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INVESTING WITH A CLEAR CONSCIENCE

PROF. DR. PHILIPP HABERSTOCK AND STEFFEN LOHRER SHOW THAT IT IS POSSIBLE TO ACQUIRE A COMPANY AND CREATE SOCIAL RETURNS

In October 2018, a special report issued by the Intergovernmental Panel on Climate Change (IPCC) highlighted an urgent need to limit global warming. Quick, sweeping, and unprecedented changes would be required in all areas of society. This emphatic appeal was in line with widespread expert opinion that painted a picture of ecological collapse if we do not change the way we treat our planet and its resources. The issue of sustainability is therefore something every individual should think about, not just in everyday areas but also in areas that, at first glance, appear to have nothing to do with this topic – such as investments and merger and acquisition (M&A) transactions. Prof. Dr. Philipp Haberstock and Steffen Lohrer of Steinbeis Consulting Mergers & Acquisitions GmbH explain why.

The two Steinbeis experts advise small and medium-sized firms on company acquisitions and divestments, and they also provide advice on a growth topic of global significance: social impact investment. This is a strategy whereby capital investments are made with the aim of creating social and environmental benefit without having to forego attractive interest rates. Sustainability factors are becoming increasingly important in corporate transactions, representing a key success factor in impact-centric M&A transactions, typically conducted according to ethical and social goals and placing emphasis on social responsibility.

SUSTAINABLE EQUITY INVESTMENT

The United Nations laid a foundation for social impact investing at a general assembly in 2015. 193 nationals agreed 17 global objectives – sustainable development goals that would provide guidelines for the use of financial resources for social and environmental purposes. For example, they demand that poverty and climate change be combated, along with improvements in the supply of drinking water and humane working conditions.

The abbreviation ESG has now become established as a standard of sustainable investment, covering three areas of corporate social responsibility with a bearing on sustainability:

  • E (environment) stands for areas such as environmental pollution or ecological hazards, greenhouse gases, and topics relating to energy efficiency.
  • S (social) includes aspects such as health and safety at work, diversity, and social engagement.
  • G (governance) refers to sustainable business management. This includes aspects such as corporate values and monitoring and control processes.

Outline concept for an impact-centric M&A strategy

 

“These days, many investors want more than returns – they also want to do something good for society, so they want returns that create an impact or deliver ‘social benefit’,” says Lothar Jakab, director of the Steinbeis Consulting Center for Impact Investing and a partner of Steinbeis Consulting Mergers & Acquisitions GmbH (Steinbeis M&A). Martin Schmitt, director of Steinbeis M&A, agrees: “The sustainability-oriented buyers of companies that are involved in our company acquisition projects benefit on two levels – on the one hand from financial returns and on the other from the social, ethical, and ecological impacts. We see major potential in this new trend, since impact-focused M&A transactions are often associated with positive returns in combination with relatively low levels of risk.”

With company acquisitions, which are often entered into by private equity companies, the focus lies not only in risk-return factors but also in the fact that taking a share in a business should also be a reflection of the values and goals of the investor. This form of impact-centric investment is particularly popular with affluent families and so-called family offices. The proportion of institutional investors now looking into this area is also growing, since more and more insurance companies, major banks, and foundations are becoming interested in the topic of sustainable corporate transactions (impact M&As). The German market is still somewhat small in this area, but it is nonetheless growing rapidly, with momentum picking up in a number of areas of the market. A study conducted by the Research Center for Financial Services, a Steinbeis Transfer Institute, showed that adhering to sustainability criteria when making capital investments by no means implies that lower returns should be expected. If anything it’s the opposite: Giving consideration to so-called ESG criteria can even have a positive influence on the success of an investment.

VALUES AND GOALS INFLUENCE INVESTMENTS

Steinbeis M&A has now developed a structured ESG management method that allows sustainability principles to be brought into harmony with the revenue expectations of investors. Specifically considering ESG factors during the transaction process should not just reduce costs and risks to a company’s reputation, it should also realize opportunities to increase value and pursue a company’s values. Taking a company acquisition for a major German private equity investor as an example, according to exclusion principles, companies should first be disregarded if they do no justice to certain defined values. The exclusion principles most frequently named in Germany include the production of or trading in weapons, violation of human rights and labor legislation, gambling, corruption and bribery, tobacco, alcohol, nuclear energy, and environmental damage. To complement this approach, there are also positive criteria, which are often based on “best in class” principles. This involves defining the criteria that should be met for a company to be considered eligible as an investment in the first place.

There are a variety of information sources to help when assessing the sustainability of different business models and companies. Many firms already write their own sustainability reports, and there have been reporting obligations for European companies with a bearing on capital markets since 2017. As a result, these companies have been reporting annually on key developments relating to the environment, labor law, and social factors, as well as respecting human rights and combating corruption and bribery.

ESG factors have become an important aspect of transaction processes in recent years. Whereas these risks were often considered make-or-break in the past, the focus of impact transactions today increasingly lies in opportunities to enhance value and achieve the sustainability targets that can arise from outstanding ESG practices. This requires a tailored approach placing appropriate emphasis on risk. An initial review of the target company is carried out, for example by using an information memorandum to pinpoint possible risks for the further assessment of the company (due diligence). If a more detailed assessment is required, this is based on a dataspace or interviews with the management of the target company. The results can then be incorporated in contract negotiations, for example in the form of warranties and indemnity against risks.

SUSTAINABILITY: STANDARD FUTURE PRACTICE

Sustainability issues will be with us for good now. This is not just because of climate change, but also because of strict social standards being laid down by companies and robust business management. As a result, Steinbeis M&A has set itself the goal of helping to ensure that sustainability and impact-centric M&A strategies become standard practice and a benchmark for M&A transactions for years to come. “Impact investors will also be rewarded – by successful transactions and the satisfaction that you’ve done something good at the end of the day, not just for yourself but also for others,” says Haberstock, with conviction.

Contact

Prof. Dr. Philipp Haberstock | Partner
Steinbeis Consulting Mergers & Acquisitions GmbH (Hamburg)
www.steinbeis-finance.de

 

 

Steffen Lohrer

Steffen Lohrer | Managing Partner
Steinbeis Consulting Mergers & Acquisitions GmbH (Mannheim)
www.steinbeis-finance.de