Sustainable Growth Through Smart Acquisitions

Environmental, social and governance (ESG) is no longer a nice-to-have. Regulation and oversight are increasing at pace, and companies are now expected to have fully embedded ESG frameworks and processes in their day-to-day activities.

Added to this, the tools and technologies used to measure a company’s impact are also evolving, making it essential to ensure ESG policies are documented, embedded, and can be backed up with solid data.

Aside from the legalities, ESG is an important reputational factor impacting how clients, colleagues and communities view an organisation, and therefore the trust they’re prepared to place in the brand. It’s also an increasingly relevant factor in the valuation of a company (if and when time comes to sell or seek investment), making it a key element business owners should be addressing prior to any potential deal.

There is another important consideration when we focus in on the professional services sector: when it comes to ESG transformation, professional services firms play a critical role in because they can influence both their own operations, and those of their clients.

Sectors like construction or manufacturing may seem to have more straightforward, tangible measures available to them like switching to sustainable materials, building an ethical supply chain, and so on. But in professional services, similar investments in internal transformation can provide the additional benefit of adding or expanding a revenue stream by augmenting a firm’s portfolio of services.

With this dual benefit, M&A is becoming a strategic tool to enhance ESG capabilities across the professional services space.

Leading from the front

In the bid to better incorporate ESG into the fabric of an organisation, firms must begin with a process of introspection. Agreeing, documenting and embedding internal sustainability policies and practices such as carbon-neutral or paper-free initiatives or sustainable workspaces is one element.

Another may be committing to leadership diversity targets, inclusive and accessible hiring practices, and more. Starting from scratch can be a complex and daunting undertaking, so many firms are turning to M&A to fast-track the process and expand their offerings. Companies across sectors are investing in technology solutions to assess risks, provide transparency, and track progress, then offering these services to clients embarking on similar transformations.

Larger corporations are acquiring ESG-focused startups or SMEs to integrate these innovation capabilities into their own business and provide additional services to clients dealing with their own ESG journeys. Consulting firms are acquiring ESG data analytics companies to strengthen their advisory capabilities; law firms are merging with sustainability-focused practices to expand compliance offerings; and investment managers are looking for specialist expertise to assist clients in structuring ESG-focused investments like green bonds or impact funds.

The good news for M&A within the sector is that UK and European private equity firms are increasingly shifting capital towards ESG-compliant businesses to future-proof portfolios, and divesting non-compliant assets to align with regulatory pressures and investor demands.

For professional services businesses, this means building or acquiring solid ESG credentials can have a dramatic impact on their valuation come a sale or fundraise – but it’s not without its challenges.

Navigating a complex landscape

Despite the momentum, ESG-driven M&A is not entirely straightforward, and one of the biggest challenges is the lack of standardised metrics. Without a universal framework it can be difficult to definitively assess a target company’s credentials, adding complexity to the due diligence process, so having well documented policies and processes can make a big difference.

Similarly, it means it can be complicated to navigate cross-border deals with multiple regulatory landscapes to consider. These evolving landscapes present a challenge in themselves, with changing global regulations affecting deal structures and leaving uncertainty over potential long-term liabilities like carbon credits, or ethical supply chain risks.

Greenwashing also remains an issue, and it’s important to be able to verify actual ESG performance versus corporate sustainability claims, otherwise both buyer and seller risk reputational damage if ESG acquisitions fail to deliver genuine, measurable impact.

There are also post completion considerations to anticipate. Having a clear vision around ways of working and cultural fit prior to embarking on a sale or purchase will ensure acquiring firms can align ESG commitments with existing business models, balance profitability and sustainability goals, and retain any key talent from both companies.

Embracing the future

With ESG becoming an ever more relevant factor for companies across industries, now is the time for professional services firms to consider their own ESG strategies in combination with the services they could potentially offer to clients on the same path.

Acquisitive companies and those looking to be acquired need to crystallise their plans and develop a clear view of their future ways of working to maximise the chances of a smooth transition to a much more ESG-focused environment.

Loïc Bourdonnec is an Associate Director at LAVA Advisory Partners. 

He has experience across M&A having honed his private equity project management skills in European mid-market fundraising environments.