Embracing ESG and defining purpose to create value and attract investors

Miriam Pozza Partner, Deals, Transaction Services Global and Canada Deals, ESG Leader, PwC Canada April 14, 2022

Mergers and acquisitions (M&A) activity during 2021 rose 117% compared to 2020, and it’s expected to remain relatively strong over the next year, according to our 2022 Canadian M&A industry and market trends report.

While this is good news for Canadian business owners who might be looking to sell, our report also highlights an important trend to consider when getting ready for sale. This is the increased emphasis investors are placing on environmental, social and governance (ESG) factors when evaluating target companies.

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Recognize the growing importance of ESG

If you’re contemplating the sale of a business, you need to be aware of how investor sentiment is changing. We are now seeing most, if not all, investors looking critically at how companies address ESG across different dimensions, including regulatory, compliance, strategy, impact and operations, so they can better understand each company’s material risks and potential growth opportunities. Investors want to see net-positive pathways that address both risks and opportunities.

To get the most value for your company, you’ll need to be able to communicate your ESG approach to potential investors and show them you have a robust ESG strategy and realistic roadmap for change in place.

Approach ESG strategy from a value perspective

When it comes to developing an ESG strategy for your business, also consider assessing priorities and activities from a value perspective. Go beyond simply focusing on the risks to your company and identify the opportunities your ESG actions could generate over time. This combined view can help you communicate the implications of your ESG approach to potential buyers and investors.

ESG-related value can be categorized in three ways:

Value erosion refers to value that could be lost if specific ESG actions aren’t taken. Examples include higher input costs, cost of supply chain disruption, physical risks associated with extreme weather events and risks associated with regulatory non-compliance.
Value preservation refers to value that can be preserved if companies take specific ESG actions. Examples include planned greenhouse gas reduction, waste reduction and energy efficiency, and planned customer and employee strategy.
Value creation refers to value that can be created because of specific ESG actions over time. Examples include new markets, products and services, stronger customer loyalty, lower cost of debt and increased employee retention.

Make your company more attractive to investors: Three key activities

If you’re looking to sell your business—now or in the future—there are three concrete steps you can take to make your company more attractive to buyers, while also supporting the development of a robust ESG strategy.

Baseline your current ESG activities

Evaluate what your company is currently doing with respect to each of the ESG factors: environmental, social and governance. Use this information to compare your organization to key competitors and against existing ESG frameworks and standards—such as the SASB FrameworkOpens in a new window, the TCFD FrameworkOpens in a new window and the SDG UN Sustainability Development GoalsOpens in a new window—to identify gaps and opportunities.

Develop a capital allocation strategy

Consider your desired ESG outcomes and use them to guide your ESG investment decision making. This can help you prioritize where to make specific investments (for example, acquiring enabling technologies or funding R&D initiatives) so you get the best return while also making funding available for ESG initiatives over the long term.

Identify opportunities for growth

Consider how you can use ESG activities more broadly to support and drive growth for your business. You can do this by incorporating ESG principles into your overarching business strategy so ESG becomes a fundamental part of how you approach end-to-end operations and engage with stakeholders across your value chain.

Embrace sustainability with purpose

Investors today are increasingly emphasizing ESG factors when evaluating potential companies. But if you want to create sustainable value for your business in the long term, think of ESG as a way to operate in the service of multiple stakeholders. By embracing ESG and defining a purpose for your business, you’ll do good in the eyes of society and your stakeholders, and you’ll set up your business for a sustainable and profitable future.