Green deals are gaining traction as M&A activity returns to pre-pandemic levels, said BCG recently.
In the first seven months of 2022, companies announced more than 22,000 deals, with a total value of US$1.85 trillion—a level of M&A activity more in line with pre-pandemic averages than with the previous year, according to a new report titled “The 2022 M&A Report,” by Boston Consulting Group (BCG) in collaboration with Professor Sönke Sievers of Paderborn University.
The firm forecast that ESG considerations will motivate an increasing number of deals, despite unfavourable macroeconomic conditions.
Report highlights
- The global number of ESG-related deals rose from about 5,700 in 2011 to an all-time high of about 9,200 in 2021—a 60% increase.
- The volume of these deals as a share of all M&A activity rose from 12% in 2001 to 17% in 2011 and then rose further to 22% in 2021, suggesting that more dealmakers are recognising the value-creating potential of these transactions.
- BCG’s analysis revealed a clear upward trend in ESG-related deals over the past decade, with the strongest acceleration occurring in 2021, when deal volumes jumped by 35% following two softer years for broader M&A activity and ESG transactions.
- Although environmental-related deals — green deals — account for only a small fraction of all M&A transactions, they have increased in recent years— rising to 6% in 2021 after hovering at 5% from 2011 through 2019.
- The 20% increase from 2019 to 2021 indicates that green dealmaking is gaining traction as a strategic lever for environmental transformation.
- Green M&A has been growing particularly quickly in industries that are at the forefront of the energy transition and in emerging markets.
- Over the past ten years, the energy and utilities industry had the highest share of green M&A and the largest increase, seeing its share of green deals grow from 20% in 2011 to almost 40% in 2021.
- Asia Pacific (especially China) was the second-most active region, with a green deal share of approximately 8% in 2021.
- The region with the highest level of green M&A activity in 2021 was the Middle East.
- More than 10% of deals in that region in 2021 were environmental-related, following a steady share of around 3% to 5% since 2014.
Do green deals create value?
As green deals become more popular, they are becoming more expensive, according to BCG.
Average acquisition prices for these deals exceeded the overall market average by about 7% over the past three years, with premiums of 20% to 30% in certain industries, the firm pointed out.
Nevertheless, green deals generally create more value than non-green deals upon announcement and over the ensuing two years despite the substantial premium they often command, BCG observed.
By analysing cumulative abnormal return (CAR) for three-day periods before and after a deal announcement, BCG said it found that the median CAR of environmental-related transactions (1.0%) is significantly higher than that of non-green deals (0.6%).
The report also determined that the median two-year relative total shareholder return (rTSR) of green deals (0.6%) exceeds that of non-green deals (0.4%).
“Green deals often command a substantial premium---as high as 20% to 30% in certain industries—but our research shows that, in many cases, the price is justified,” said Daniel Friedman, a BCG managing director and partner and a coauthor of the report. “In both the short term and the longer term, the message is clear: companies that use the right approach to green dealmaking generate higher returns.”
