ESG factors are being prioritized in M&A decision making: Let’s look at SPAC and ESG
As green finance becomes mainstream, investors are maturing towards the utilization of innovative instruments like SPACs that can be leveraged to invest in early stage companies.
Over the last 2 years investors have increasingly invested in new market trends which include SPACs (Special Acquisition Companies) and ESG (environmental, social, and governance). SPACs are Special Purpose Acquisition Companies that are created to raise capital through an IPO to acquire shares of private companies, taking them public through mergers. Environmental, social and governance (ESG) refers to three key factors to measure .
how businesses function as it relates to the planet, ethics, and employment. ESG is becoming mainstream because environmentally and socially conscious investors now use ESG scoring and standard to prioritize their investments.
Towards the end of 2021, the momentum around SPACs have slowed down. However, ESG focused SPACs are increasing and recent SPACs equities performance show that SPACs with clear ESG focus perform better than non-ESG SPACs. As decarbonization goals and climate risk continue to be a trending priority for the capital markets, ESG M&A will become an inseparable component of SPAC going forward.
As discussed in my recent articles ESG will become mainstream in 2022, investors have been prioritizing ESG factors when making investment decisions as these have given better result in recent years. They have increasingly paid more attention to companies with greater performance in terms climate mitigation, labor inclusiveness, and board-related positive track records. ESG projects are favored by Wall Street as demonstrated by the numbers of climate M&A activities completed in 2021 as these sectors are creating tangible value for businesses. These are not only brining younger ESG focused investors to these projects, but they are also helping navigating stricter policy changes that are anchored on sustainability and social inclusiveness performance.
In 2021, ESG deal making moved to the mainstream of M&A and SPACs increasingly become one of the favorite tools of sustainable finance. A December 2020 report in the Financial Times put it even more clearly stating: “A staggering 83 percent of business leaders say that ESG factors will be increasingly critical to M&A decision making in the next 12-24 months.” Also, I have stated in one of my recent articles, Over the last 24 months, ESG stocks have outperformed the market and have showed they can withstand bear market conditions.
ESG-focused SPACs will outperform the market
Most SPACs transaction completed since 2000 did not have ESG components. In 2021 according to the Nasdaq we had 613 SPAC listings, raising a total of $145 billion, an increase of 91% from the amount raised in 2020. However, according to Pitchbook data, the trend is changing and is promising and since mid 2020, more than 20 SPACs have launched with an ESG focus, raising more than $5 billion through their IPOs. It is also important to note that the ESG-focused SPAC outperformed those of non-ESG ones by a significant margin. When ESG-focused SPACs and private companies create smart sineries based on deep due diligence and partnership development, they become a revenue force multiplier but also but also help streamlining ESG priorities particularly as they take better care of the environment.
Final Thought
SPACs and particularly ESG SPACs provide investors access to early-stage ventures that are normally not accessible to the non-institutional investors, and this is a driving force behind SPAC growth. However, the regulators will monitor more severely the SPAC trend to ensure a more compliant and transparent investment process. ESG-focused deals are likely to become a permanent feature of the SPAC market in 2022 and 2023 as a lot of investors are becoming more activist aiming to have an impact in our economic, social, and the global environment. SPAC leaders will naturally shift their attention towards companies that address current societal and climate risk. In 2022 expect more SPACs in the renewable energy, waste management, electric vehicle industry and other green technologies that help decarbonizing our economies and reach the ambitious net-zero targets by 2050.
About the Creator
Andrea Zanon
Empowering leaders & entrepreneurs with strategy, partnerships & cultural intelligence | 20+ yrs international development | andreazanon.tech | Confidence. Culture. Connection.
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