Sustainability is driving M&A pivots: Goldman Sachs

While climate, governance, and inclusion considerations have typically been seen through a lens of risk and exposure, Bertie Whitehead, head of ESG in investment banking at Goldman Sachs is witnessing companies reframe their strategies - around these sustainability considerations - in an attempt to turbocharge growth.

Whitehead attributes much of the rethink to the energy transition currently playing out in Europe, courtesy of the Ukraine war.

One of the more amusing fallouts, observes Whitehead is that sustainability, previously regarded as a distraction from ‘pure’ business, is now at the epicentre of maximising operating potential.

Where’s the capital going?

While Goldman Sachs used to call these megatrends, the broker notes it is now regarded as growth investing.

"This is where capital is going… and that’s driving M&A pivots,” according to Whitehead.

“Investors are increasingly asking if companies are tapping into growth areas such as the energy transition and the waste-reducing circular economy.”

Private equity

Having recognised the potential here first, Whitehead says its private equity funds are racing to create sustainable funds.

For example, in Europe alone, ESG private equity assets under management have grown from 13% of funds in 2015 to 17.5% in 2020. If market expectations are correct, he suspects this will rise to be more than 20% in 2025.

“It means that more than 60% of new private equity [PE] flows will need to be into ESG funds.”

Premia in action

Whitehead reminds investors that the data shows the sustainability ‘premia in action’.

What he’s referring to is the amount by which the return of a risky asset is expected to outperform the known return on a risk-free asset.

“Our observations of sustainability-themed transactions show multiples commonly in excess of the average [leveraged buyout transactions between 2017-2021], with some more than 50% above.”

Long-term fallout from war in Ukraine

Whitehead believes the long-term impact of Russia's war in Ukraine is a much greater understanding of energy security and resilient supply — through self-generation or trusted partnerships — including the use of hydrocarbons in the near term. 

One telling signal, adds Whitehead is that the largest IPO in Europe since Russia’s invasion was for a hydrogen company, De Nora.

“Sustainability and ESG at scale haven’t travelled through a true recession yet,” Whitehead noted.

If the early stages of the pandemic are any guide, what we saw was an acceleration towards these factors — in particular the S and the protection of colleagues.”

Seismic shift in public opinion

Bottom line adds Whitehead is that people vastly underestimated how far public opinion has progressed on issues relating to climate, governance and inclusion.

“Focusing on sustainability and ESG is good business practice… minimising your environmental footprint can make for increased sales because customers are now really prioritising the issue,” he adds.

“Capital will flow to those companies that can prove themselves to be risk insulators and growth companies.”