Acquiring ESG skills, a growing motivation for M&A activity

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The motivation behind much of the consolidation in the channel lately has been to gain expertise in managed services.

Many deals have been struck that add more skills to managed service providers (MSPs), many of whom are also looking to gain security knowledge.

But future steps could be taken by those who want to boost their environmental, social and governance (ESG) credentials, as demand for expertise in these areas is growing and becoming a trend in mergers and acquisitions (M&A) activity.

According to Environmental, Social and Governance Technology M&A Market Report from Hampleton Partners, the first half of 2022 saw a significant increase in the number of deals closed in the technology sector for ESG companies, with 93 M&A deals worldwide, representing a 173% increase over the figures of 2019.

Among those acquisitions, Hampleton tracked 52 deals in the enterprise software and software-as-a-service (SaaS) segment in the first half of 2022, which more than doubled the deals closed before the pandemic hit in 2019. have seen companies reach out to add e-learning and financial governance as a service to their portfolios.

The activity also comes at a time when the chain is open about its plans to achieve net zero, reduce carbon emissions and introduce more ESG policies into their operations. There have been anecdotal reports of trades being lost because the chain player was unable to compete on ESG credentials against a rival.

Due to the rush to set sustainability standards, some have been tempted to use mergers and acquisitions as a method to catch up in the market and improve the story they can tell to customers and targets. potential.

“While all signs point to a new era of regulatory scrutiny and corporate accountability in the race for net zero and other goals, corporate ESG reporting is still falling short,” said Lolita White, senior analyst at Hampleton Partners. .

“There is an urgent need for companies to improve their use of ESG technology to support real-time recording, analysis, reporting and visibility of their ESG data. They need to ensure that their decisions on why, where and how to manage ESG risks – which can have a significant effect on business and share price performance – are sound.

“That’s why we’re seeing a growing number of software and services companies specializing in facilitating ESG reporting capabilities, attracting interest as M&A targets,” she added.

White said some in the industry were wary of the focus on ESG, saying it was a public relations exercise, but – even with critics – the debate over whether better ESG data will not diminish in the future.

“Far from negating the case for rigorous reporting, we believe these debates will amplify the need for accurate and robust disclosure, thus spurring more active regulation with increasingly granular requirements. This in turn will open many doors for ESG software and service providers to help clients navigate the ever-changing ESG landscape,” she added.

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