ESG Premium in M&A

We have heard much about the value of ESG and how imperative it is to be onboarded now. Mandatory regulatory requirements may be whipping companies into compliance but real alignment requires more convincing of the hearts. A common grievance I hear is the lack of quantification of ESG value to justify the costs involved, which makes it harder to persuade the CFO or the budget controller to invest further into ESG.

So let's look at some research studies backed by data and numbers to justify our case why ESG is an absolute measurable good to have, not just morally, but in terms of dollars and cents too.

In the olden days (we are talking about 1970, according to the Friedman doctrine), the costs of ESG was seen as a waste of resources that alternatively could be used to maximize firm value, that the involvement in ESG reduces shareholder wealth and threatens the decision maker with potential breach of fiduciary duty.

Fast-forwarding to now, academic research results from studying more than 500 qualified acquisitions in US and EU have shown that there is a proven positive correlation between a firm’s ESG performance and its merger returns and long-term operating performance, which in other words, translates to higher value realization for the shareholders.

In particular, there is a positive and highly significant relationship between governance performance and acquisition premium, where a one percentage point increase in governance, will lead to an expected 0.16 percentage point increase in the premium.

Another interesting finding from the study is that a higher ratio of female directors in the company also contributes significantly to the acquisition premium paid on the company. Of course, the study has admitted that other market factors could have influenced the premium, which may not have a direct causal relationship with the female director ratio.

In a separate study on governance and acquisition premium, it is statically proven that certain aspects of governance, e.g. board duality (as opposed to board independence) has a negative correlation with the acquisition premium. An inefficient board (larger board) also decreases acquisition value in terms of the premium. Better executive compensation mechanisms such as executive equity compensation also improves acquisition premium.

While more research and studies would be required to continuously verify quantitatively the impact of various aspects of ESG on the company's value, we already have some solid basis to be confident that ESG is not just a subjective good to have. To all the companies large and small, and their budget controllers especially, it is time to stop denying the value of change, and to learn to embrace ESG wholeheartedly.

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Disclaimer: The content of this article is informational only. Nothing in this note shall constitute legal, investment or professional advice.

Read?my other publications on:

LinkedIn: A Moral Practical Dilemma; A Case of Reusables; Is Poverty Real in Singapore?; Conservation & Choices; Female Entrepreneurship - Unique Opportunities & Challenges; ESG for SMEs in Singapore? S Integration & Implementation I - How to Think about Impact Integration in Social Enterprise; Let's Talk about Governance; The Social Aspects of ESG — Where Every Organization Finds a Soul; Carbon Credits — Quality Matters; On Greenwashing: Greenwashing Behaviours to Avoid as an Organization; Why I Still Believe in Blockchain; Chat GPT is Not Your Best Friend Yet — and Here is Why; Living a Colourful Life; Carbon Taxes & Credits — An Introduction; 3 Reasons Why Every Business Should Incorporate Sustainability; Master of None — Reflections on Tips to Becoming a Successful Generalist;The Fool-Proof Guide to Setting up an ESG Framework & Policy for Businesses, Investors and Investment Managers, Part 1 of 5; Gone with the Red — Ep.1; My footprints 2022;

Medium: A Case of Reusables; Is Poverty Real in Singapore?; Conservation & Choices; Female Entrepreneurship - Unique Opportunities & Challenges; ESG for SMEs in Singapore? S Integration & Implementation I - How to Think about Impact Integration in Social Enterprise; Let's Talk about Governance; The Social Aspects of ESG — Every Organization Needs a Soul; Carbon Credits — Quality Matters; On Greenwashing: Greenwashing Behaviours to Avoid as an Organization; Why I Still Believe in Blockchain;Chat GPT is Not Your Best Friend Yet — and Here is Why; Living a Colourful Life; Carbon Taxes & Credits — An Introduction; 3 Reasons Why Every Business Should Incorporate Sustainability; Master of None — 3 Key Tips to Success as a Generalist; The Fool-Proof Guide to Setting up an ESG Framework & Policy for Businesses, Investors and Investment Managers, Part 1 of 5; Gone with the Red — Ep.1; My Footprints 2022; More than Just Words — embracing a greener life