Focusing on compliance of social-led governance criteria

May 15, 2021 | 08:00
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Environmental, social, and corporate governance (ESG) criteria are internationally seen as the foundation of long-term sustainable growth. Robust ESG initiatives could thus help companies access a larger pool of high-quality capital, especially from value-based investors. Dr. Bournet Gregory, partner, head of Corporate Finance at PwC Vietnam and Malaysia, explained to VIR’s Celine Luu how a holistic approach to sustainability could impact the mergers and acquisitions landscape.

How do you assess mergers and acquisitions (M&A) prospects in Vietnam and the Southeast Asia region in 2021, especially in the context of the forthcoming mass vaccine rollout?

focusing on compliance of social led governance criteria
Dr. Bournet Gregory, partner, head of Corporate Finance at PwC Vietnam and Malaysia

M&A activities are accelerating and there is much capital in play. Companies must keep a long-term strategic plan and pay close attention to the fundamentals of a transaction.

By many indications, the next 6-12 months could be exciting times for M&A. Companies anticipating an economic fallout from the global coronavirus pandemic have a significant accumulated war chest with interest rates remaining at record lows. Pent-up demand may be unlocked as the availability of vaccines increase the confidence of market participants (CEOs, business owners, investors, consumers, among others). For companies facing imminent distress, consolidation may be inevitable, and some large private equity firms have created specific debt funds geared towards these situations.

Moving outside domestic shores has become crucial for business growth, prioritising expansion within the Asia-Pacific to target rising regional demand. Fundamental drivers have not changed and especially South Korean and Japanese investors are continuing to look for markets where growth is higher or more promising than domestically.

Headwinds do remain, however, with ongoing waves of COVID-19 continuing to trigger at least some sort or restrictions or even lockdowns. Once government support will ease, higher unemployment is likely to moderate demand for products and services. Also, the pipeline of initial public offerings continues to offer owners an alternative to M&A deals as an exit path which is nothing new though and to some extent has been in “competition” with M&A for decades. Lastly, economic recovery will likely be uneven across different sectors and geographies.

Yet overall, the prognosis for deal making in 2021 is positive and M&A maybe leading the economic recovery in Southeast Asia.

What do you think about the importance of ESG criteria in M&A? How should ESG be addressed in an M&A transaction?

PwC’s Global M&A Industry Trends report showed ESG factors are on the minds of investors, business leaders, and governments, and that investors are increasingly allocating capital based on a company’s ESG performance.

Investors around the world have been embracing “sustainable investing”, allocating ever-increasing capital on the basis of a firm’s ESG performance. ESG’s rising profile offers opportunities to increase societal value creation. We are already seeing investors allocate more capital to new investments in energy and renewables, reducing exposures to carbon-intensive assets, and managing the value chain in a more sustainable manner.

In 2020, an increasing number of companies and countries made commitments to reduce carbon emissions and announced net-zero targets. In addition, several banks, institutional investors, and private equity funds have made commitments to reorient their strategic directions and evaluate both existing and future investments through an ESG lens. It is anticipated that these commitments will impact all sectors. However, we are seeing an accelerated trend of focus on renewables, waste/water management, and recycling sectors.

Similarly, firms that can help mitigate the most pressing drivers of nature (habitat loss, climate change, pollution, over-exploitation) are starting to attract increased investor attention. Share prices for companies that have the highest ESG ratings are outperforming others; on average, they fell less far and have recovered more quickly than the market since the onset of the COVID-19 crisis.

Currently, international acquirers are becoming more focused on ESG-related compliance. What is your advice for companies seeking investors to successfully embed ESG into their culture and reporting practices?

Investors will be looking closely for signs that companies are aware of the impact ESG factors can have on the business, and if they have a robust reporting on ESG strategies and risk assessment. Some investors may put pressure by only considering companies that meet certain ESG criteria, thereby having a direct impact on the company’s access to the investment pool.

As the stewards of a company’s purpose, the board plays an important role in ensuring that the strategic plan of the company supports long term value creation and includes strategies on economic, environmental, and social considerations underpinning sustainability. With a clear understanding of the principal risks of the company’s business, the board can determine a suitable risk appetite, along with a risk management framework to identify, manage, and monitor significant financial and non-financial risks.

What are the biggest roadblocks for investors in ESG integration, especially in Vietnam? In which areas is it the most difficult to implement ESG criteria and why?

Some companies have already begun to reshape corporate reporting to include ESG criteria and meet investor needs. However, while there are rigorous assurance requirements and regulations for financial reporting, the guidelines for non-financial reporting data are still evolving and to a large extent not consistent. This will be a challenge in valuing the economic benefit of intangible assets such as environmental performance, governance, brand value, and reputation. Companies will experience difficulties in assessing and quantifying the (positive) environmental impact and the related risks in their conventional lending and investment portfolios.

For investors, it will be important to assess the quality of management and the real commitment of a target relating to the ESG agenda. The tone at the top is important and for the board of directors and C-suite it needs to form part and parcel of an integrated strategy – rather than just a lip confession.

By Celine Luu

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