The role of M&A in managing emission risk: Do acquirers use M&A to improve their emission risk, and how does emission risk affect equity performance?

Abstract

We study if companies use, or can use, M&A to reduce their emission risk and how this affects their short and long-term returns accounting for the materiality of emission-related issues. Our findings suggest that acquirers, on average, see an increase in emission risk resulting from the M&A. This indicates that firms are not actively using M&A to reduce their emission risk. However, we find a positive correlation between the target's emission score and the change in the acquirer's emission score. This finding implicates that firms can use M&A to reduce their emission risk if they incorporate an environmental aspect when evaluating the transaction. When only evaluating transactions performed after the Paris agreement in 2015, we find weak evidence that reducing emission risk positively affects the acquirer's long-term returns. This contrasts our initial result when evaluating all transactions, as we then find no relationship between a changing emission risk resulting from the M&A and returns. The result can suggest that investor awareness related to emission risk changed after the Paris agreement as the risk of future environmental regulations and punitive actions increased.