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The Integration of ESG in India's M&A Landscape
In recent years, Environmental, Social, and Governance (ESG) criteria have become pivotal in shaping the business strategies of corporations worldwide, and India is no exception. The Indian market has witnessed a significant shift towards sustainable business models, driven by dynamic ESG considerations that are redefining value and success in mergers and acquisitions (M&A).
The Rise of ESG in India's M&A
The Indian M&A market has shown resilience and dynamism, with a robust performance despite international market fluctuations. In 2023, the market continued to thrive, and this trend is expected to sustain throughout 2024, with a growth in both deal volume and value. This surge is partly due to the increasing importance of ESG factors in corporate strategy and M&A deals.
Why ESG Matters in M&A
ESG considerations are fostering higher standards of environmental stewardship, social responsibility, and governance. They are not just enhancing M&A deal premiums and valuation but are also becoming a significant factor in due diligence, risk assessment, and deal execution. A sustainable business model, coupled with healthy profitability, is becoming a necessity in the globally interconnected world of today.
Impact on Valuation and Deal Pricing
Enterprises with robust ESG governance can often command a market premium. They benefit from lower costs of borrowing capital, better risk mitigation, and enhanced brand reputation. Financial institutions favor such enterprises by offering better lending terms, which, in turn, boosts their valuation.
Due Diligence and ESG
Due diligence has always been a crucial step in assessing an enterprise's performance. Now, ESG has become a major focus area. Enterprises are expected to have watertight environmental policies and all relevant licenses and permits as a starting point for environmental diligence.
Investor Focus and ESG
The investor focus on ESG in India is evidenced by the growth in ESG fund size, which saw a significant increase from 2019 to 2022. The India Private Equity Report 2023 highlighted a sharp uptick in ESG-driven investments, with a notable increase in deal value to nearly $7.9 billion.
ESG as a Value Driver
ESG is more than a buzzword; it's a value driver. It addresses commercial risks and opportunities in transactions, acting as a catalyst for private equity funds and corporations to determine the business viability of investment targets and the possibility of future sustainable value creation.
The Global Context
Globally, there is a large pool of ESG-aligned capital, with investors from regions like the European Union, the United Kingdom, and the United States looking for ESG-compliant targets for acquisitions. This global movement is influencing the Indian M&A landscape as well.
Conclusion
The integration of ESG into the M&A process in India is a reflection of a broader global trend towards sustainability and responsible business practices. As ESG continues to influence dealmaking, it is clear that these considerations are no longer peripheral but central to the success and longevity of business ventures in India and beyond.
