Liberty Global Transaction Solutions’ Markus Messinger examines how ESG is changing the landscape for M&A deals, and highlights why Germany provides guidance as to how the future might look for M&A insurers.
ESG has become a hot topic in M&A in the last few years, playing a key role in the investment decision process of both private equity players and corporate buyers.
Fund managers have to satisfy the ESG expectations of institutional investors and assess potential targets against it.
The financing banks also formulate certain ESG minimum standards. In a process of self-regulation, the private equity community has even developed ESG-specific investment standards – such as the ESG Data Convergence Project – or is adhering to standards such as the UN Principles for Responsible Investment.
At the same time, governments all over the world are addressing ESG in new legislation and Germany is at the forefront of this.
Aiming at being a world leader in the transition to a low-carbon economy, the federal government is accelerating Germany’s legal and social transition.
Last year the German federal parliament passed the Climate Protection Act, which sets out a national goal of reaching climate neutrality by 2045.
This was followed by the Supply Chain Act – set to be implemented in 2022 – which extends each company’s responsibility for human rights violations through its whole supply chain.
Such a changing landscape for M&A deals increases the demand for protection against ESG risks, but is also transforming how insurers look at the deals that they are asked to insure.
This changing view of where best to deploy capital is transforming the types of deals that are coming through.
While for decades foreign investors were attracted by Germany’s family-owned medium-sized manufacturing companies, in particular in the automotive space, the green transformation puts the spotlight on companies with sustainable product portfolios and technological innovations.
Many German companies have already set out on the path to net zero, but the challenge is complex: they need to invest in transforming their facilities and their value chains end to end, while at the same time identifying the demands on their workforce and creating diverse and equal employment opportunities within a modern governance structure – a task of enormous proportions.
As a result, leading sustainability-oriented companies often benefit from attractive valuations. Government stimulus packages and a growing “green capital market” are providing additional tailwinds.
Consequently, M&A insurers are presented with a new set of target profiles and transformational risks have to be assessed.
With ESG now being a key factor in M&A transactions, M&A insurers expect that investors will no longer buy a target without having carefully considered its ESG risk profile.
While the detail of documented due diligence still differs, a specific ESG due diligence performed by external experts can be seen as best practice and has been adopted by the leading private equity firms.
The M&A market in Germany gives a window to future paths in M&A insurance elsewhere – there are lessons to be learned about how we may all need to adjust insurance considerations in years to come as the path to net zero and other ESG goals accelerates.
For insurers the key is to understand and seek due diligence on ESG issues, as well as having a clear understanding of the requirements that will be coming down the track for the transaction targets we insure.
Our role is to support the capital markets as they invest in sustainable companies, and we will continue to do this in Germany and elsewhere.
Markus Messinger is head of EMEA for Liberty Global Transaction Solutions