Companies are looking at newer niches to deepen their ESG expertise
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ESG M&A frenzy continued in 2021
The year 2021 has continued to see a hectic M&A activity in the ESG space. During the year, several large ESG firms were acquired by a range of companies including data providers, rating agencies, stock exchanges, and asset managers. Some of the ESG firms have commanded billion-dollar valuations indicating that ESG is gaining a greater role in investment management.
The common theme across all the acquisitions is pointing towards expanding the sustainability product suite and differentiating their product offerings.
“Across NN Investment Partners’ offerings, they have been successful in integrating sustainability which mirrors our own level of ambition to put responsible investing and stewardship at the heart of our business” David Solomon, Chairman, and CEO of Goldman Sachs on the acquisition of NN Investment Partners.
There aren’t many pure-play ESG firms left in the market for acquisitions. However, companies are still exploring niche themes to add depth and differentiation to their ESG practice.
Race to Net-Zero Emissions
Climate change is shaping this century’s priorities. The world is working towards creating a "climate-neutral" environment by the middle of the century. The Paris climate agreement of 2016 has been a big driver in this direction, and it required governments to limit the temperature increase to 1.5 degrees above pre-industrial levels. This requires regulators to roll out several environmentally conscious policies and initiatives. It will have strategic and financial implications for governments, corporates, and investors, which, in turn, will affect their investment choices.
At U.N. COP26, few developed countries have made commitments to provide the $100 billion annually in climate finance to support the climate transition needs in developing countries, although the modus operandi is still unclear. The members of the Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition of leading financial institutions, announced a pledge of $130 trillion of assets over the next three decades to support this effort.
Climate Risk is Investment Risk
“Investors and companies are increasingly recognizing that climate risk presents investment risk.” Sudhir Nair, Global Head of the Aladdin Business at BlackRock.
However, these risks must be identified and managed through science-based methods. The underlying data, models, frameworks should integrate with the existing risk management frameworks to provide meaningful insights for decision-making.
Climate Flavored acquisitions dominated the current ESG M&A
New-age firms are tackling these issues by applying climate science principles in combination with data, technology, and frameworks. Their models are science-based, and scenarios are forward-looking. They also integrate results into existing risk management frameworks and process flows. This makes these specialized climate firms hot acquisition targets for financial firms.
"More than ever, investors and companies seek evidence-based insights, high-quality data, and advanced analytics to support the decisions driving their strategies linking sustainability and business performance." Dr. Richard Mattison, President, S&P Global Sustainable1 on the acquisition of Climate Service Inc
"Our investment in ClimateSeed is further evidence of our commitment to expand and scale up the range of activities that combat climate change and preserve biodiversity.” Marco Morelli, Executive Chairman of AXA IM
Digitalization makes data governance the next big ESG driver
Data governance has not historically been considered an ESG issue. But since the pandemic has hit, the world has transitioned to digital in the way it lived and worked. However, the data breaches across large corporations and the ensuing lawsuits are making data governance a financially material risk, and are forcing corporates and investors to take a closer look.
Source: AlphaSense | Company commentary on data privacy in transcripts and ESG reports has increased YoY
“In the context of a global pandemic, the climate crisis, and increasing cyberattacks, our customers must manage a80 wider range of risks than ever before." Rob Fauber, President and Chief Executive Officer of Moody’s
Global risks are now more complex, connected, and systemic. Climate change and catastrophic events like extreme weather, pandemics, and cyberattacks have broader and more harmful impacts across virtually all industries.” Chief Executive Officer of RMS on Moody’s acquisition of RMS
Traditionally, even if data privacy has been included in ESG reporting, it has largely been under the social category. This made technology stocks the darling of environmentally conscious investors. However, newer challenges such as data localization, energy footprints, and biodiversity impacts, are making a case for data governance emerging as a newer niche in the ESG practice.
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