Climate change concerns are now the biggest risk to M&A, according to a survey of 400 dealmakers in the US and the UK by Datasite, a technology platform used by buyers and sellers for virtual data rooms.
Some 44% of those surveyed said they expected climate change to be the biggest dealbreaker in year ahead, while 64% said that more deals would collapse because of related due-diligence risks in the next two years. Regulatory risks, physical asset risks and litigation risks were given as the biggest reasons why deals would fail.
We have been monitoring an expanding diligence environment over the last two years
During the next five years, 89% of respondents said they expected climate-change risks to affect their M&A strategies.
The findings paint a startling picture of how issues related to climate change are explicitly feeding into corporate and sponsor activity. And they come despite a surge of deal preparation during the past year, after an initial pandemic-induced slowdown in the first few months after coronavirus struck the world.
“Three years ago, most buyers didn’t have a filter for ESG [environmental, social and governance] and climate change in their diligence – it wasn’t on their radar,” says Rusty Wiley, CEO of Datasite. “But now they are concerned about post-transaction value destruction.
“If you don’t do enough diligence on the environmental footprint of an asset, you might acquire something that turns out to have much less value than you thought, or which will take a lot of expense to bring back to value.”
ESG-Covid combination
Covid had already led to an increase in diligence related to deals, as evidenced by the rise in data being processed through Datasite’s systems – continuing a trend that had been seen even before the pandemic hit. But ESG issues have also begun to weigh more heavily on deal preparation.
“We have been monitoring an expanding diligence environment over the last two years, tracking the size of the data rooms,” Wiley tells Euromoney. “We are seeing right now that a combination of Covid and ESG has driven the number of data-room pages up more than 50% on a year-on-year basis. There is a pronounced trend of deeper diligence.”
This reflects a marked change in the priorities of asset buyers.
Fully 70% of those who participated in the survey told Datasite that ESG was now a priority category for them, with Wiley saying that the environmental component seems to be the most impactful.
Positive trends
For all the worries, Wiley also draws two positive conclusions from the trends he observes in the market. The first is that while buyers are being more selective, they are also finding new sectoral opportunities in a world where climate change is shifting priorities.
“Private equity funds in particular are targeting the areas of clean energy and sustainable farming,” he says. “So, while the ESG focus adds a new level of scrutiny, it also opens up other possibilities.”
The other stems from how the Covid pandemic has driven market participants to change their way of working. The efficiency benefits derived from greater automation of information processing are leading to shorter completion times from those deals that do go ahead, Wiley says.
“One thing that happened during the pandemic, as we saw the deal-making community move to remote working, was that there was a deeper adoption of technology, particularly using artificial intelligence to organize data-room content through Datasite Prepare,” he says.
“What that is doing is compressing deal duration. TMT [technology, media and telecom] deals, for example, are down from an average of 10.5 to 11.5 months over the last five years to about 9.5 to 10 months now.”
