According to the survey, a good seven out of ten large German companies, or 73 percent, are currently planning acquisitions or sales over the next two years in order to improve their own sustainability performance.
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“We are currently experiencing a radical upheaval on the M&A market: There are more and more green deals, i.e. transactions related to sustainability, and their share of the overall M&A market is steadily increasing. Because sustainability is no longer ‘nice to have’, but vital for the survival of many companies,” says Constantin M. Gall, Managing Partner of the Strategy and Transactions department at EY. “Anyone who does not review and optimize their business model for sustainability will be severely punished on the stock exchange and also risk losing access to outside capital.”
Such companies quickly ended up as takeover candidates – despite possibly good profit development, says the expert. Nine out of ten companies assume that investors will attach even greater importance to sustainability in the future than they currently do.
Renewable energies are coming into focus
The M&A market and investment bankers can currently use positive stimuli, as the industry is suffering from the consequences of the Ukraine war and the economic slowdown. According to the analysis company Refinitiv, the global M&A volume collapsed last year by 40 percent to 3.5 trillion dollars, in business with German participation it did not look any better with a minus of 36 percent.
In this environment, the shift to renewable energies is a key driver for deals. “For example, we are looking for corporations that have green and fossil areas under one roof. Here there are ideas for reorganization or splitting up,” says Dirk Albersmeier, co-head of global M&A business at US bank JP Morgan.
“In light of the energy crisis, numerous companies are looking for independence and are acquiring the necessary expertise for the sustainable restructuring of their own business model through acquisitions,” says Lucina Berger, partner at the law firm Hengeler Mueller.
According to Refinitiv, in the weak M&A year 2022 there were already numerous deals in the field of renewable energies in Europe. For example, the electricity producer EDP Renovaveis SA acquired a majority stake in Kronos Solar Energy GmbH, and an international group of investors participated in a financing round in Zolar GmbH in Berlin. Wind farms and solar parks also changed hands.
>> Read here: The end of mega deals – Six trends that will shape the M&A market
Companies use different strategies to deal with areas of the company or products that no longer meet the requirements of sustainability. Every second company is phasing out products and almost every fifth company plans to sell “non-green” business units.
However, such projects are proving to be increasingly difficult in practice, and according to EY, sellers sometimes have to accept significant price reductions. The purchase of sustainable assets is apparently more popular than selling business areas for sustainability reasons: 43 percent of the companies surveyed by EY as part of the “Sustainability Portfolio Review” study are planning such transactions, in which start-ups are bought, for example.
Such measures can be worthwhile for companies. Because the capital market grants companies with better sustainability ratings significantly higher multipliers. An EY analysis for companies with an excellent sustainability rating showed a valuation premium of 2.0 times their operating profit (Ebitda) compared to those with a weak sustainability performance.
“Green assets are now trading at a significant premium – and this trend will continue. Companies’ efforts to adjust their portfolios accordingly are therefore rewarded with very concrete financial advantages,” emphasizes Gall. In addition, bank lending is increasingly linked to sustainability and ESG ratings. The abbreviation ESG stands for environmental and social criteria as well as good corporate governance.
More: Every second sustainable fund invests in oil, coal and aviation