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Gaining ESG skills a rising motivation for M&A activity

The need to have a good story around environmental, social and governance (ESG) is driving more mergers and acquisitions

The motivation behind a lot of the consolidation in the channel in recent times has been to gain managed services expertise.

Numerous deals have been struck that add more managed service provider (MSP) skills, with many looking to gain security knowledge as well.

But future moves might be made by those keen to bolster their environmental, socials and governance (ESG) credentials, with the demand for expertise in this areas rising and becoming a trend in merger and acquisition (M&A) activity.

According to the Environmental, social & governance technology M&A market report from Hampleton Partners, the first half of 2022 has seen a significant rise in the number of deals being struck in the tech sector for ESG firms, with 93 M&A deals globally, representing a 173% increase compared to 2019 numbers.

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 struck before the pandemic hit in 2019. Some of the largest deals saw firms reach out to add e-learning and financial governance as a service to their portfolios.  

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

As a result of the race to get sustainability standards in place, the temptation by some has been to use M&A as a method of catching up on the market and improving the story they can tell customers and potential targets.

“While everything seems to point to the advent of a new age of regulatory scrutiny and corporate responsibility in the race to net zero and other goals, businesses’ ESG reporting is not yet up to scratch,” said Lolita White, senior analyst at Hampleton Partners.

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

“That’s why we’re seeing increasing numbers of software and services firms specialising in facilitating ESG reporting capabilities, garnering interest as M&A targets,” she added.

White said that some in the industry were suspicious of the emphasis on ESG, claiming it was a public relations-driven exercise, but – even with the critics – the debate about the need for better ESG data is not going to diminish in the future.

“Far from negating the case for rigorous reporting, we believe that these debates will amplify the need for accurate and robust disclosure, thus spurring more active regulation with increasingly granular requirements. In turn, this will open many doors for ESG software and services providers helping customers navigate the ever-changing ESG landscape,” she added.

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