The Value of ESG: Evidence from M&As: An Empirical Analysis of ESG in M&As in the OECD from 2010 to 2021
Abstract
This paper investigates whether acquirers are willing to pay a premium for targets with greater environmental, social, and governance (ESG) performance in mergers and acquisitions (M&A). The topic is scarcely investigated, and the existing research offers ambiguous findings on the value of ESG. Our thesis provides evidence that acquirers pay an ESG premium and shows that ESG is valued in M&A transactions.
We construct a sample of 1,944 deals conducted between 2010 and 2021, where the target is incorporated in an OECD country. In 485 of these transactions, the target has an ESG score. We use scores provided by Refinitiv as the measure for performance. Additionally, we test for the target’s degree of self-reporting by using the disclosure score provided by Bloomberg.
Using a standard OLS regression model, we find a positive relationship between target ESG score and deal premium. Furthermore, our findings indicate that the environmental and governance categories drive the ESG premium. Additionally, we run separate regression models for strategic and financial acquirers and find that an ESG premium is paid by strategic acquirers only. This result indicates that target ESG performance is valuable to strategic acquirers in M&A transactions.
Our paper suggests that acquirers value targets’ ESG performance in M&A transactions, as it may be considered a way to reduce information asymmetry and target-specific risk.